We ride on profitable lending business, leaner cost to deliver 20% annual return – Branch
Dayo Ademolais the Managing Director, Nigeria, for Branch International, a San Francisco-based fintech operating in Nigeria, Kenya, Tanzania and India. In this interview with BusinessDay’s Endurance Okafor, she shares insights on how Branch is deepening access to credit while also rewarding investors with a 20% annual return. Excerpt:
How did Branch remodel its strategy to tap from the COVID-19 induced opportunities?
Our reaction to COVID-19 wasn’t necessarily to re-strategize. What we did was throttle the business. At that point we had a single product in the market which was lending and obviously if people were losing their jobs and businesses or going out of business, their repayment rates were going to be affected as well. What we did was to turn off the tap on new lending for much of the middle and latter part of 2020 just to let the world and the market recover to enable people to become more creditworthy once again. It wasn’t necessarily changing the way we operate, because the sort of change in business strategy that you would find are businesses making more investments in digital and remote channels for them to serve their customers. The pandemic made it impossible for a lot of face-to-face and in-person transactions to take place. If you are a business like ours, we are already 100% digital, we were poised to be a go-to brand when Nigeria started emerging out of the pandemic. I won’t necessarily call it a re-strategization, it was us just throttling back a little bit on our business and getting new borrowers into the business. We have since turned the spigot back on and our business has rebounded to pre-pandemic levels and even beyond. We are happy and now we are more a full-scale digital bank and we have multiple products right now not just lending.
Did Branch’s default rate increase as a result of the economic impact of COVID-19?
Our default rates increased slightly but not as significant as we thought they would. As part of our financial accounting, we provision based on what we expect our default rate to be. We were adequately positioned in 2020 for default rates. What was affected was a new business, the first time borrowers coming in because that’s what we turned off just to be more cautious. We took this caution globally, it wasn’t just Nigeria and it pretty much paid off because late 2020 and the first half of 2021 so far we’ve effectively rebounded. There wasn’t for us a huge spike in default rates to more directly answer your question.
How was Branch able to position itself as a key industry player?
Our single product business which is lending, we have spent a lot of time, effort, and energy in building our decision-making algorithms and making sure they continue to learn and continue to evolve to make sure that we are making the best credit decisions that are possible and that’s our unique advantage.
In a market like this, where we operate and you’re giving out unsecured loans, your credit decision-making has to be very sound for you to be able to remain in business and to make money rather than lose money. Our process is a loan ladder which allows us to bring in people at a certain amount and as they repay on time they grow to be able to borrow larger amounts. Not only do we make credit decisions based on first-time borrowers and a large set of data points, but we are also able to let our customers build their credit with us. That way we get the best of the credit-worthy customers that are out there. I think that’s what our advantage has been as far as our lending product goes.
Right now, as we are transitioning into a full-service digital bank, we also offer some of the best value that there is today in the market with our investment product that is offering a return of 20% annually, it’s one of the highest returns available in this market right now and we can do that for a variety of reasons.
We have a profitable lending business; we have a leaner cost model than the regular commercial banks and we are also able to do what we do with investor backing and our investors making the best in a country like Nigeria in the customer base that we can acquire here. There’s that and we have a wallet product that is also commission-free. You can make commission-free bill payments, pay your electricity bills, phone bills, unlimited free transfers to any financial institution, that’s within Branch or outside of Branch. We are offering the best possible value and at the end of the day that’s what counts with our customers and we always put our customers first. Our app user experience is top-notch. Our Google Play ratings are some of the highest in the industry with 4.5 or higher. These are the reasons we are uniquely competitive particularly in this market.
What are you doing to reach the millions that lack access to credit?
Like any other business, we have plans to continue to scale and grow. That’s one of the reasons why we are as invested as we are in Nigeria and making the kind of bets that we are in Nigeria. The one thing that I think especially for a credit business is to grow sensibly and grow with the right customers. There’s a lot of market potential that needs to be tapped in Nigeria but we need to make sure that we are tapping that potential safely and logically so that we don’t lose our edge and become unnecessarily unprofitable. To answer your question more broadly, I would also keep in mind that we are a full-service digital bank, so yes we will continue to scale our lending product which is our flagship. We are also doing a lot of things Nigerian customers also need. As you mentioned that there is less than 2% of the Nigerian population actually has access to credits whether for personal or business use and we also realize that the number is even smaller if you think about people who have access to profitable investments, structured investments and with our investment products, we are targeting exactly those people and we are doing things that banks can’t or won’t do. In the sense that you have immediate and 24 hours access to your money as soon as you invest so we are not locking in your funds and making you have to wait to get it. We are offering some of the highest interest rates that are available in this market right now and this is available to any adult who has an android phone in Nigeria and you’re able to invest with Branch and immediately start earning those returns. While we look at financial inclusion and the banked and the unbanked, the real focus should also be on the underbanked. If you have a basic savings account you are counted as banked but do you have access to investments, lending and largely the answer is no, and that’s what Branch is here to solve.
In the sense of are we launching new products? As we continue to speak to our customers and identify gaps in the market we will be launching new products as well as an iteration of products that are currently out there and that I think is our secret sauce to be able to gain even more market share. The more they hear about us the more they want to participate.
What are the risks that you see in the market and how do you plan to manoeuvre them?
Risk is one thing that we have established that we are quite good at assessing at Branch. Today our default rate or NPLs are below the threshold that our regulators set for us. How do we test the credit worthiness of our customers, I mean the core of our lending business? Using AI and machine learning we assess a wide range of data points with our potential customers.
With certain permissions that you give us to access information on your android device that you use to apply for these loans, we can make decisions based on your creditworthiness and that looks at everything from your credit history if you have one, it looks at what kind of device you have. There are a series of things we look at. We are very careful with our customer data, we don’t store any of this data. We comply with the GDPR, the EU’s data protection regulation and we are also in compliance with the NDPR which is Nigeria’s data protection regulation. We use this data to assess whether the customer is creditworthy and the other thing that helps us manage our risk is our loan ladder. People come in at a certain level at sort of smaller amounts, those amounts depend on what our algorithms score you’re at and then you grow in the amount you can borrow with us. You are building your credits with us and that again also helps us even better assess your creditworthiness and that’s basically how we operate.
Have you applied for any license recently Or is there any license you are currently pushing for?
We currently operate with a finance company license which gets us fully regulated by the CBN and also permits us to offer the products and services that we are offering. We are very much looking to upgrade that license into an MFB license and once that is operational, the press will be the first to know, as well as the public when that is done. PSB isn’t built for us, we are a financial service provider so we don’t qualify for a PSB license, it’s for Telco’s and non-FSB’s.
Why do you think the Fintech industry is very attractive for investment, is Branch looking at raising funds?
To answer your last question first, we raised a series C a couple of years ago, we may be looking to do a series D in the near to medium future but there are no real concrete plans I can disclose to you right now. Not because I don’t want to disclose them but because there’s nothing to disclose. This is an evolving decision.
Why do I think fintech is such a hot space? First of all Sub Saharan Africa, in particular, is attractive now because any time you look at any market that has the market size as we command and sort of like gaps in the provision of certain services, you’ll want to exploit that for-profit and for impact but largely for profit.
If you look at our financial inclusion numbers that were released recently by EFInA, if you’re an investor and you look at those numbers, what you see is an untapped market, and fintech is uniquely positioned to deliver a retail product at scale digitally. You don’t need to come here and build shops or branches in every single state or local government. You can provide those services from a particular hub and reach millions of people and that’s just the very major of what fintech is.
When you put all of those factors together it becomes really attractive. You then also look at some marquises and investment numbers in African and Nigerian entities. If you look at the number that Paystack was able to exit at, what Flutterwave has raised recently, and much more, it becomes an even more attractive market and the biggest driver for investors. I’ve spoken to investors as well and I think they will confirm this is what we call FOMO, fear of missing out. When you hear about a deal that was done or that exited at a very high number, as an investor your incentive lies in going to chase a deal in that particular market as well, and then it becomes a competition with who can throw the largest amount of money and entities so they go with them to build their business and exit at juicy numbers.
If you put all of those things together it kind of makes sense that fintech is heating up.
What should Nigerians expect from Branch in the medium to long term?
From us, we continue to have our customers’ interest at the center of everything that we do. Available, affordable, secured, easy to access in minutes lending, an investment product that is giving one of the highest yields in the market and is so simple to invest in and withdraw from. A wallet product that gives you the ability to do all your transactions effectively for free, we are not taking your money in that regard. All of these things offer a more valuable proposition versus what is available in the market today and as far as I am concerned that is just the beginning.
Customers joining us on this journey is basically in their self-interest. They are getting the best possible value and we are a team of people that are working both locally and globally to bring the best possible value to these customers. We will just continue to expand on our offerings so that it becomes more and more possible for you to conduct your entire financial life within Branch. So I think that’s basically what our focus is. Whether it’s coming out with debit cards, tailored investment products that you can use for targeted investing, or whatever the case may be. We will continue to iterate and continue to speak to our customers and bring out things that are the best for them. Branch is better than your bank and we will continue to build on that reputation.