MFO Regulations: New Market Challenges And The Ways of Working with Them

Previously, we have been covering mostly the banking peculiarities of a financial business and its regulations. Since beginning of July such changes have come into force directly concerning microfinance market and changing the operating conditions of the microlenders. As a partner of several market players on this field, we wish to share our vision and tell how we could be useful in response to the new upcoming challenges.

OOn July, 1 regulation changes will come into effect. The main part of them is about limiting the Pay-Day Loan interest rate to 1% per day. The rate has already been limited to 1.5% before, but the the new regulations will significantly reduce the previous limit.

The rate limiting will have an impact on the profits of the MFO business, which raises concern among established market majors. Keeping focus on the heterogeneous and complicated market since 2011 and being a mediator between borrower and microfinance companies, the regulator is seeking to establish the basis for a healthy, competitive and compliant with the modern market needs.

This will affect above all the market structure.

Rate reduction and regulation changes are always a challenge. Everyone will have to face the new difficulties. And we cannot know for now who will be affected more – small and smart young companies or solid established institutions. Yet the basic concern of the regulator is to repress and put out of business disreputable players, shadow lending market actors and market players with a poor business model, which will be the first step towards market stabilization.

Secondly, the interest rate limitation is about changing the financial business model.

Borrowers of higher risks on the one hand and disregard of control on the other have resulted in raising the rate in order to solve the problems. Putting aside some cases of excessed and unmotivated rates which were possible before the regulations came along, the interest rate is a combination of cost of funds, risks and operation costs. Now, when the rate is fixed and notably lower than usual (even compared to the 1.5% in the beginning of the year), the institutions will have to reconsider their operating activities, take serious their risk politics and reorganize their business to a great extent.

Thirdly, facing the market changes and changing its own philosophy, the business will have to confront with some changes in its brand and audience as well.

Microfinance companies are sought not only by those whose loan requests were declined by banks due to payment delays, but also by clients who cannot confirm their income in a traditional way, by self-employed and by young people, by residents of remote towns and settlements , by people with “thin” credit history, etc. This alone speaks for audience improvement, for these are no “fraudulent” clients but people who cannot correspond with the typical bank requirements or a standard customer portrait. Yet the general attitude to short-term loans and microlenders remains negative. Environment changes, new business models and evidential changes in positioning can help to improve public image of microlenders and attract wider groups of clients, also those of higher welfare level.

Gearing up for the new competitive environment with a new and hopefully active demand, in the context of the changing business model, we would like to suggest a decision aimed to lower the risks and operational costs.

How we can help to reduce credit risk:

We filter out credit shopping and search out factors affecting social default. We trace repeated and multiple applications sent to different market players within a short period of time, repeated use of the same device and real IP address, manipulations with the application data, etc.
We identify good rules for low risk segments which are difficult to evaluate using traditional data sources. Instead of them, we rely on device, software, real IP and network analysis.
We assess and verify disposable income using alternative data, such as evaluation of device quality, the Internet infrastructure and economic factors.

How we can help you cut down on operational costs:

We help to set auto-reject rules using filtration of 10–30% high risk inflow and help with manual verification allowing to carry it out more quickly. This is possible due to an accurate device authentication, randomizers detection and other factors of technical fraud, data manipulation, digital theft, synthetic applications inflow, etc.
We reduce marketing costs and time on search for “good” borrowers, helping to find the best possible sources of potential clients who meet the business risk policy.

Changing of rules is always a difficult period of time. However, on the other side, it gives a chance to take a fresh look at the business, find new solutions and start using new tools. We hope to improve risk management of financial institutions and help to find new clients who will be good to work with during this new stage of market development.

Your Juicy Team