By JOWIT SALUSEKI –
THE financial services industry is currently facing a perfect storm of challenges – and it’s increasingly turning to data and insights to not only survive the economic headwinds, but to thrive and deliver growth in the face of adverse conditions.
The industry continues to face challenges and economic headwinds.
These include growing revenues, reducing risk, managing a rise in Non-Performing Loans (NPLs), accessing new audiences and driving greater financial inclusion.
Addressing the growing problem of fraud without affecting the customer journey are only some of the challenges being faced as 2023 unfolds.
When a lender records a large percentage of its outstanding loans as NPLs, it can hurt the financial performance of the lender.
Banks mainly make money from the interest they charge on loans, and when they are unable to collect the owed interest payments from NPLs, it means that they will have less money available to create new loans and pay operating costs.
According to Christopher Bwalya, a Russian trained economist, a NPL is a loan in which the borrower is in default and has not paid the monthly principal and interest repayments for a specified period.
“Non-performing loans occur when borrowers run out of money to make repayments or get into situations that make it difficult for them to continue making repayments towards the loan.
Usually, banks classify loans as non-performing loans when the repayments of principal and interest are due for more than 90 days or depending on the terms of the loan agreement,” her said.
Mr Bwalya added, “As soon as a loan is classified as an NPL, it means that the likelihood of receiving repayments are significantly lower. However, a borrower may start making repayments to a loan that has already been classified as a non-performing loan. In such cases, the non-performing loan becomes a re-performing loan.”
It is against this background that TransUnion Zambia chief executive officer Mildred Stephenson has given an insight on how Zambia’s banks can thrive in challenging economic times.
She says in the current economic climate, many customers are in distress.
However, financial services businesses are still being pushed to deliver growth.
“The obvious pockets of growth are underserved markets and Small Medium Enterprises (SMEs) – but the problem is that not only is everyone eyeing the same market, but they represent elevated risk and higher cost of acquisition.
The answers to many of the current challenges lie in the data.
It’s quite possible to grow your business; access new audiences, reduce fraud and manage NPLs at a time when the world is digitising. You just need the right analytics and insights,” Ms Stephenson said.
She noted that data-driven lending and decision-making was essential to the success of any modern financial institution.
Ms Stephenson said the age-old dilemma for banks in Zambia had been that while it was relatively easy to create a credit profile for someone who was employed or has a formal business or already uses formal credit products, many consumers were still operating in the informal sector.
According to Ms Stephenson, many consumers have houses and money, but they are credit-invisible, to all intents and purposes.
“The challenge lies in identifying the people who have been credit-invisible until now, and then putting a number in the form of a credit score on that person through the smart use of data, insights and intelligence,” she said.
Ms Stephenson says this could be the biggest opportunity facing the sector right currently.
She explained that the onus was on banks to bring more people into the financial inclusion net as it doesn’t just change their lives, but it’s good business too.
Before they reach new markets, though, financial institutions would do well to get a better handle on their existing customers.
“Often, a consumer deposits their salary into Bank A, has a credit card with Bank B, and a car loan with Bank C, without any of the three institutions having a view into where they can cross- and upsell,” she said.
Ms Stephenson further explained that the most important channel to reach new and existing markets lies in creating products and services that could be accessed digitally, but this brings its own set of challenges.
She stressed that Zambian financial institutions and businesses need to protect themselves and their customers from fraud, while continuing to provide a seamless customer experience.
“As we accelerate the shift to transact online, fraud is shifting digitally as well. Businesses must give their customers the smoothest possible onboarding experience on digital channels, but traditionally fraud detection gets in the way of this,” she said.
Ms Stephenson said digital onboarding helps businesses offer greater digital access to products and services, while addressing fraud threats.
“It delivers a friction-right experience that includes combining digital and physical identity establishment and verification, while increasing conversions and loyalty, reducing fraud, and improving operational efficiencies. In this new banking and credit landscape, risk-based pricing is becoming an industry standard,” she said.
Ms Stephenson said lenders increasingly require deep insights into their customer base and general market trends to develop and implement appropriate pricing strategies across products and consumer segments.
Identity verification, fraud prevention and collections solutions will assist in managing risk and optimising growth throughout the portfolio.
To adjust to the new market conditions, Ms Stephenson says lenders must evolve their ecosystems and take a more insight-led approach to customer segmentation.
“Digital lending platforms allow lenders to automate the decision-making process and assess risk more accurately while creating a superior customer experience,” she said.
She advised that a single integrated digital lending platform ensures lenders could run the customer application through background checks and verifications instantly, and auto-decisioning ensures customers can get a response almost immediately.
TransUnion currently operates in eight African countries such as Botswana, Kenya, Namibia, Rwanda, South Africa, Swaziland, Zambia and Malawi.
It offers commercial, consumer, insurance and auto risk information solutions across a number of industries, as well as personal credit management solutions in Africa.
The firm is in partnership with banks, healthcare providers, property managers and other companies to help customers see a bigger picture and apply effective business strategies.