In the early 1900s in the United States (U.S.), if you walked into a drugstore and went to the back office, you would probably find a few people working on book-keeping, each handling around 1,500 accounts. These were accounts of customers who had taken credit from the business. Each worker would send out monthly bills to customers owing as little as a few dollars, and the customers would pay maybe three or four months later.
Costs were high due to postage and stationery such as envelopes, as well as the labour used to process the accounts. Still, it was common practice among businesses at that time.
In those days, it was difficult for the average person to get a bank loan, but businesses understood that the ability to pay in instalments was key to enabling customers to afford many of the new technologically-advanced products like cars and refrigerators.
Despite the cost and difficulty of assessing creditworthiness and managing collections, many businesses still found that offering credit was a viable way to increase the pool of who could afford their products, and ultimately increase their profits.
Today, Nigerian businesses face a similar challenge. They are looking to reach the mass market and the middle class with their products, but most of these consumers cannot afford the upfront costs or access loans to purchase these products, therefore hampering demand. Nigerian businesses also face a similar problem on the supply side, as many of their potential suppliers cannot afford the upfront investment needed to serve their needs.
However, as payments technology improves and business gain access to more data on customers and suppliers, they are leveraging this data to provide access to credit as a means of expanding their supply and demand pools.
In 2015, two Nigerians trained at the MIT returned home to make a bet that the growing e-commerce space would need logistics providers to deliver packages to consumers. They set up a platform that aggregated third-party logistics providers to deliver products for e-commerce merchants.
Independently, two other well-educated Nigerians returned to the country around the same time, to build a similar platform, based on the same bet.
Both companies eventually realised that the e-commerce space wasn’t quite as primed for growth as we thought it was. They soon pivoted to different models, both powered by providing access to credit. If you have not guessed it already, the companies are motorcycle-based MAX.ng and truck-based Kobo360.
Nigeria is a large country, with millions of goods and people to be transported daily, and a large unemployed population available to do the transporting. Almost anyone can learn how to drive a motorbike or a truck, but unfortunately, most Nigerians do not have the resources to invest in buying a motorbike or in financing a trip from Lagos to Kaduna.
MAX purchases bikes for its riders and allows them to pay over a period of time, eventually owning the bikes once they’ve paid off the cost and some interest. Without MAX, most riders would not have been able to afford the investment and would have resorted to renting bikes at very high daily rates, with no path to asset ownership.
Truck drivers have a similar problem. They typically wait for weeks, and sometimes months, to receive payments from cargo-owners. Every trip requires significant upfront expenditure on diesel, insurance, and “sorting” all the policemen on the road. As a result of the long payment cycles, truck owners need capital to finance the costs involved in delivering cargo. Truckers who do not have the money for this are severely constrained in the number of trips they can take. Kobo360 provides trip financing to its drivers, expanding the pool of drivers who can take these trips, and allowing them to take more trips than they ordinarily could.
Both MAX and Kobo360 have solid technical platforms that aggregate a supply of drivers and demand from customers. But the critical feature is financing, which allows them to expand the pool of Okada drivers or truck drivers beyond just people who could ordinarily afford to purchase a bike or finance a trip.
Companies like MAX and Kobo360 not only provide suppliers with an asset (a bike or line of credit), but also provide them with a platform to utilise these assets, giving the companies data on all their activity and the ability to evaluate their most valuable users. This allows them to lend to their drivers at a much lower cost than traditional financial institutions, which do not have as much data on their performance or the utilisation of the asset.
Credit does not only allow businesses to grow their supplier base, but it also allows them to grow demand by giving customers the ability to pay in instalments—just U.S. drugstore in the opening paragraphs. This trend is driving the growth of another fast-growing industry across the continent: renewable energy.
Although solar systems cost 15-20x more than gasoline generators due to upfront investments in solar panels and batteries, they provide cost savings in the long term. However, by some estimates, it takes more than 8 years for the cost savings to exceed the initial investment. Most people simply do not have the money for the upfront investment, and cannot afford to wait that long for the cost-savings. As a result, most solar product providers have added a credit element, where they finance the initial investment in equipment and collect smaller payments from the consumer over a longer period of time. This allows them to widen the pool of customers beyond those that can afford expensive solar panels and batteries.
Another example is in education. Take Schoolable, which started as a platform for schools to manage student records and payments but quickly evolved once they noticed that schools were often cash-strapped by delayed fee payments. Today, a big part of their business is providing financing for parents to pay fees, increasing the value of their product to the schools because it expands their pool of users to parents who might have otherwise taken their kids out of school.
Similar to MAX and Kobo360, the credit offered by these businesses to customers on their platforms allows the firms to collect more data, track usage and assess creditworthiness more effectively than traditional financial institutions. You can only use a Schoolable loan on their platform, and you can only use Daystar Power’s financing to purchase a solar system. Both companies are able to estimate your creditworthiness based on what you were already spending on the product—whether its education or electricity—and then track your usage after you take the financing.
Credit as a path to scale
At the moment, credit in Nigeria is being unbundled, with various companies offering their own credit options to their users, similar to retailers in the U.S. in the 1900s. As the technology industry continues to develop, this trend should penetrate other sectors like healthcare and housing—sectors providing a basic need targeted at the general population, where payments are upfront and often large.
Of course, today, very few retailers in the U.S. provide credit to customers, thanks majorly to Bank of America, which released the BankAmericard (now known as VISA) in 1958, rolling up existing credit products by multiple retailers into a single platform which they managed. This relieved retailers of the need to manage multiple accounts and allowed them to focus on their core business. There is no guarantee that the Nigerian credit ecosystem will develop in this manner, but there is certainly a gap for players to come in, aggregate these various credit products and build a holistic picture of each person’s credit position. Something that the banks and credit bureaus are trying to do; still, private credit bureau coverage is still below 34%. It is still early days, but players like Migo are already starting to build out a credit bundle across a number of consumer products.
For many innovations, there is no path to scale in low consumption, low savings countries like Nigeria without providing access to credit; the ability to boost both demand and supply through credit is key. Expect more products to layer on a credit component as they search for a path to reaching more people. And just as consumers start to struggle with managing different credit lines from different products, expect a company to come in and aggregate all of them into a single bundle.