By George Taylor on 16th January 2017
Executive Vice President
Strategy & Business Development, 4finance
Since its establishment in 2008 and an initial presence in just two markets, investments in innovation and the integration of talent and technology has enabled 4finance to rapidly grow its presence to 18 countries with 7 million registered customers.
4finance targets tech savvy customers for whom convenience and speed are key priorities. Millennials make up 64 per cent of its customer base, for whom the process of handling applications, credit scoring and issuing loans has to occur within 15-30 minutes. Against this backdrop, the process of borrowing responsibly has necessitated the development of very complex back end systems that integrate traditional sources of data (e.g. Credit bureaux) and alternative sources such as Facebook to reinforce our data driven approach.
An important consequence of our cutting edge proprietary systems is that the process of rolling out in new markets is streamlined. We do not need branch networks, we can offer financing for difficult to reach customers in rural areas all over the world and we can create customer intimacy through the use of data.
4finance may therefore be driven by very sophisticated technology, however by keeping its offering simple and ensuring that the platform is replicable, 4finance has managed to expand rapidly, growing revenues by over 2.5x in three years.
80 per cent of 4finance’s roll-out process is replicable across all geographies, with only 20 per cent of the start-up process needing to be specific to the local market.
Based on our experiences, we have learnt to adopt the following set of key principles, which can enable us to enter the soft launch phase of a new market within 3 months of a positive investment decision:
· Conduct extensive market research and diligence, in-house and with external consultants;
· Commence operations gradually to minimise cost and maximise option value;
· Low initial capital injections;
· Start with a short-term, single payment product to acclimatize to the new marketplace;
· Test market efficiency and develop scorecards within 6 months; and
· Target month-on-month profitability within 18-24 months.
4finance’s rollout process features four distinct phases to ensure smooth and effective market entry. These principles facilitate rapid but rational new market entry, whilst also providing ample opportunity to withdraw from entering a market if local market dynamics prove to be unfavourable. Growth opportunities in the global consumer credit markets are numerous, but pragmatism rules and one occasionally postpones entry into a new market if the market is not yet ready for your products.
In the research phase due diligence is carried out using in-house and external consultants to deep-dive into the market situation, current regulation, existing competition, payments and pricing. This is critical part of understanding whether or not a viable business opportunity exists, and only a qualitative approach can help you determine if the business is going to work in terms of fitting into the cultural and financial fabric of the country. In this phase, finding out the availability, accuracy and cost of credit bureaux data is very important. If it is not readily available then we may not be able to offer the simple, convenient decision in seconds that we pride ourselves on and the level of service that 4finance’s main brand Vivus is known for.
The next, preparatory phase involves working with local officials to apply for the appropriate licenses to operate in the country. We establish a local office base and team with local market knowledge and the language to work with local stakeholders. We always have a local country manager and team in place to work day to day on preparation and implementation, as well as using experienced IT/development teams to ensure that best practice procedures are replicated with the help of a centralised HQ project management team. We also set-up local bank accounts with all in-country banks Tt ensure we can transfer funds quickly to approved customers, typically less than 15 minutes.
Our business was predominantly European based until last year, and our HQ in Riga had worked well as a base for international expansion. However, when we decided to expand into Latin America, it was clear that we needed to open an office in Miami to oversee market entry, and we have a regional IT development/support hub in Buenos Aires to maximise talent and cost efficiency. Any business relies on its people so we dedicate a large amount of time to recruiting those with the right skills and a mind-set that matches our values.
The soft launch phase involves a measured approach to start lending using the ‘minimum viable’ product developed in the preparation phase. Given the short-term nature of the loans, typically 30 days, we start to get data on repayment behaviour quickly. We work on rapidly improving our processes, with the same development team working in the weeks after launch to update the product where necessary. Getting the local aspect of the business right at this point is critical. For instance, in some LatAm countries, consumers prefer to receive their money direct to their bank, but they want to be able to repay it in cash, which necessitates partnerships with local retailers. We have to establish scorecards and use data effectively to be successful from the moment we enter the market.
Importantly we have a locally sourced customer care team as a transaction with 4finance often represents the first on-line financial transaction that our customers carry out. Even in the digital age, customers want a point of contact to discuss any queries, even as basic as ‘did you receive my loan repayment?'. We may be a digital lender, but it is vital that we keep a personal touch with customers to prevent any issues and ensure they are satisfied. We don’t have big fixed costs of setting up branches and major infrastructure like a bank, but we do invest properly in local support to provide customers with the level of reassurance they need to borrow from a new international lender.
The ramp-up phase sees the activation of an extensive marketing plan to raise brand awareness. This is typically done after a 6-12 month period, by which time credit underwriting scorecards have been built and it becomes clear the product is working smoothly. TV advertising is used successfully to increase awareness and website traffic. In Mexico for example, a TV campaign contributed to a 3x increase in lending volumes during the fourth quarter of 2016. With more applications providing more information, we can also tailor our product features, make our marketing more targeted and understand our returning customers better. We are a data driven business and our team works to make the data we collect work commercially for us.
In some new markets, there will already be well-established competitors, and sometimes we will be the sole digital credit provider. As our lending volumes reach critical mass, continued engagement with local regulators is key to ensure they are comfortable with how our products work in practice, building on the more theoretical discussions at initial license application stage. We either join or start up a non-bank lending association to raise awareness around the benefits of our products to regulatory, political and media stakeholders, and we use our experience of regulation across 18 markets to give our perspective on what has and hasn’t worked in other geographies. Just last month we provided a ‘pre consultation’ input to an EU regulator, proposing the UK FCA model of interest rate cap and cost of credit cap as an example of best practice.
When these principles come together, we are able to strike the right balance between rapidly expanding to where we see large market opportunity, whilst not stretching management time too thinly by doing it all at once. Few companies have been able to expand across geographies and get the local unit economics right to be a responsible and profitable lender in each individual market – that’s one of the things that makes 4finance special.