> Posted by Andrew Fixler, Freelance Journalist
Atikus, a new financial inclusion-focused enterprise, is gearing up to launch an underwriting platform and a credit insurance product in Rwanda for micro, small, and medium enterprise (MSME) credit. The insurance product is designed and brokered by Atikus, and ultimately backed by a local insurance company. I recently sat down with Kate Woska, co-founder and CEO of Atikus, to discuss financial innovation and her company’s work.
Microfinance has long benefited from careful experimentation and innovation. Initiatives that are targeting the base of the pyramid tend to be consumer-focused (e.g. micro health insurance or mobile payments development); however, according to Woska, these initiatives may be populating an industry that also suffers from institutional and market-level inefficiencies.
To illustrate, Woska turned to inefficiencies in the capitalization of MFIs, an area relevant to Atikus’ business. She notes that a large number of financial institutions serving the base of the pyramid hold capital reserves beyond Basel’s 8 percent Capital Adequacy Ratio standard. This is the case due to the high volatility in a microfinance portfolio, as well as MFIs’ insufficient opportunities to hedge risk, lend between each other, and effectively engage with global capital markets. This condition manifests as a higher cost of capital for MFIs, which ultimately contributes to the high cost of capital for the client. Woska contends that the private insurance sector is primed to help alleviate this problem by offering new credit risk management tools. For example, the insurance industry can develop loan guarantee-like products (coverage of a portion of the lender’s portfolio in the event of default loss) that more efficiently pool and more accurately price credit risk than existing models, which she notes have resulted in under-leveraged guarantee funds. Though microfinance is moving away from a reliance on subsidies and towards a model of self-sufficiency, the insurance sector’s value proposition is this ability to more effectively pool risk than small MFIs can, and to price risk more accurately through robust actuarial algorithms and advanced data analytics.
Woska didn’t quantify terms due to large variances in outcomes per institution, but she is confident that unsubsidized MSME credit insurance from the private sector will more effectively pool risk and data, hopefully helping to reduce interest rates and expand the financing capacity of MFIs.
More broadly, Woska contends that, as MFI management and investors overcome the challenges of financing institutions that function in an imperfect system, concerted innovation needs to enhance and expand institutional and market-level infrastructure while maintaining a focus on base-of-the-pyramid users. This multidimensional process will involve “the client side on one end, with the banks, risk transference tools, and regulators at the other; so it’s not an easy situation where everybody can immediately see the same path forward.” The onus for institutional-level innovation (i.e. helping banks) isn’t immediately apparent, and raises interesting questions about the future field of players influencing financial inclusion; this institutionally-focused stratum of financial inclusion isn’t always as sexy a cause compared with the development of consumer facing platforms and products.
Woska believes in the potency of auxiliary financial services players in the private sector to innovate effectively. While many of these auxiliary players are new, some, like Atikus, are developing products designed to plug into existing organizations with experience in underwriting, risk management, regulatory compliance, and other operational competencies. Woska points out that introducing new financial technologies without government and/or NGO subsidies will allow for better real-time understanding of a new product’s viability, and also bodes well for long-term product sustainability. Guarantee funds that failed to self-sustain are a case-in-point of subsidized products that serve a temporary purpose and break down in the long run.
Innovations using “big data” are anticipated to improve the outreach and quality of financial services for small businesses. Woska is highly optimistic about these prospects, though blunt regarding their as-yet-unproven results: “Alternative underwriting models based on new sources of big data, such as an individual’s mobile data or social media profile, are very compelling, but are all still in early stages of experimentation and proof of concept, especially in the developing and emerging markets. Thinking otherwise could be dangerous.”
As Atikus gears up to launch its underwriting products, the company wants to better quantify the utility of its analytical models compared with the intuition of an experienced loan officer. Woska says, “In the man vs. machine debate, I don’t necessarily care what the outcome is, I just want to see decisive evidence one way or the other. This is one of the things we are aiming to do.”
Atikus is poised to be a “data machine,” according to Woska. The company prices its credit insurance based on hard and soft data from both the financial institutions with which it does business, as well as the loan applicants against whose credit risk Atikus will build an insurance policy. Institutional data include balance sheet figures and compliance with regulatory-mandated ratios, as well as softer metrics regarding corporate governance, loan product design, IT systems, and social performance. On the client side, Woska is interested in entrepreneurs’ psychometrics, as well as information on their enterprises. Atikus’ data-informed pricing structure is a departure from the traditional guarantee fund pricing structure, which often examines the historical performance of a portfolio rather than the likelihood of default of its individual constituent borrowers.
Other auxiliary players harnessing non-traditional data to underwrite thin-file clients in frontier markets include inVenture, whose mission is to pioneer a standardized credit metric for mobile users globally in order to reduce the cost and improve the efficiency and transparency of lending in frontier markets, Lenddo, which leverages social media histories in the Philippines, Colombia, and Mexico, and Cignifi, which models credit using mobile phone usage data in Brazil, Mexico, and Chile. SMEs have also leveraged credit from their relationships with major companies in their sectoral clusters, who are naturally better informed about the health of their smaller partners than banks, and have an incentive to transfer essential factors of production to ensure the continuity of their supply chain.
Like inVenture, Lenddo, and Cignifi, leveraging non-traditional data is key to Atikus’ operating model. The company’s credit insurance products couldn’t be conscionably offered without Atikus’ ability to collect and parse non-traditional data points for its actuarial models. It is impossible to talk about credit insurance without flashing back to 2008, when complacent underwriting and the illusion of hedging undermined credit on a global scale. The effects of a credit implosion concentrated at the base of the pyramid would be devastating. With the considerations of competition between lenders, a commercial drive to expand MSME loan portfolios at all costs, and over-indebtedness breaking down the social credit-risk mitigators, this issue becomes all the more salient. For these reasons, according to Woska, the quality of the loans insured by Atikus is a paramount concern.
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