Digital Lenders: Future of Loans in MexicoBy Piotr Godzinski | Tue, 11/03/2020 - 09:00
More than 55 million Mexican adults do not have access to formal credit products. What are their options? Offline pawnshops and digital lenders. Hmm.. let’s build an alternative.
The question is why? Why would anyone use our solution? Every startup should ask itself the “why” questions.
It is common for founders to be in love with their solution. It very often starts with a solution idea, but founders should first embrace a problem. We started with a solution and didn’t ask ourselves the “why” questions (enough). I’ll let you guess what happened. Yes, we failed.
In late 2019, we were screening European markets with a single-item insurance idea in mind but we discovered no one had a need for that. The founding team was completed and we had an almost-ready MVP but we performed customer interviews after the journey started – not prior to it.
Since we are stubborn, we decided to screen Latin American markets to check if any were a fit so we could launch “our” solution. This doesn’t sound like we learned from our European disappointment. Not yet. Nevertheless, while pursuing our “insurance” path, we discovered a (new to our knowledge) critical problem that Latin American markets were facing: the lack of access to formal financial products for adult individuals.
In Mexico only, more than 55 million adults are excluded from the formal financial ecosystem. The more we dug, the more we understood that addressing this problem was to become our mission. And here comes the learning: We dropped our assumptions and focused on a real and massive problem.
Why do millions of Mexicans go to offline pawnshops to finance themselves? Are digital lenders a mass market alternative, and under which conditions?
Finnu was born: Let’s build an alternative to the above-listed players; an almost purely digital, asset-backed lending solution. Let’s have an impact and offer affordable loans aiming to financially include our customers.
Finnu was meant, by then, to offer loans against electronic collateral we would pick up and revise. No more offline transactions – almost everything was meant to be digital. Securing loans with collateral enables lower interest rates and a higher acceptance rate than unsecured digital lenders offer. The path was clear and looking good.
Then COVID-19 hit.
A month before our launch, in March 2020, COVID-19 came into the picture. What would be the impact on our offline component i.e. collecting, revising and storing the collateral? Necessity is the mother of “transformation” and Finnu had to adapt. How can we lend against electronics without physically collecting them? How can we succeed in this lending-impact mission?
Once again, we challenged ourselves and we found the answer: We can connect to electronic devices’ operating systems.
Indeed, connecting to an electronic device OS enables us, in case of a missed installment, to restrict the device usage until our customer can reach out to us and, together, we can find a way to avoid loan default. With this new setup in mind, 100 percent digital this time, we are launching. Heavy software changes have been made and we closed our pre-seeding round along the way.
Offering 100 percent digital-asset backed loans is our first solution to the problem of lack of access to affordable credit. The potential is huge. Offering cheaper credit than the market and accepting more customers at the same time, some without any credit history, can have a noticeable impact but it also brings a set of challenges.
Despite the physical collateral, a lending product needs to rely on a sophisticated underwriting model. Cash loans might sound like simple products (i.e. providing money); it is actually necessary to understand the exact customer need.
We won’t make the same mistakes more than twice: we interview our customers. Finnu has to develop according to our customers’ needs even though one could assume offering money is enough.
It’s about understanding why customers need loans. What are their current behaviors? What do they or don’t they like about the solutions they experience? Running customer interviews is crucial in order to offer what our customers want instead of what we assume they do. We could write an article about customer interviews only. Know Your Customer shouldn’t be restricted to its legal compliance meaning. KYC should be a general leitmotiv for any endeavor.
MORE TO COME
With this in mind, Finnu aims to reach 1 million customers within the next three years and build a much deeper relationship with our customers than punctual loan transactions. We have to do more. We will continue our learning curve and since we have a great and dedicated team (management, operations and investors), we are positive about our ability to improve our customers’ lives.
In a few months, we’ll write another article. The topic might be about our traction or our funding journey: everyone told us “no”, even our current VCs, before they said “yes.” In the meantime, should you want to have an impact and increase financial inclusion, feel free to join.