Wonga’s CEO on Financial Inclusion, the Future of Finance in South Africa, and the Evolution of Wonga

In this episode of the Lending Link Podcast, host Rich Alterman welcomes Brett van Aswegen, CEO of Wonga, for an in-depth discussion on the South African lending market and Wonga’s strategic evolution. Brett outlines how Wonga transitioned from a traditional payday lender to a leader in short-term financial solutions, focusing on ethical lending practices and the impact of these changes on consumers and the broader market.

Brett shares insights from his extensive experience in the financial services industry, reflecting on the challenges and breakthroughs in navigating Wonga through significant regulatory and market shifts. The conversation also covers Brett’s approach to leadership and how it shapes Wonga’s operations and corporate culture.

Rich and Brett also discuss key aspects of the South African credit landscape, including economic conditions, consumer behavior, and regulatory challenges. Personal anecdotes from Brett offer a glimpse into his life outside finance, shedding light on how his interests inform his professional perspective.

Tune in to explore the nuances of consumer lending in South Africa, leadership strategies, and Wonga’s future direction in ensuring responsible and sustainable financial services.

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Episode Transcript

Brett van Aswegen - Wonga

 

Rich Alterman  00:04

You're syncing up and tuning in to the Lending Link Podcast, powered by GDS Link. Where a modern-day lender can dive deeper into the future of data decisioning and Credit Risk Solutions Welcome to the show everyone. I'm your host Rich Alterman and today we're syncing up with Brett van Aswegen. Brett is the CEO of Wonga, and online lender serving the South African market. Brett joins us today with more than 20 years of experience in the African retail credit and financial services industries. Brett joined Wonga as CEO in 2015 as part of a strategic turnaround of the business and subsequently led a management buyout in 2019. During this time, Brett has driven the transformation of Wonga from a traditional payday lender into a meaningful short-term lender while transitioning out of the longer group structure into owner managed business. Among his career highlights, Brett led the automation of credit decision at the Lewis group, a leading retailer with 840 stores in South Africa and neighboring African countries where he worked for over 12 and a half years and was appointed to the board at the early age of 31. Brett further built an African business finance retail card operation in Kenya from inception and built the team of over 500 staff. Under his leadership, the division went on to issue more cards in the country than all retail banks combined. Brett was admitted to the degree of Bachelor of Commerce majoring in business management and information technology from the University of South Africa and later achieved a Masters of Business Administration from the University of Cape Town Brett's vision is to create a purpose led business that offers responsible and safe short term financial products to customers that need to break small financial gaps. In this episode, Brett and I will be discussing the background of Wonga some insights on the South African lending market and so much more. Before we dive into the interview, please head over to our LinkedIn and Twitter pages at GDS link that's G D, S, Li and K and hit those like and follow buttons. If you have not done so already, please subscribe to our podcast on Apple podcast, Spotify or wherever you prefer to listen to your podcast. All right now let's get synced with GDS link. Welcome, Brett, I hope you are having a great week so far. Where are you joining us from?

 

Brett van Aswegen  02:16

Hi, Rich, I'm joining you from Cape Town, South Africa, the very tip of Africa.

 

Rich Alterman  02:22

Well, I'm pleased to tell you that I've spent some time there. And it's a beautiful country, I actually did work in South Africa, in Johannesburg for almost two and a half years from January 98 until June of 2000. And actually, I have family in Cape Town. So, I've had the opportunity to visit there. So, thank you for spending time with us this morning and to share more about Wagga and discuss aspects of the lending market in South Africa. But before we discuss business, let's get a bit personal. I see that you're a member of ypo.org, a global leadership community for more than 34,000 members in 150 countries, please share a little bit more about YPO its mission, how long you've been involved in what's the value is brought to you.

 

Brett van Aswegen  03:03

So YPO stands for Young Presidents Organization. It's actually an organization that I think was born in the US. And you know, it's not got national and international representation in most countries around the world. And you know, I've been a member of the YPO. Since 2015, since I became CEO, at Wonga, it's open only to CEOs where the companies are above a certain level of turnover. It's obviously aligned to each country, but the purpose of that organization is to help build better leaders around the world. And I think that one of the biggest values of the organization is you, you have what's called a forum. So, it's a group of between six and eight people that become part of your forum that you meet with on a monthly basis. So, it's fellow leaders in in different companies, obviously, they have to make sure there's no conflict involved in that process, you know, conflict of interest in your different businesses because you're effectively sharing a lot of very deep, intimate information and confidentiality is a huge part of it. But it's an organization that would allow you to share very difficult problems that often CEOs find that don't have anyone to really talk about what they're dealing with in their in their business. So, it's in the idea to create this trusted space where you can be quite intimate with what's going on in your life. The focus is not just on your business, but also your personal life and your family. So you know, looking at people from a holistic perspective and making sure that we're kind of thinking about all three so it's like once a month really just doing a bit of a check in with yourself really around, you know, where am I at in my life across these three areas. And if there's any particular challenges I might have, I've got access to six to eight other CEOs who I can share the problem I'm struggling with, and they can give me their perspectives and their expense. errands without trying to give me advice on what to do. Very interesting.

 

Rich Alterman  05:03

One of the things you hear a lot about in the US from leadership teams is some of the new challenges brought on by the new generation of workers and some of their expectations to both, I think, balance work and life family, which is good. But also, maybe they have a view that they should become managers right away, for example, when they get out of college, are you seeing some of that in the challenges in your workspace? And is that something that's been discussed a lot within your YPO, four, Keynote, but

 

Brett van Aswegen  05:32

this certainly is a generational shift that we're seeing, I see a lot of differences in expectations of the way some of our people, particularly in the engineering space, software engineers, how they want to be treated the amount of money, they want to earn their expectations around how quickly they should advance. So we're certainly seeing that I think from the management side, South Africa, is maybe a little bit more conservative to a US markets, I think people do realize that there's, there's a difference between managing and leading, and that I haven't seen as much of people pushing into managerial roles or trying to get into managerial roles. But you know, then again, I'm not currently in a very big corporate way, you might see more of that. So maybe I'm not as exposed to it.

 

Rich Alterman  06:17

Right. Okay. Well, thanks for sharing that. On another personal note, I understand that you love to swim and hike, but your real passion is in the kitchen, cooking, what led you to develop your passion for cooking? And what's your favorite type of food?

 

Brett van Aswegen  06:28

You know, I think that cooking thing is actually I find it very meditative. You know, if you think about people who are doing any kind of getting into the zone, or into flow, I think is something you know, that it's certainly my role is very hard for me to get into flow ever. So again, I compared software engineers, for them, when they're really focused on doing one thing, and they've focused on writing their code, and they're super focused on it. Like a lot of my job. Unfortunately, not. A lot of my job involves me, engaging with people in meetings, making decisions. And so seldom gets the chance to sit and focus on one little thing. And so for me cooking, you know, I put on the music and I get stuck into heading vegetables or something like that, you know, and yeah, that I think is what kind of stimulated the initial enjoyment around cooking was just, it was a great escape for me. But you know, I'm very passionate about food keeps on is probably considered, in my view, rightly, one of the food destinations in the world to come to, we are so spoiled for the quality of food and the affordable price of our food. And so, we kind of grown up with a little bit of a culinary view of the world and what's possible. And so yeah, I've just really come to enjoy good food and good wine. And you know, the making thereof is just a bonus.

 

Rich Alterman  07:49

Well, that's great. Well, thanks for sharing that well, okay, good. Let's get down to business. So certainly, I'd like to learn more about Wonga. But before we delve into why it would be interesting to learn more about the consumer lending market in South Africa. First, let's discuss the regulatory landscape in South Africa as relates to consumer lending. In the States, we have multiple regulations that impact lending multiple federal and state entities that have oversight over lending and lending practices, perhaps you can share, you know, what's the regulatory and oversight landscape in South Africa? And specifically, what are the specific regulations that govern loggers lending practices?

 

Brett van Aswegen  08:21

So, I guess just to draw the, the comparative between South Africa and the US to make sense of it, South Africa would be similar to one state in the US, we have, you know, one set of laws, everyone abides by the same set of laws. The difference, though, is our one state has over 60 million people in it. So, it's not the largest market by any stretch of the imagination. But it's a fairly sizable market for a one state solution, if you wish. But it doesn't, it's a lot simpler for us, because we are dealing with one set of laws in the country. I guess, if we were to talk about Africa, it would probably be you know, each country in Africa is probably similar to what you're dealing with in the US where you would have that level of complexity between different laws and different states. So, I do think that we're a bit fortunate that I only have to worry about one set of regulations. The law that we operate under as a credit provider is called the National Credit Act. It was promulgated in 2007. And probably was one of the leading global leading pieces of credit legislation. And what it does is it creates, and it's intended to create a very level playing field for all credit providers in the in the country. That's from your very small corner payday lender, through to your national large banking institution. We have the same law that we are obliged to apply by the difference with banks, though, is that they would have additional pieces of legislation that would be covering them, you know, around sort of the Financial Conduct Authority, the Prudential authorities, so there are different pieces of legislation that affect a large bank But as credit providers, we all operating under this one single piece of legislation. And so, if you look at like, what are the primary elements behind the legislation, what it's doing is creating standardization for the different types of credit agreements. But that I mean, as an example, you might have a mortgage loan, or a vehicle finance, or an unsecured credit agreement, or a revolving credit facility like your credit cards. So, it's creating the standardization across those products, what defines them. And if you were a bank issuing a visa branded credit card, or you were in a store, providing a store credit facility, you'd be operating under the same revolving credit facility agreement and the rules around that govern that. The other thing that happens there is that the pricing is regulated as well. So, you'd be having the same pricing caps that are in place across those different products, so that the different products do attract different types of pricing. And then I think, you know, if I had to say to you, what are the good things about our Credit Act? Apart from doing this, what it's really done is requires a credit provider to conduct an affordability assessment on the consumer. So I have a legal obligation to ensure that every consumer I'm granting a loan to has the means to repay his loan, I have to do in a bureau inquiry, credit bureau inquiry, I have to look at say, Who else has he got credit with and taking his income into account, and his what's called considered living expenses, I'd have to make sure that he could afford to repay all the other creditors and myself on top of it, if I don't do that, or I over lend to him, the consequence there is that the loan could be whether the credit agreement could be considered to be reckless, that consumers debt could be written off, I don't think doesn't have to pass. And I could be fined up to 10% of my annual turnover.

 

Rich Alterman  12:01

Wow. Okay. We'll probably delve into that a little more later on. But thanks for sharing. So, what under the National Credit Act, what are the current interest rate caps, that lenders can work into their agreement?

 

Brett van Aswegen  12:13

So, it's based on a floating interbank lending rate in South Africa called the repo rate, the rates will range per product as I as I mentioned. So, you know, if I had to give an example, such as the unsecured loan, which will be like a cash loan with no, no security back to it, your rate, there would probably be just short of 20 or 30%, nothing is 29.25. And, you know, if you were looking at a revolving account, the rate there, I think it's about 24 25%. At the moment, in the short-term lending space, where we operate, our rates are fixed, they're not linked to lending rates, because you're charging per month, and they range between three and 5% per month. But you know, people are taking a loan, they're not, they're not lending in 12 consecutive months at that rate event that gives her a sense of the rates.

 

Rich Alterman  13:08

So it's interesting, and I'm sure you're familiar in the US, the payday lending industry, over the years when it first started back in the 90s really had to go out and secure enabling legislation in each of the states that they would operate since they would actually be exceeding the rate cap in those states. And there's been a lot of talk in the US about introducing a national rate cap of 36%, which was first introduced under what's called the Military Lending Act, where you could not basically do payday lending with any people in the military. So, there's been a lot of talk about a 36% rate cap, there's been several states now that actually have implemented 36% rate cap. So, we'll see where that shakes out, depending on how the election shapes up this year. I think, certainly the Democrats remain in office at 36% National rate cap and some more possible. So, you are kind enough to share a two-year report TransUnion report with me and, you know, I was reading through that and according to us Industry Insights report on quarterly consumer credit trends. For the third quarter of 2023. The South African summer credit landscape realized a steady uptick in personal loan originations growing seven half percent year on year. What I really found interesting was that non-bank lenders, a group that you fall into, represented 80% of all personal loans extended in the third quarter of 2023. I found also report on financial inclusion where I learned that in 2021, there were over 8000 non-bank credit providers. And despite this considerable number, the report indicated that the banking sector still dominated the lending market holding a bit over 80% of the country's credit book. While the stats are certainly dated a little bit can you share what you feel has been the key drivers in both the number of non-bank credit providers and the associated share of new personal loan growth.

 

Brett van Aswegen  14:59

So, they just explained the difference in the in the percentages there. So, the banks are probably the only players who are really playing in the mortgage, and almost exclusively in the vehicle asset finance space. So, the value of debt that the banks are issuing in the country, you know, when you look at the mortgage portfolio, it's the bulk of the lending that's taking place in the country. And I guess the reason for that is that you need a lot of cash flow, and you need long cash, you know, and I think the banks are in a position to be able to deploy cash for 20 plus years into a mortgage portfolio, it will be very difficult for an independent lender to be able to have sufficient capital to be able to drive that lending strategy. So, from an overall quantum perspective of the value of loans that are granted in the country, absolutely, the bank certainly would hold 80% plus of the of the lending in the in the business. But the reality is that the banks are servicing a much smaller portion of the market. So, when you talk about financial inclusion, and you know what the market opportunity is, the banks are focused predominantly on the higher end of the markets, middle to high end. And while they absolutely are playing in the same space as what my business or similar businesses like mine are, with unsecured lending, and issuing of cards and things, the reality is that they're not servicing the whole market. And so South Africa is considered to have one of the highest Gini coefficients in the world, in being the disparity between rich and poor. And so, we have an enormous part of our population, who are a living in what I would consider to be poverty levels. And so, you know, the banks are not going to be playing down in that space, because then, you know, the risk is high. And the way in which you would service those customers is different as well. And if you look at lack of those 8000, plus credit providers that are registered with the National Credit regulator, a large number of those would be, you know, what we anecdotally referred to as mom and pop shops, you know, that they have a, you know, in a small town, they have the little shop on the corner, you know, they know the community, they know that the people that they're lending to, you know, and so it's this small sort of community based lending that's taking place. And that model is completely different to what we would be doing as a national FinTech lender. And so, I think, you know, in ways they're able to manage some of their risk by being so close to customers. And that's why you've got such a lack of large opportunity for some of these smaller lenders to be able to operate, because they really are servicing a very small niche, but you add them all together. And if you look at the number of actual credit agreements entered into your, like loans issued in it, it's not just loans, you know, but the amount of credit, the number of transactions loan transactions that are entered into your it's substantial, you know, you know, in terms of what you're servicing and a markets of probably in the region at the moment, about 48 million adults in Africa.

 

Rich Alterman  18:07

Yeah, interesting. Just for context, you mentioned, you mentioned mortgage, as you know, here we've had, like you have had rate increases. And, you know, our population here was spoiled for quite some time where you can get a fixed mortgage at 2.875. We're now up about, you know, we're at six 7% People are screaming for the mortgage rates in South Africa.

 

Brett van Aswegen  18:26

So yeah, you know, I mean, when, when we've seen the whole world suddenly wake up to inflation, you know, and when one girl was part of a UK business, my UK counterparts didn't understand what inflation was. And so that forget being who we are, you know, we've lived with inflation forever. Our average inflation rate over the last 10 years has been about 5.2%. Wow, that for us is on the low side, I can recall times when inflation rates were north of 15%. So, we've been through, you know, certainly in my lifetime, we've been through some relatively high inflation rates, but that then also stimulates what our interest rates are. So, I spoke earlier about our repo rate being sort of the quasi-interbank lending rates or what one bank will end to the other. And that's currently sitting at 8.25%. So, when you start talking about what are the entry level rates for mortgages, currently, it's about 12% 11 12%. And that's, that's what we would consider pretty low cost of credit, and, and even for funding for lenders out there raising capital, you're probably raising capital anywhere between sort of the eight to 15%. Mark, you know, depending on your risk profile. So, the cost of capital in South Africa is significantly higher than what you would have in other countries. So, when people look at our interest rates, and they're saying, Oh, how can you be charging, you know, on an unsecured credit agreement, how could you be charging, you know, nearly 30%? Well, the fact is a third of that is just your own cost of capital that you have to pay Ya.

 

Rich Alterman  20:00

know exactly. And as our rates started going up here, we definitely saw a lot of pull back from a lot of the marketplace lenders, we saw volumes dropping, credit, quality tightening, so certainly can appreciate that. So, in the US, you know, there were several impacts in the lending industry during and immediately following COVID. So, I want to chat about that a little bit. On the data reporting side, many lenders in the US place consumers loans into forbearance, or deferment, holding a loans current delinquency status in their free state, if you will. And this had an impact on the quality of the bureau data. In addition, we saw some consumers receiving a lot of people are receiving stimulus funds via the COVID stimulus package, and allowing many people to pay off debt, put some money away for savings. And as a result, we actually saw some bumps in people's credit scores. So, it had the impact of temporarily improving people's financial position. Of course, we're not seeing that continue in the state we're living in now. But you know, when we think about the COVID, and what took place during COVID, in the US, from a credit perspective, are there some similarities going on in South Africa? And was there also stimulus that were being put forward by the government?

 

Brett van Aswegen  21:11

Yeah, unfortunately, we don't have the social safety net that you have in the US, you know, there have been some social grants given to people. But in order to qualify for it, you really needed to be really on the low end of the market scale, not everyone would qualify for some of the social relief grants that were given. So, the value of those social grants was around 350 Rand per month. So, you know, that's roughly 18 $20, you know, that people were getting so it's too small to really make a difference. You know, so there wasn't that social safety net. But what we did find in South Africa, is that people were not spending as much in consumer led consumption spending. And so, people were actually sitting with a lot more disposable income than what they might have otherwise had. And, you know, there was sitting at home, nothing to do, nowhere to go and no, not eating out at restaurants, all those sort of things came into play. And so, what we did see is that people actually had surplus cash and were able to settle down some of the debts through that, from a credit reporting perspective, you spoke about the forbearance, we didn't have much of that. I mean, I think that there were some companies who might have been in the early stages of COVID, put a freeze on their on their aging and their arrears. But we also operate in an environment, you know, with our credit regulations around, you know, exactly how arrears are calculated and how that needs to be shared at the credit bureaus. And that, in fact, the data we share to all of our credit bureaus is submitted via a portal. So, I don't send my data to individual bureaus, I send it to one portal, and it gets shared, then distributed against all the Bureau's so everyone holds the same data. But with that comes, you know, a requirement on what to share and how to share it. And there certainly wasn't any process by which they were saying, okay, you've got to now stop aging accounts. And so, for him very much an individual company’s prerogative to do that. But nobody was really incentivized to do it, because actually, people were paying, you obviously had the exceptions to this rule where people were faced with, you know, loss of employments deaths in the family, you know, so there definitely were some hardship cases in there. But those really were dealt with on an individual basis, I would imagine.

 

Rich Alterman  23:35

Good, good. Cool. Well, now that we've got some insights on the South African lending market, let's spend a few minutes discussing manga and a little more detail. So first, can you share some more background on Wonga? And what led you to doing a management buyout in 2019?

 

Brett van Aswegen  23:49

So longer South Africa was wholly owned, our shares were wholly owned by the UK based company in Surrey, in the UK, but we operated it independently to the UK, in the sense that we were operating under rules and regulations in South Africa as a South African registered entity as well, when the UK business filed for administration or bankruptcy protection, I think would be the equivalent in the US. The South African business continued operating. And we saw a marvelous opportunity to buy the South African business because the challenges that face the UK business were fundamentally different to what we were dealing with in South Africa. We didn't have that challenge that they were faced in the UK. And so, there was absolutely nothing wrong with the South African business. It was a well-established strong brand in the South African markets. And we were, we were sort of three years or so into our turnaround strategy. So, we had a very clear idea of what we wanted to be doing in South Africa. And the problem we were solving for South Africans. And so, there wasn't any sort of process at had to go around to reinvent the business, we had done all the hard work up until that point. And when they were looking, you know, really faced with the decision, aren’t they? Do they sell the South African business? Or do they just shut it down? Because they were winding up the business in the UK, we offered to buy the shares in the business and take over the local operation, which took a long time to conclude the deal. But it was, you know, an opportunity, I think, for me to really independently prove to myself that we could sort of have this purpose-led business that could still make money. I guess, you know, it's sort of conscious capitalists’ kind of approach it like we're doing something worthwhile. It's good for the country, it's good for consumers. But can it still be good for shareholders? Right, I guess, good.

 

Rich Alterman  25:49

Thanks for sharing. So, I know that while you really started more in the payday lending, and now you offer short term installment loans up to six months, and I believe he goes high as 1000 Ran, which would be about four and $20. Us. So, can you share a little bit on that, you know, shift from payday to installment? And how has that impacted your business? And maybe what type of changes did you have to meet your underwriting policies, and you talked about ability to repay, it'd be interesting to just learn about that process without maybe given up some of the secret sauce that you go through to really get to that point where you can be comfortable that this consumer can actually pay the debt.

 

Brett van Aswegen  26:26

Yeah. So, when I took over the business as CEO in 2015, the company was a true-blue payday lender, only offering maximum 30-day loans to consumers, or typically when they were the payday came in, so the average loan term was around 22 days. And on average, consumers were using the product eight to 10 times a year. So, you know, the strategy was a churn and burn strategy, effectively, an incredible amount of money was spent on marketing, there was a, you know, a significantly large quantum of people applying for loans. And we, you know, once the person got a loan, the customer would have to re lend, because they didn't have the means by which to not need to re lend, you know, they would have got caught in the in the classic debt trap. But this would go on until the customer would fall over. And what we picked up then is more than half of the customers over a 12-month period would end up going bad. And so, you know, for me, it just wasn't a sustainable strategy. And one of the first things we did was, you know, look at, at what we needed to do in South Africa, to be able to have a more sustainable business. And what we then did, you know, we had to obviously rebuild platforms and systems and things like that, in order to be able to offer consumers an installment based loan and give consumers up to six months to repay the loan. What also takes place from a from a regulatory perspective is, this whole, I spoke about the affordability assessment. It's a big part of our regulations. So, I need to make sure that the customer can afford to repay the loan installment that I'm giving to him, in addition to all of his other existing credit agreements. So, you know, what we what we found is that the when we implemented that affordability regulation in 2015, and I did that literally, I think two weeks after I arrived in the company, we implemented this regulation, which was coming into fruition, you know, there was some changes in the, in the credit regulation in 2015. But we did that, and in the space of my first month in the job, I had cut our revenue by two thirds. So, we went from being a highly profitable business to loss making in the space of a month and that was my first month in the job. But what we've subsequently managed to do is obviously rebuild the business and shift the, the focus of business of the business is to help people bridge financial cash flow shortfalls that they will experience in their lives as everyone does. I mean, you, me and everyone, sometimes you need cash, and you have facilities available to be able to bridge that some of our customers don't have those facilities. So, we now find that consumers will take on average their loan is, is I mean, okay? It's just to give you a sense of the size of loan to their income. Our average consumers income is 21,000 rands and it's, I'm trying to think what that is, in USD, probably about five and a half $1,000 I think, no $1,050. So yeah, and the size of their loan is on average around 3000 Rand. So, it's a very, very small percentage of their loan. So that's developed by about $150 You know, to the income, so just over, over 10% of their income is what they're what they're lending from us. And People then will use our product on average twice a year, their loan repayments is around three, three months on average. So, people now get into a cycle where they're, they're taking the product, they're, you know, they're settling it over three months, there's normally a gap between their next loan of between one and three months, and they'll take another loan for about three months. So, I'm very happy that we're now able to service people with a product that's helping them, they're not getting caught in a debt trap, the product term is a little bit longer, you know, so it's higher levels of cash flow utilization in those loans. You know, and maybe our yields aren't as high as they were. But the thing is, I don't have to go and acquire 100,000 new customers every single month in order to keep this this boat afloat. So, it's definitely changed the way in which we're building up a receivable customer base. And our flow through of new business is a lot smaller than what it needed to be and what it was back then, in terms of default rates, our default rates are sub 10%. So, we have well over 90% collection rates every month. And for me, that's a very clear sign that we are lending responsibly and ensuring that people are not getting caught in a debt trap. And we've managed to maintain those, those collection rates through multiple business cycles through COVID. Through rising inflation and rising interest rate cycles over the last year, our collection performance is extremely consistent.

 

Rich Alterman  31:28

So, one of the things that is interesting to me is to think about data accessibility. Prior to joining GDS, I was with a company called Teletrac. And Teletrac was actually the first payday credit bureau established in the US. And when payday first started, you know, a lot of the payday lenders would say if I pulled a credit report from TransUnion, or Equifax, or Experian, I know what I'm going to see, I'm going to see a lot of delinquencies. And it's not really going to be something that's going to help me decide whether or not I should make a payday loan or not. So Teletrac was started. And it was really designed to help lenders understand how is this person paying on a payday loan product that I'm going to extend to this consumer? So, a couple of questions when you were doing the payday side, and I understand you use TransUnion? You know, what were the kind of hit rates that you would get on the bureau file? And did 10 People tend to have thin files? Or did you also find the same experience that a lot of their, if they had trade lines, a lot of those trade lines were in a delinquency position. And also, was there ever talk about, you know, creating some type of secondary Bureau, that would just focus on the payday space.

 

Brett van Aswegen  32:37

So, I'm sorry, I keep coming back to the regulations. But we've really got normalized data sharing across our industry. I mean, there are a whole number of credit bureaus registered, but the ones who actually play in the consumer lending space is five or six credit bureaus that get the same data that shared through our data exchange had, right, so they have access to all the same data. So, if you start a credit bureau, you will have almost instant access to all data that's available in the markets. So, I mean, it's good from a perspective of, you know, I can use any credit bureau and have access to the same data. And we don't have this idea of, you know, when Bureau focuses on one kind of data, because there's a credit provider, I have to share all of my data to this debt exchange hub that automatically shares to all the bureaus. So that's just, I suppose one went differential that we'll find here, in terms of performance, you know, the reality is that we're dealing with a segment of the market who's attached attracted to our brand and our value proposition, we're not really servicing a market who has a mortgage loan, and you know, all the other products or we know that there's a small percentage of our customers who have a mortgage loan, but it's not the majority of our customers. And so, you know, if you had to compare our risk profile of our customers against the market average, you know, we could be a little bit riskier than the average. But the reality is that we're not seeing a disproportionate level of negative tradelines. At the credit bureau for our customers. It's not like we are the lender of last resort, we have what we term here, loan sharks, which I think you might have a similar term in the US. But in our world, we are considered a regulated formal credit institution. And we're playing by exactly the same set of rules as our large banks play here. I do the exact same levels of compliance checking as what you would do for a mortgage loan in South Africa. So, you know, in terms of who am I servicing, it's people who have access to the form of markets, but we have this informal market in South Africa which is substantially large, that is completely unregulated and not playing by the same set of rules that I am in charge and completely different, right? It’s of interest. And the problem there is that consumers are being taken to the cleaners by some of these folk. So, we, I mean, I do understand that the US payday lenders, as a cohort have a very bad reputation because of some of the things they're doing in South Africa, as I mean, we were a payday lender. We aren't any more. We're not a short-term lender. But we are, we are treated and seen, I would like to think, as a formal credit provider. And so, we don't have the same level of tarnish. And we're certainly not, we're not picking up the consumers that I have that level of desperation, where they've been excluded from the formal market. Is that being a big differential between the different institutions, or the countries?

 

Rich Alterman  35:46

Yeah, I mean, certainly in the US we've seen most payday lenders have shifted to an installment loan product similar to you have, as well as a line of credit, but certainly, you know, pay days are still out there. The other point I just want to share is that, you know, in the US, we do have what's called the Metro two reporting format, which is used by all the big lenders to report to Equifax, Experian, TransUnion. So, it is a common format, that there's actually association called the CTIA, which is Consumer Data Industry. But then companies like Teletrac, which has competitors, there's Teletrac, there's clarity factor, trust, micro built, and data x. But what we've seen over the last several years is that the bigger bureaus have acquired them via our puppet experience, for example, and Teletrac. And data x by Equifax and factor trust by TransUnion. And part of that was to allow for a more holistic view of a consumer, right, because you had this gap where this data was not showing up in a traditional credit report, but to your point, and one of the big things you mentioned marketing, one of the questions I had for you, under the payday world, and it may be under your current installment, or the concept of lead generators, very popular in South Africa, as they are here in the US, where you as a lender will be evaluating leads that are being driven by some affiliate or organic, a third party company is that similar in South Africa 100% or so.

 

Brett van Aswegen  37:09

So Wonga is a fully digital business, we only operate on digital platforms, we don't have any kind of branch network out there. So, we are fully integrated into the into digital based lending and into social media and into digital aggregators out there, or affiliates. And so, we get a fair portion, probably around 40 to 45% of our businesses coming through affiliate through those kind of lead gen spaces. But you know, we also, because we're a digital business, set for ourselves a few years ago, the ambition of making digital marketing one of our core competencies. And we've invested quite a lot into building out that capability. And so, you know, for us, Google Search is a huge form of our acquiring of consumers through PPC, organic search. And so, you know, we've got a whole team that just focuses on that. And we're very strong at Digital Marketing acquisition as well. But yes, South Africa does have affiliates out there that provide quite a lot of leads. There are some comparative sites out there as well. I think it's a great source of business for us.

 

Rich Alterman  38:21

So, you know, financial inclusion is an area that's receiving a lot of focus in South Africa as it has been here. In the US. November 2023, the National Treasury of South Africa published a paper entitled and inclusive financial sector for all whose objective is to establish the overarching policy for Financial Inclusion in South Africa defined financial inclusion is a state in which all individuals and small medium and micro enterprises have access to and can effectively use a range of quality products and services provided by the regulated financial sector, which includes reaching those segments of society, who historically have been excluded from the formal financial sector. You've talked about this, as well as those who underutilize financial products. Unfortunately, we don't have time on today's podcast to dig deeply into the national Treasury's paper. That said, you published an op ed piece entitled, the growing divide South Africa's financial exclusion crisis, which we're going to include with the post of this podcast. For the remaining time we have on the podcast Brett, can you please share what was the catalyst for writing and publishing your op ed and touch on some of the key points and statistics you put forward to support your concerns?

 

Brett van Aswegen  39:27

Early last year, we had to make a very tough decision to stop lending to thin fall clients. So those are people with no formal credit bureau record. And it really flew in the face of what we're trying to do. Well, commercially, it made sense for us to stop lending to them. You know, philosophically what our business is designed to do is to be able to help people access the formal credit markets. And this just didn't make a lot of sense to me. And so, as a result of that, I went back to go and look at the information that's available from the National Credit regulator. There's a very good data set of statistics that have been recorded over the last 15 plus years of the credit information in the market and what's happening in the market. And what I unpack there is that over the last couple of years, since around 2015, we saw a fairly stable level of credit access in the credit markets. And then post COVID, we've seen a very sharp rise in credit applications, it's now sitting, you know, the last couple of months have been sitting around a 40% growth in credit demand for credit that's we're seeing in the industry. But since around 2018, we've seen a very gradual, but steady rise in the rejection rates of credit applications. And when we dug down into it, we identified that the rejection rates are coming from the low end, the low-income end of the market. So low-income consumers are seeing a higher proportion of rejection rates coming through. And it really got me wondering, why is that and I had my own experience to reference on the reality, unfortunately, is that income has to some degree, a level of reference to the risk that you're seeing coming from consumers. And it's not because low-income consumers are bad peers, it's just because lower income consumers have less disposable income to manage through shocks in their in their earnings. So, when there's a rise in inflation, and there's a cost pressure, a higher income consumer has more disposable income to in order to manage through the shocks, whereas low-income consumers do not. And so, what ends up happening, unfortunately, is that there is a correlation between your level of income and the level of risk that you present to credit providers. And I think that this and certainly from our experience, what we what we ended up doing last year is we were looking at thin file clients and saying, because you're a thin file cloud, we don't have a lot of credit information to be able to understand who to lend to, we started declining them, because the level of risk that they presented to us as a business was disproportionately higher to what we could afford to take. And so, what we're seeing in the markets at a national level is that credit providers are pressing for risk and are rejecting more low-income consumers. And you may be asking, why is that? Why is that happening now? Well, over the last 10 years, the last time we had a pricing review of us of our fees and interest rates that are being charged in this market was in 2015. And since then, we South Africa has an average inflation rate over the last 10 years of 5.3% per annum. And our depreciation against the US dollar has been sitting at around 5.9% per annum. And we've on top of that we've had a number of significant regulatory compliance requirements that have come into play and we've, you know, additional things that we as credit providers need to comply with. And all of that is in the face of the slats of revenue that we're able to earn out of the lending activities that we're doing. And the only way that credit providers can manage this margin pressure is by reducing risk as the only lever that's really available to credit providers. And so, the unintended consequence of these outdated regulations pricing regulations is that the middle to low-income consumers are being disproportionately excluded from the formal credit markets. And what's worse is that these working-class consumers are being forced to access super high-cost credits from unregulated loan sharks in our country. And it just, you know, the irony is that it's the wealthy who are continuing to enjoy artificially low cost of credit, rather than we're giving low cost of credit to low-income consumers. So, as an as a, you know, we have obviously worked with some of our local associations that we're members have, we've brought this to the attention of the National Credit regulator, and we're partnering with them to now start engaging with policymakers around this dichotomy of what's happening in the markets. And, you know, it's obviously it's something we do feel quite passionately about. But if we want to increase access to the credit market, what our policymakers need to realize is that there is a relationship between the cost of credit and access to credit. It's not like there is a right cost of credit, you know, we're not coming there saying you have to increase the pricing to a certain number. But the problem that they need to realize is keeping the cost of credit static over a long-extended period means that as inflation works through that Your access to credit is naturally going to reduce. And if they want to increase access to credit, it's not about rewarding or increasing profits of credit providers. It's about increasing the cost of credit in order to create a higher access to credit in this market. And I suppose bringing this back to the discussion point we had at the beginning of the of the podcast about this, possibly setting a rate in the US market of what the rate should be. And I think the rate you mentioned was around 36% per annum, that's fine, you just set a rate but realize that by setting a rate, you're creating a cap in the market, and you will limit access to credit. And so as much as I do understand the need for policy, and potentially for some kind of price protection, what you're doing at a at a market level is you putting a lid on the market, and there will be a component of the market that will not be able to access credit at those rates. And what you'll find happening as we're seeing in South Africa, is this explosion in the unregulated loan shark activity, which is completely unregulated. And, and this is the need just won't go away. People will find it and it will form these black markets lending activity as what we're seeing in South Africa.

 

Rich Alterman  46:22

Yeah, no, it's a dilemma everywhere, right? You know, we're seeing with the with the increasing Buy now pay later, hearing people that are using BNPL to pay for groceries. That's a problem, right? And inflation is hitting everyone. Unfortunately, we're up on the hour and I had a lot more I wanted to cover with you today. So maybe we'll have to invite you back at some point. But I do want to thank you for joining us today. Once again. This is Rich ultimate. And we've been syncing up with Brett van Aswegen CEO with Wonga, an online lender in South Africa and client of GDS Link since 2023. We hope you've all enjoyed this podcast. Please stay connected with genius link in the lending link to listen to future podcasts and catch up on ones you've missed. Thanks for Thanks for listening. If you've enjoyed today's episode, please be sure to subscribe on Apple, Spotify, Google or wherever you listen to your podcasts. And be sure to leave us a review. Follow us on LinkedIn and connect with us on Twitter at GDS link that's at GDSL I NK have a question for the show or have a specific topic you want us to cover. Hit the link in the description to drop us a note. Thank you for lending us part of your day. Make it a great one.

About Wonga

Established in 2011 as part of the Wonga Group, Wonga South Africa has become a leading force in the nation’s financial technology landscape. Over the past decade, the company has been at the forefront of revolutionizing access to short-term credit, quickly becoming a pioneering force in the local personal finance sector.

In late 2019, Wonga South Africa gained independence from the UK-based Wonga Group following a management buyout led by the local executive team. This shift has reinforced Wonga’s commitment to responsible lending and financial inclusion. Utilizing advanced technology, Wonga continues to offer fast, transparent, and flexible financial products designed to meet the varied needs of its customers.

About GDS Link

GDS Link is a global leader in credit risk management, providing tailored software solutions, analytical and consulting services. Our customer-centric risk management and process automation platforms are designed for the modern lender in their pursuit to capitalize on the entire credit lifecycle.

By providing a personal, consultative approach and leveraging our own industry-leading knowledge and expertise, GDS Link’s solutions and services deliver exceptional value and proven results to thousands of clients around the world.

About The Lending Link Podcast

The Lending Link Powered by GDS Link is a podcast hosted by Rich Alterman and designed for the modern-day lender. Each episode deeply delves into innovation within the financial services industry and transformation efforts, including AI / ML integration, Modeling, Risk Management Tactics, and redefining Customer Experiences.

GDS Link launched The Lending Link to explore unique strategies for the modern-day lender, dive into the innovative advancements GDS Link and our partners are currently developing and delivering, and gain insights from captivating guests within the FinTech, banking, and credit union worlds.

We have a wide range of guests from various lending institutions and diverse organizations who talk about strategies, technology, and everything in between.