In 2005, American Matt Flannery started Kiva, a non-profit organisation that allows people to lend money via the internet to low-income / underserved entrepreneurs and students across the world. By June 2014, the platform had reached 1.3 million small businesses that received nearly $600m in loans. Last year Flannery stepped down as CEO of Kiva (although he continues to sit on its board).
Flannery’s new venture is Branch, a Kenya-based for-profit mobile lending platform. He spoke to How we made it in Africa about his mission to build a ‘branchless bank’ and the challenges of getting Silicon Valley investors to back an Africa-focused start-up.
You founded and ran non-profit lender Kiva for 10 years, and now you have established for-profit lending platform Branch. Is there a reason you opted for a commercial venture this time round?
The rise of mobile technology made it viable to have a for-profit entity to do lending. Kiva funds NGOs that then lend that money to people in cash. With Branch we can reach people directly, and it makes more sense to do this as a commercial venture because you can raise so much more capital as a for-profit entity.
I saw an opportunity and I knew I couldn’t seize it through a non-profit – I couldn’t have raised the money to do it. At Kiva we started [a direct lending] project called Kiva Zip, which is great, but couldn’t scale it to millions of people because we didn’t have the money. In a non-profit, even when you have something that runs really well, you can’t necessarily raise money for it.
When Kiva was starting we got on Oprah Winfrey’s show, we got lots of publicity [and] it was fashionable – which made it possible to get hundreds of millions of dollars. But after 10 years you can’t be fashionable and trendy every day. So non-profits can be very fickle in that sense. It depends on people’s emotions, what they think is ‘hot’.
So now you are building a branchless bank?
Our mission is to provide world class financial services to the mobile generation. Our first product is lending and our first market is Kenya. We are lending to people via their Android phones. You install the Branch app, and the app scans the data on your phone. It particularly looks at your SMS history, your call log, your contact list, and even some Facebook data – and it uses that information to create a credit score.
It then gives you a small loan based on the perception of risk that it perceives in you, based on your phone. It makes a probabilistic decision using artificial intelligence. If I bought a new phone now, I probably wouldn’t get a loan on this app because it doesn’t know enough about me.
Most of the customers we have attracted so far are aged around 30, the majority are male and 80% of them are using the money for business, or their side hustle. So you have taxi drivers getting petrol, a musician making CDs and selling them, or a hotel owner buying food. You also have people who have a business but they have lags, so they need money in the meantime to feed their families.
Right now we disburse 1,000 loans per day. We lend between Ksh.1,000 to Ksh.50,000 (about $10 to $500). Our current repayment period is between two weeks and six months depending on the amount.
The Ksh.1,000 is just an entry point, and in fact people are growing [their loan limits] fast and we have already disbursed the Ksh.50,000 loans to a lot of borrowers. Our vision is to provide big loans. We don’t want to be a small lender or a short-term lender. We want to be like a bank that gives you loans of thousands of dollars.
We are just using these small loans to prove who you are and to get you to a better credit score. One constraint is our money. We just raised $1.4m in February and we have lent almost $2m already. If this continues we will run out of money. So we need to raise more so we can lend larger loans.
Foreign investors are still sceptical about the opportunities in Africa. How do you convince them to lend money to businesses focused on the continent?
In Silicon Valley the tide is turning with regard to investing in Africa. I have had enormous success recently talking to investors, getting them to change their minds about this opportunity. I am battling every day to change the perception and it’s happening. You will see in a matter of time the enormity of money that I am going to raise with this, because Kenyans are proving wrong the perceptions every day. Kenyans are paying back the loans. Our default rate is just 5%. I show investors the data, and the data is proving wrong the sceptics.
Branch runs on an Android app. Don’t you think that people who can afford smartphones don’t actually need your loans?
It’s a chicken and the egg problem. We didn’t design for feature phones because I am trying to design for the majority case in the future. The number of smartphones in Kenya is small today, but it is doubling every year. All the best indications say in 2017 most Kenyans will have smartphones. Our existing business is working. We don’t have the time and resources to do a new product where it reaches people over USSD. It’s completely different technology and we don’t have that expertise. As a start-up with very limited resources we have to focus on one thing.
Describe the challenges you faced setting up Branch.
The main one was convincing funders in Silicon Valley that you can actually start a viable business in Africa. There is an unaddressable scepticism that you can’t really argue with. You can argue, but you can’t prove them wrong. Someone would ask: “Will you get bullied out of the market if you are successful? Will the government or telco shut you down if you are successful? Will there be corruption?”
And I would say: “I have worked here for 10 years and it has been great.” Truth is [telcos] here work with everyone – from banks to start-ups – but just overcoming that scepticism so venture capitalists can even take a meeting, was hard. They would send a quick email back: “Congratulations on Kiva, good for you, but this (Branch) is outside of our theme.’
Now, curiously having had some success, the same people who about a year ago said it is outside of their theme now say we are inside their theme. It’s funny how the theme changes. I guess the theme is things they think will succeed. It was hard to raise funds, even for me with my track record with Kiva.
A VC in the US will fund a start-up that delivers alcohol to your apartment instantly but they won’t fund a business in East Africa that provides basic necessities like credit or e-commerce. It is really foolish, but bound to change. Like I said earlier, things are changing.
Are you looking to take Branch beyond Kenya?
We are currently integrating with MTN in Uganda and [Vodacom] in Tanzania. Early next year we should be in those two countries. Our focus for now is East Africa.
What impact do you hope to have?
I think it is giving business people options and different ways to finance their business. I think one of our biggest impacts will be creating competition. Start-ups can make existing institutions better. We have to make existing banks better by showing them this is how good customer service works, or how borrowers can get loans instantly.
If it’s not Branch becoming the dominant player, it’s at least stoking great competition in the market that eventually helps borrowers along the way. I went to a bank in Nairobi [this week] trying to get a loan for my business because we need more money and I showed them all the transactions and statistics. And at the end they said they need collateral.
We have no collateral, we have no factory. So what do they want? It is really hard to move banks. You can’t move them by arguing. You can only move them by beating them.