Branch’s Micro-Finance Failure and Huge Success: A Case Study

Kenyan Shilling

May 17, 2019//-The largely unbanked African continent has been witnessing a dramatic progress in financial inclusion over the past years. Broad mobile adoption has been giving impetus to this refreshing change.

Africans particularly those living south of the Sahara, stopped embracing cumbersome remittance practices in favour of instantaneous SMS-based mobile fund transfers.

In 2017, Sub-Saharan Africans were some of the primary contributors to the widespread mobile wallet transactions worth $780 billion, as illustrated in the Carsurance infographic.

One of the successful disruptors in Sub-Saharan Africa is Branch, a young micro-finance company, which had to rely on extreme ingenuity to overcome the challenges the region presents.

Streamlining the Application Process

Unlike micro-financiers in the West, Branch’s minimum personal loan is just $2. In Kenya, Nigeria, and Tanzania, two bucks have a purchasing power of up to 40, so such a product is appealing to more customers.

The company’s $2-loans have a one-month term at 15% interest, and its $1,000-loans at 15% APR are payable in 12 months. Branch loses more money than it makes out of smaller loans, but its secret to profitability lies in repeat business. It also charges no overdraft fees, ensuring its customers do not get trapped in debt cycles.

The company’s business model is purely smartphone-based. Its technology judges the creditworthiness of borrowers through their phones, which is generally not frowned upon as invasion of privacy in this part of the world.

Since the financial transactions, from ATM withdrawals to utility bill payments, in the countries it serves usually trigger SMS alerts, Branch gleans valuable customer insights from text messages.

The company’s application process requires no face-to-face interactions to eliminate human biases and to promote automation. A borrower just needs to download Branch’s app to request for a loan.

Facing Early Struggles

The biggest problem the company encountered, since its foundation in 2015, is risk management. Using almost 5,000 accounts, fraudsters in Kenya stole a total of $50,000 from Branch.

The startup’s team learned about the uptick in non-payment at the end of December of the same year the company was established. Branch admittedly expected 6% of all of its loans to go into default, but 12% of them actually went bad.

Turning Losses to Victories

This oversight would have hurt the company financially more if it failed to figure out a way to counter the fraud sooner. Luckily for Branch, it was able to unmask the culprits through a careful data analysis.

It turned out there were only about a dozen individuals behind the nearly 5,000 fake accounts. Branch’s co-Founder and CEO, Matt Flannery, managed to get ahold of them in hopes of learning about their tricks to protect the company moving forward.

Interestingly, the perpetrators were cooperative. They spilled the beans, revealing tactics like doing phone resets to apply for new loans after receiving the funds. Based on the confessions, the company started using similarity detection to combat the basic fraudulent hacks, to which its algorithm used to be vulnerable.

Branch learned from its experience and has raised its revenues by 500% since then. With a dedicated team of data scientists, the company is now more capable of monitoring its risk exposure effectively.

The fintech startup has not expanded in Africa any further yet, but its presence should give it the edge over potential competitors to dominate other markets once regulation becomes less of a concern in other parts of the continent.

African Eye Report

 

 

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