JIKKU JOSEPH: How consumer data can help fix SA’s credit crisis

As the economy struggles out of the Covid-19 pandemic, ordinary South Africans are suffering most. Debt to disposable income for SA households is at a staggering 75%. This means the average SA family is spending three quarters of their take-home pay on servicing loans, leaving little else for monthly expenses such as food, school fees and transport.

Even scarier is that this figure, from the SA Reserve Bank, only considers formal debt — in other words, loans from registered financial service providers such as banks. In reality, the percentage is probably much higher. Millions of desperate South Africans have no access to the formal banking sector and are at the mercy of loan sharks, who offer off-the-book credit at obscenely high interest rates, with dangerous consequences if loans are not repaid.

It’s an untenable situation and a sad reflection of our polarised society. We might have a highly regulated and well-developed financial sector, but it’s pointless if that sector only services a minority of citizens.

New developments will hopefully change the status quo. I have written previously about how financial institutions can give many more people access to safe and smart ways of saving and investing, by combining traditional information with alternative data. This data comprises all transactional metrics outside a history of paying off a car and a home loan, for example — things such as cash payments for groceries, transport and airtime; medical aid contributions; payment for video streaming services; or payments towards electricity and other utilities.

Gathering this data relies on implementing a robust open-finance framework, where customers can share their financial data safely and securely with third-party companies. However, this framework is still under review by the Financial Sector Conduct Authority (FSCA) and is likely not to be formalised anytime soon. Also, open finance relies on the consumer’s agency — he or she must make the decision to share their financial data, which is often a big ask.

In combination with the FSCA process a better solution is for established financial institutions to take ownership of SA’s credit crisis and think creatively to offer better solutions to more people. The key is to use data to build a complete picture of the customer. Current practice is for customers to fill out a form detailing their monthly budget when applying for credit. How can a bank trust this method? And why should the bank trust it, when there is technology available to track a customer’s spend and provide a detailed and accurate account of that customer’s financial health? 

Using data smartly goes much deeper than approving credit applications. By aggregating and categorising transaction data across various consumer segments, a financial institution can gain detailed insights into segments that might previously have been ignored. And that can result in the development of more inclusive financial products like safe and affordable credit options.

In turn, institutions will position new products to their customers with greater potential for take-up. At present, a bank might know a customer’s gender but not their age, spending habits or preferences. However, combine all of this information and link it to products that make sense in the segment, and there will be a surge of demand. 

We are so quick to point out problems in SA, both in society and in business. The solutions to those problems often seem too complex or impossible to implement. That’s not the case here. The technology exists and it makes sense. It’s time to use it.

• Joseph is MD of personal finance app and API service, 22seven.