Did you know that there is a $35Bn opportunity in the Philippines for alternative financing companies that are capable of embracing technology? The thing is, in the Philippines a lot of individuals and businesses are not served by traditional banks due to either lack of collateral or absence of credit history.
In 2016 the successful entrepreneur James Kodrowski saw that there are a lot of unbanked customers in the Philippines. Gathering a diverse team with extensive experience in leading commercial banks, finance companies, and fintech companies, he decided to found a Right Choice Capital (RCC) based in Singapore, a holding company that would serve South East Asia. The Right Choice Finance (RCF)- is the subsidiary company that will serve the customers in the Philippines in particular, who were left out behind by the traditional banking system. The brand name speaks for itself- the goal is to make the customer feel that they have made the right choice and of course, experience it.
He saw that shark loans (loans with effective annual rates above 100%) were causing a lot of defaults for businesses, as the loan maintenance would cause difficulties with cash flows. Since the beginning RCF has issued thousands of loans with limited or no collateral. They have managed to achieve this thanks to the development of sophisticated scoring algorithms. The algorithms can process thousands of applications per second. The algorithms keep improving as more data is added to the system. The maximum time it takes from the moment of filling the application to the moment of receiving money is just 24 hours. The interest rate is competitive, 1%-5% per month flat rate, due to automating a lot of internal processes and partnering with HR and payroll departments in local businesses to allow payday (salary) loans for individuals without the collateral. The clear sign that the business model is working is the low default rate- below 5%.
Philippines have astonishingly low household debt as a percent of GDP- only 9.4% (in other South Asian countries these figures are much higher; 72% in Singapore, 77% in Thailand and 84% in Malaysia!) Low debt levels in the Philippines are not caused by poor credit rating or inability to repay the loan, as the non-performing loans are around 3% in banks.
Right Choice Finance saw an opportunity in two distinct sectors that are overlooked by the banks- MSMEs (micro, small and medium enterprises) including sole entrepreneurs and individuals.
There are 912,000 MSMEs, in the Philippines. Around 42% of them are looking for financing to improve their working capital, another 17% are wishing to acquire machinery and equipment. However, they have insufficient credit history or collateral. These things are usually required by the old-fashioned banking system, who are unable to adapt to serve these clients. Just think about- how many promising start-ups are missing out on financing, that will overall help to improve the economy and will bring innovation. RCF targets all businesses registered in the Philippines with over a year of operating history.
The same story is with individuals- due to the lack of collateral and incomplete documentary requirements, 70% of Filipino adults are forced into the informal lending sector. The most popular reason why individuals borrow is for Food and medicine (60%), education (19%) and personal business (12%). Given that 62% of Filipino citizens are employed, this is a safe business- to offer payday loans. The key competitive advantage of RCF is integration with the HR system, which allows evaluating applications for salary loans. The customers are approved by their employer, so the rejection rate is only 1%. The target audience of Right Choice Finance is employed citizens with an average salary of below Eur330. More than 90% are repeat customers, as the rates offered by RCF bare competitive in the industry and don’t push the customers in debt spiral. Usually, workers go to their employer to ask for an advanced payment an this was a strain on the businesses as it was an unexpected expense. Given that the Filipino workforce is growing rapidly due to the population expansion, there are more opportunities for Right Choice Finance in the near future. The current portfolio of RCF is over Eur 3 Mln, however, given this tendency RCF has plans to grow its on-balance sheet portfolio to Eur58 Mln within next 5 years.
In the future Right Choice Finance plans to expand regionally and become number one provider of such services in the Philippines. Grupeer investors can earn a premium return and diversify their portfolio with the first loan originator from South Asia – the Right Choice Capital!