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Instant loans ain’t cheap: The cost of convenience

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CRECENCIO I. CRUZ

By Melissa Luz T. Lopez, Senior Reporter

PICTURE this: a family emergency crops up, and with it comes the urgent need for a few thousand pesos to save the day. Who do you run to?

Instant loan providers hope they will be the first thought of a struggling mind during such cases. One might think that these firms are little fish compared to banks which have long dominated the industry, but the very fact that financing companies have stayed alive for decades proves the opposite.

Demand for instant cash continues to grow especially in urban areas and now assisted by digital portals meant to keep up with the urgent demand. The need is so strong that international loan providers actually view the Philippines as a prime market, and have raced to cash in on the huge opportunity here.




Take the case of Robocash, a loan provider all the way from Russia which has chosen Manila as its first foray into Southeast Asia.

Felipe Jose N. Zamora III, president of the homegrown Golden Legacy Financing Corp., recalled how the Russian firm had approached them back in 2016 with an offer which they could not refuse. Prior to the tie-up, their firm had been focusing on military retirees and pensioners.

It then led to a formal partnership in September 2017, which allowed Robocash to set up loan booths starting with their first branch at the Recto Station of the Light Rail Transit Line 2. They have since expanded to operate in other train stations as well as supermarkets, with their network currently at 42 booths in less than a year since entering the Philippines.

“The real focus is really the unserved need. Most of the clients we serve are those which banks don’t cater to, or have difficulty servicing. A lot of them have actual dire needs, and if possible, we want to be the ones they go to for that need,” Mr. Zamora said in an interview at their humble headquarters in Quezon City.

Mr. Zamora then went on to be president of Robocash Philippines.

Unlike banks which follow a rigid 9 a.m. to 3 p.m. schedule, instant loan booths are open until 10 p.m., while online applications may be done 24/7. Around 75% of their loan volumes come from branches, while a fourth is generated online.

Robocash Philippines’ goal is to fulfill a loan in five minutes — something that may sound ambitious for banks, but they say is actually doable.

GOING PAPERLESS
What keeps instant loans more attractive to borrowers is access and convenience, as these providers do away with the paperwork often required by banks.

Mr. Zamora said that Robocash loans only require one government-issued identification card (like passport or social security) in order to secure a loan, worth as much as P10,000 for first-time borrowers and P25,000 for repeat customers. This would then trigger a computerized process of verifying a person’s identity, employment status and credit history that will eventually trigger the release of funds to a bank account, mobile wallet or over-the-counter.

Tala, another instant loans start-up from California, has also ventured into the Philippine market recently. Their operations have remained purely digital as the entire loan processing, approval and releasing occurs via their mobile app for Android smartphone users.

“Without data on underbanked populations, banks can’t make lending decisions or design financial products that fit people’s lives. Tala’s proprietary identity and credit scoring technologies use alternative data to prove the potential of customers who have been underserved by traditional finance and deliver customized loans that meet their unique needs,” said Angelo Madrid, country manager of Tala Philippines.

Mr. Madrid said the Philippines has emerged as Tala’s second-biggest market globally and is the largest in Southeast Asia, as they take advantage of the country’s tech-savvy population armed with smartphones and Internet.

Both lenders tap credit bureaus and artificial intelligence to assess loan applicants and process their credit lines in a jiffy, against standard practice of posting a collateral.

A check with their online portals require signing up for an account, supplying one’s government ID numbers, personal address and contact number, job details, contact numbers of two co-workers and two relatives as character reference. A user must also sync his/her Facebook profile to confirm identity.

THE CATCH

However quick and breezy as it may be, it comes with a cost.

A Tala loan secured via the Lendr online portal would have to be settled within a month with 15% interest. Payments are split into four weekly payments worth P2,875 – or a total of P11,500.

On the other hand, Robocash charges a fixed daily rate of 2.5% for loans ranging from P1,000 to P25,000. For a P10,000 loan, a borrower needs to come back and settle P17,500 within 30 days after securing the cash.

These compare to the quoted lending rates of commercial banks for short-term loans, which ranged from 3.4-8.7170% for the week of Aug. 13-17 according to central bank data.

Robocash offers a one-time payment scheme for quick loans within 30 days after releasing the credit, hence the moniker “payday loan.” However, cash-strapped borrowers may apply for a longer repayment program by as much as a year subject to additional fees.

Mr. Zamora said their typical borrower works in Metro Manila and earns P10,000 to P20,000 monthly.

Although steep, these margins allow the lender to price in the cost and risks attached to serving this market segment, particularly to cover potential defaults — which Mr. Zamora admitted to being “high,” although not unexpected.

Ronnel C. Mapaye, credit and collection manager at Robocash, likened their service to ride-hailing apps.

“Why are you taking a taxi or an Uber if you have a choice to ride public transportation? What benefits can you get — it’s the accessibility, convenience and comfort. And you’re willing to pay, no one forced you to get a taxi when there’s a jeepney,” Mr. Mapaye said.

While rates may be astounding, the businesses thrive as the need for instant cash persists. Similar to cash disbursement, loan payments can also be made over-the-counter or via bank deposits and fund transfers.

REGULATORS WEIGH IN
Both Robocash and Tala are under the watch of the Securities and Exchange Commission (SEC) as regulator of financing companies.

The SEC, however, admitted that they cannot impose a cap on the interest rates charged on such loans.

“Being contractual in nature, the specific terms of loan agreements (particularly the interest rates and penalty charges) are beyond the authority of the SEC to regulate,” Rachel Esther J. Gumtang-Remalante, Assistant Director and Officer in Charge of the SEC’s Corporate Governance and Finance Department, said via e-mail when sought for comment.

“Unfortunately, although the Commission has regulatory and supervisory jurisdiction over lending and financing companies, it does not include the authority to regulate interest rates nor pass upon controversies involving the same, in view of the suspension of the Usury Law.”

For its part, the Bangko Sentral ng Pilipinas (BSP) said they see lending companies as providing a complementary service to the public, particularly for over 52 million unbanked Filipino adults.

“There are financing gaps in the market that can be legitimately filled by players that leverage on technology to enable them to provide ‘instant loans’ which can also be a potential case study for traditional lenders wanting to expand client base by leveraging technology throughout the whole credit process,” said BSP Deputy Governor Chuchi G. Fonacier, who heads the Financial Supervision Sector.

Ms. Fonacier cited the advantage of borrowing from lending firms, as they are “better protected” and are subject to “relatively lower” interest rates compared to loan sharks.

“While we understand the appeal of 5/6 schemes to some borrowers given the convenience and access provided, their exorbitant interest rates can trap the borrower in a cycle of expensive informal debt. Moreover, informal loans do not contribute in building the borrower’s credit history that can eventually support access to loans with better terms from banks and other formal lenders,” she added.

Times may have evolved to give birth to more convenient solutions to access cash, and those who need the service pay the premium for convenience.