In 2005, American Matt Flannery started Kiva, a non-profit organization that allows people to lend money via the Internet to low-income / underserved entrepreneurs and students around the world. By June 2014, the platform had reached 1.3 million small businesses who received nearly $ 600 million in loans. Last year, Flannery resigned as CEO of Kiva (although he continues to serve on its board of directors).
Flannery’s new venture is Branch, a for-profit mobile lending platform based in Kenya. He spoke to How we did it in Africa on its mission to build a âbranchless bankâ and the challenges of getting Silicon Valley investors to support an Africa-focused start-up.
You founded and ran nonprofit lender Kiva for 10 years, and now you’ve created the Branch for profit lending platform. Is there a reason why you went for a business venture this time around?
The rise of mobile technology has made the possibility of having a for-profit entity to make loans viable. Kiva funds NGOs who then lend this money to people in cash. With Branch, we can reach people directly, and it makes more sense to do that as a business enterprise because you can raise a lot more capital as a for-profit entity.
I saw an opportunity and knew I couldn’t seize it through a nonprofit – 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 we couldn’t expand it to millions of people because we didn’t have the money. In a non-profit organization, even when you have something that works great, you can’t necessarily fundraise for it.
When Kiva started we were on the Oprah Winfrey show, we got a lot of publicity [and] it was all the rage – which raised hundreds of millions of dollars. But after 10 years, you cannot be trendy and trendy every day. Nonprofits can therefore be very fickle in this sense. It depends on people’s emotions, what they think is âhotâ.
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 loans and our first market is Kenya. We lend to people through their Android phones. You install the Branch app and the app analyzes the data on your phone. In particular, it examines your texting history, call log, contact list, and even some Facebook data – and it uses that information to create a credit score.
He then grants you a small loan based on the perceived risk he perceives in you, depending on your phone. He makes a probabilistic decision using artificial intelligence. If I bought a new phone now, I probably wouldn’t get a loan for this app because it doesn’t know enough about me.
Most of the clients we have attracted so far are around 30 years old, the majority are men and 80% of them use the money for business or their sideline. So you have taxi drivers who get gasoline, a musician who makes CDs and sells them, or a hotel owner who buys food. There are also people who have a business but have delays, so they need the money while they wait to feed their families.
Right now we make 1,000 loans a day. We lend between 1,000 and 50,000 Ksh (approximately 10 to 500 dollars). 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 loans of 50,000 Ksh to many 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 thousands of dollars in loans.
We just use these small loans to prove who you are and to get a better credit score. One constraint is our money. We just raised $ 1.4 million in February and have already loaned close to $ 2 million. If this continues, we will run out of money. So we need to raise more to be able to lend larger loans.
Foreign investors remain skeptical of the opportunities in Africa. How to convince them to lend money to companies focused on the continent?
In Silicon Valley, the tide is turning when it comes to investing in Africa. I have had tremendous success recently speaking with investors, causing them to change their minds about this opportunity. I fight every day to change the perception and it is happening. You will soon see how much money I am going to amass with this, because Kenyans deny the perceptions every day. The Kenyans repay the loans. Our default rate is only 5%. I’m showing the data to investors, and the data proves the skeptics wrong.
Branch runs on an Android app. Don’t you think people who can afford smartphones don’t really need your loans?
It is the problem of the chicken and the egg. We have not designed for multifunction phones because I try to design for the majority of cases in the future. The number of smartphones in Kenya is low today, but it is doubling every year. All the best indications are that by 2017 most Kenyans will have smartphones. Our existing business is functioning. We don’t have the time or the resources to create a new product that reaches people through USSD. It’s a 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 encountered while creating Branch.
The main thing was to convince the Silicon Valley donors that you can actually start a viable business in Africa. There’s an overwhelming skepticism that you can’t really argue with. You can argue, but you can’t prove them wrong. Someone would ask, “Will you be bullied in the marketplace if you are successful?” Will the government or the phone company shut you down if you are successful? Will there be corruption?
And I would say, âI’ve been working here for 10 years and it’s great. The truth is [telcos] here working with everyone – from banks to start-ups – but it was hard to overcome that skepticism so that venture capitalists could even join a meeting. They would send a quick email back: âOutside of our topic.
Now, oddly having had some success, the same people who about a year ago said it was outside their theme are now saying we’re inside their theme. Funny how the theme changes. I guess the theme is what they think is successful. It was difficult 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 it won’t fund a business in East Africa that provides basic necessities like credit or e-commerce. This is really crazy, but it will change. As I said earlier, things are changing.
Looking to take Branch beyond Kenya?
We are currently integrating with MTN in Uganda and [Vodacom] in Tanzania. At the beginning of next year, we should be in these two countries. Our focus for now is East Africa.
What impact do you hope to have?
I think it gives business people options and different ways to finance their business. I think one of our biggest impacts will be creating competition. Start-ups can improve existing institutions. We need to improve existing banks by showing them how good customer service works or how borrowers can get loans instantly.
If Branch doesn’t become the dominant player, it at least stirs up a lot of competition in the market which ultimately 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 stats. And in the end, they said they needed guarantees.
We don’t have a warranty, we don’t have a factory. So what do they want? It is really difficult to move the banks. You cannot move them while chatting. You can only move them by beating them.