Banks are ‘stuck in the past’ — Yiba defiantly enters African credit market

The peer-to-peer (P2P) lending space in South Africa is heating up. A Johannesburg-based startup called Yiba, an acronym for “You’re Invited Banks Aren’t”, is about to join the fray.

South Africa’s unsecured credit pie is estimated to be worth north of R25-billion. Yiba co-founder Alastair Curtis believes it’s high time that traditional lenders part ways with their large profits.

The old-fashioned way of saving and lending involves banks. Yiba, like its closest local competitor, RainFin, is betting that lending and borrowing between you and me, is the way forward. Why? The middle-men (banks), are not particularly bothered to provide good rates to borrowers and better returns to investors.

Being a bank is a good deal. You mitigate risk by aggregating chunks of savings from a bunch of your customer accounts at relatively low interest rates, and rake in the profits by channeling that money into loans, sold to low risk borrowers, at expensive interest rates.

How expensive?

Banks that offer loans typically operate at a profit margin of 20%. They pay savers about 7% (on the high end), and lend their money out to borrowers at higher rates. Legally, banks can charge as much as 31% interest on loans.

P2P loan platforms are loaded with disruptive potential, allowing individuals to directly lend to and borrow money from each other. There is no bank or other large credit provider. If all goes well, lenders earn a better return than what they would have if they had saved their money in a bank. Borrowers also benefit through paying lower interest rates on their loans.

“Incumbents are stuck in the past. Banks stopped putting customers at the centre; products started being created by lawyers and marketers. People and small businesses are getting very tired of it,” says Curtis. “People want to be taken seriously and treated with a degree of dignity, they appreciate transparency and the incumbents have forgotten about that and it’s a source of opportunity for Yiba today.”

P2P sounds lovely. For the most part. There’s the little issue of risk to consider, however.

If you lend money and the borrower defaults, the loss is all on you. Curtis says that this has been managed internationally — Prosper, Lending Club (both US-based) and Zopa (UK) — by lenders spreading their risk over a number of borrowers. Additionally, from the borrower’s point of view, a loan is made up of aggregated loans.

Yiba, founded on 1 September 2013, plans to target the South African middle class first before moving on to the rest of Africa, but Curtis and co-founders Shane Lavagna-Slater are in no rush. Curtis says that the startup will only accept applicants with impeccable credit histories, which “will probably translate to about 10% of all applicants (research based on global trends).”

Yiba has a healthy (read sober) growth outlook. While the US currently leads the world in volume of P2P lending transactions — estimated to be around 72% — Yiba acknowledges the predictions that only 2% of crowdfunding transactions will come from the rest of the world.

“We are of the opinion that an existing business model in new market can be much more successful than a new business model in an existing market. We have a proven idea and an opportunity. Hence we have decided to bring the peer-to-peer lending revolution to Africa, starting in South Africa,” says Curtis.

Yiba intends to launch to the public late in the first quarter of 2014.

Curtis says that since Yiba will take vetting borrowers seriously, there is limited risk, allowing the startup to keep its interest rates “super, duper low.”

Yiba intends to play matchmaker between borrowers and investors, handling the funds management and servicing of every loan on behalf of both parties — for a fee.

Curtis and company plan to make money from loan origination fees — a one-time fee on funded loans from borrowers — as well as loan servicing fees calculated at a fixed amount annually or a percentage of the loan amount, and facilitation fees.

Co-founder Lavagna-Slater has a background in banking and consulting experience in sub-Saharan Africa. He developed the idea for Yiba during his PhD studies at the University of Pretoria — he also holds a master’s degree in financial management. He says that bringing Yiba to life in the South African context has proven to be “complex”.

Team mate Curtis graduated from the University of Cape Town, has worked at a bulge bracket investment bank in London, spent time in telecoms consulting in sub-Saharan Africa and completed a stint at a local high-tech startup operating in the military sector that spawned his passion for entrepreneurship.

Yiba is self-funded, but has apparently had its fair share of wooing from investors. “We were offered seed funding from a local venture accelerator based in Johannesburg and we are actively meeting with VCs,” says Curtis.

Despite RainFin’s presence and other online lending platforms such as Wonga.com, Yiba’s growth in Africa will certainly be met with less resistance than in developed markets. Beyond Zopa, Lending Club and Prosper, the biggest P2P platforms internationally include Funding Circle and Ratesetter in the UK, SoFi and Commonbond in the US, Auxmoney, Pret d’Union, Comunitae, Smartika in Europe, SocietyOne in Australia and Medifund in Asia. Popular non-profits include Kiva, Zidisha and Givkwik.

What’s ahead?

“We have had a poster made that simply says: ‘5:2:5’, these numbers represent 5 countries: 2 million users: 5 years. This is our goal. We want to become the most widely used, trusted and respected peer-to-peer lending platform on the African continent,” says Curtis.

Pending a successful South African launch, Yiba intends to roll out to other African countries that have high broadband and smartphone penetration.

“We will also consider those countries that embrace the concept of m-commerce and mobile money e.g. Kenya and Tanzania with M-Pesa,” says Curtis.

Yiba’s ultimate ambition is to fuel “banking 3.0.”

“How about a personal loan on your phone in say a 5 minute process. We want to do this via a smartphone application. The problem we are trying to solve is that we keep hearing that mobility is the future of banking, that bank 3.0 is going to somehow live on a phone, and then how can then be so difficult to get a loan on a phone? Can you do that in SA?,” hints Curtis.

The big picture for Yiba includes not only small loans, but also products geared toward larger investors, including funds for accredited investors.