{"id":30930,"date":"2018-11-13T16:58:25","date_gmt":"2018-11-13T21:58:25","guid":{"rendered":"https:\/\/digital.hbs.edu\/platform-rctom\/submission\/tala-providing-loans-for-those-without-a-financial-identity\/"},"modified":"2018-11-13T16:58:25","modified_gmt":"2018-11-13T21:58:25","slug":"tala-providing-loans-for-those-without-a-financial-identity","status":"publish","type":"hck-submission","link":"https:\/\/d3.harvard.edu\/platform-rctom\/submission\/tala-providing-loans-for-those-without-a-financial-identity\/","title":{"rendered":"Tala: Providing loans for those without a financial identity"},"content":{"rendered":"<p><strong><u>Context<\/u><\/strong><\/p>\n<p>There are 2.5 billion people in the world without a financial identity<sup>1<\/sup>. Since those people do not have a credit score, fixed income or assets to be used as collateral, they are often left with no financing option on traditional financial institutions.<\/p>\n<p>Tala is a microfinancing institution founded in 2011 with the goal of providing credit to such individuals through analysis of data collected from client\u2019s cellphone [exhibit 1]. The company provides unsecured loans ranging from US$ 10 to US$ 500 to clients without any credit history or income proof, having consolidated operations in Kenya, Tanzania and the Philippines.<\/p>\n<p>&nbsp;<\/p>\n<p><strong><u>Current Business Model<\/u><\/strong><\/p>\n<p>To access an individual credit worthiness, Tala`s evaluate over 2.000 data sets available on the client\u2019s phone, informing decision on three different criteria<sup>2<\/sup>:<\/p>\n<ul>\n<li>Verification data: Are the clients who they say they are?<\/li>\n<li>Credit capacity: What\u2019s the client inferred debt to income ratio?<\/li>\n<li>Behavioral data: What\u2019s the client willingness to pay?<\/li>\n<\/ul>\n<p>The company\u2019s business model is a very interesting example of Machine Learning\u2019s application. By analyzing user\u2019s social network, app and email usage, location over time and personal contacts, Tala\u2019s algorithm is able to correlate user\u2019s behavior with its credit worthiness. For example, the algorithm identified that users that have high network diversity and constant contact with that network have a 9% increase in repayment rates<sup>1<\/sup>. By allowing the model to continuously iterate the correlations between the data and the user\u2019s repayment rates, Tala has been very successful in having low defaults in such a risky market. \u00a0As a comparison, Tala has repayment rates of 92%<sup>2<\/sup>, versus the average 83.5% in US subprime loans in 2015<sup>3<\/sup>.<\/p>\n<p>As Tala\u2019s CEO, Shivani Siroya, describes it: \u201cthe problem of financial access is, ultimately, a data problem\u201d<sup>4<\/sup>.\u00a0 Tala\u2019s intensive use of data and machine learning allowed it to gain two important advantages over traditional microfinancing institutions.<\/p>\n<p>First, it strongly reduced the costs associated with servicing the loan. Typical institutions have a labor-intensive process of loan officers visiting clients to conduct interviews and validate provided information. Since those costs are relatively fixed per client, they carry a stronger burden on the small loans of a microfinancing institution<sup>5<\/sup>. Tala has virtually no fixed costs associated with servicing a new loan.<\/p>\n<p>Second, it is able to provide loans at a fraction of the time. 85% of Tala\u2019s clients receive credit scores in less than 10 minutes<sup>6<\/sup>. This provides extreme convenience to the clients and allows the company to grow at a rate of 130% quarter-over-quarter.<sup>7<\/sup><\/p>\n<p>While allowing the company to scale fast, Tala\u2019s business model also feeds its own algorithms. With more data, Tala becomes increasingly better at predicting a client\u2019s chance of default, generating additional competitive advantages and increasing barriers to entry.<\/p>\n<p>&nbsp;<\/p>\n<p><strong><u>Future opportunities and challenges<\/u><\/strong><\/p>\n<p>In 2018 the company raised $50 million in its Series C and announced a strategic partnership with Paypal<sup>8<\/sup> in order to fund its growth. Together with the funding, the company is evaluating its priorities for the future. Expansion to huge markets such as India and Mexico seems logical<sup>9<\/sup> but another option could be the development of related products to Tala\u2019s clients, such as savings accounts, insurances and investments.<\/p>\n<p>While Shivani says openly that those products are not the priority now<sup>2<\/sup>, I would be inclined to think they are necessary to improve Tala\u2019s client lifetime value and serve as additional barriers to entry for competitors. In the past few years, we\u2019ve seen the proliferation of digital consumer wallets, such as WeChat in China, Venmo in the US and Apple Pay and Samsung Pay across the world. These products generate potential risks for Tala\u2019s business, since they already have the customers, the resources and the data needed to provide loans. In fact, the development of such a product is certainly a major reason why Paypal, itself a wallet, invested in Tala.<\/p>\n<p>In my opinion, Tala needs to increase its touchpoints with clients to protect itself from those competitors. While Tala\u2019s customers use the app to get loans on an average of 6 times a year<sup>2<\/sup>, most digital wallets are used daily by clients. With more touchpoints, those wallets have higher chances of converting users to their own microfinancing services. The only way for Tala to survive in that environment might be to offer high frequency products, such as savings accounts or financial education courses.<\/p>\n<p>Even though challenges exist, it\u2019s undeniable that Tala business model is disrupting the existing microfinancing scenario. Nevertheless, a major question surrounding the business persists. Does the access to credit promote higher income for families? Is it sustainable long-term? In fact, research of traditional microfinancing in markets such as India and Mexico has not shown increases in family income following increases in the availability of credit<sup>10<\/sup>. Is Tala&#8217;s business model innovative enough to provide long term value to it\u2019s clients and the society? \u00a0<em>&lt;797 words&gt;<\/em><\/p>\n<p>&nbsp;<\/p>\n<p><strong>Exhibit 1: App screens<\/strong><\/p>\n<p><a href=\"https:\/\/d3.harvard.edu\/platform-rctom\/wp-content\/uploads\/sites\/4\/2018\/11\/Tala-Print-Screens.png\"><img loading=\"lazy\" decoding=\"async\" class=\"size-large wp-image-33559 alignleft\" src=\"https:\/\/d3.harvard.edu\/platform-rctom\/wp-content\/uploads\/sites\/4\/2018\/11\/Tala-Print-Screens-1024x597.png\" alt=\"\" width=\"640\" height=\"373\" srcset=\"https:\/\/d3.harvard.edu\/platform-rctom\/wp-content\/uploads\/sites\/4\/2018\/11\/Tala-Print-Screens-1024x597.png 1024w, https:\/\/d3.harvard.edu\/platform-rctom\/wp-content\/uploads\/sites\/4\/2018\/11\/Tala-Print-Screens-300x175.png 300w, https:\/\/d3.harvard.edu\/platform-rctom\/wp-content\/uploads\/sites\/4\/2018\/11\/Tala-Print-Screens-768x448.png 768w, https:\/\/d3.harvard.edu\/platform-rctom\/wp-content\/uploads\/sites\/4\/2018\/11\/Tala-Print-Screens-600x350.png 600w, https:\/\/d3.harvard.edu\/platform-rctom\/wp-content\/uploads\/sites\/4\/2018\/11\/Tala-Print-Screens.png 1554w\" sizes=\"auto, (max-width: 640px) 100vw, 640px\" \/><\/a><\/p>\n<p>&nbsp;<\/p>\n<p>&nbsp;<\/p>\n<p>&nbsp;<\/p>\n<p>&nbsp;<\/p>\n<p>&nbsp;<\/p>\n<p>&nbsp;<\/p>\n<p>&nbsp;<\/p>\n<p>&nbsp;<\/p>\n<p>&nbsp;<\/p>\n<p>&nbsp;<\/p>\n<p>Source: Android Play Store<\/p>\n<p>&nbsp;<\/p>\n<p><strong><u>Sources<\/u><\/strong><\/p>\n<p>[1] Shivani Siroya. 2016. TED Talks &#8211; A smart loan for people with no credit history yet. Video content. Available at: www.ted.com\/talks\/shivani_siroya_a_smart_loan_for_people_with_no_credit_history_yet #t-100284. [Accessed 8 November 2018].<\/p>\n<p>[2] Peter Renton and Shivani Siroya. 2017. Lend Academy. Audio content. Available at: https:\/\/www.lendacademy.com\/podcast-113-shivani-siroya-tala\/. [Accessed 8 November 2018].<\/p>\n<p>[3] ProQuest. n.d.\u00a0Mortgage delinquency rates in the United States in 2015, by loan type. Statista.. Available at: \u00a0https:\/\/www-statista-com.prd2.ezproxy-prod.hbs.edu\/statistics\/206494\/us-mortgage-delinquency-rates-by-loan-type\/. [Accessed November 13, 2018]<\/p>\n<p>[4] MIT Initiative on the Digital Economy; Shivani Siroya. 2017. 2017 IIC Winner: Tala. Video Content. Available at: https:\/\/www.youtube.com\/watch? v=zbCW2Grvt5U. [Accessed 9 November 2018].<\/p>\n<p>[5] Amy Yee. \u2018Why microfinance loans have such high rates\u2019, The Wall Street Jorunal, Aug 2015. Available at: \u00a0https:\/\/www.wsj.com\/articles\/why-microfinance-loans-have-such-high-rates-1439321404?mod=article_inline. [Accessed 8 November 2018].<\/p>\n<p>[6] Finextra. 2018. Lending app Tala targets India, fuelled by $65m in new financing. Available at: https:\/\/www.finextra.com\/pressarticle\/73511\/lending-app-tala-targets-india-fueled-by-65m-in-new-financing\/retail. [Accessed 11 November 2018].<\/p>\n<p>[7] Medium. 2018. Meet Anay, Tala\u2019s VP of Country Growth! Available at: https:\/\/medium.com\/tala\/meet-anay-talas-vp-of-country-growth-86ceefdd89a8. [Accessed 9 November 2018].<\/p>\n<p>[8] CrunchBase. Available at: https:\/\/www.crunchbase.com\/organization\/inventure#section-overview. [Accessed 8 November 2018].<\/p>\n<p>[9] Tala. Available at: https:\/\/tala.co\/tala-paypal. [Accessed 8 November 2018].<\/p>\n<p>[10] Odell, Kathleen E. Measuring the impact of Microfinance: looking to the future. Available at: https:\/\/www.finca.org\/blogs\/understanding-the-impact-of-microfinance\/. [Accessed 9 November 2018]<\/p>\n","protected":false},"excerpt":{"rendered":"<p>2.5 billion people in the world don&#8217;t have access to financial services. Tala is a startup trying to access this market by evaluating user&#8217;s credit worthiness using only their smartphone data. <\/p>\n","protected":false},"author":11025,"featured_media":30931,"comment_status":"open","ping_status":"closed","template":"","categories":[2020],"class_list":["post-30930","hck-submission","type-hck-submission","status-publish","has-post-thumbnail","hentry","category-microfinance","hck-taxonomy-organization-tala","hck-taxonomy-industry-financial-services","hck-taxonomy-country-kenya"],"connected_submission_link":"https:\/\/d3.harvard.edu\/platform-rctom\/assignment\/rc-tom-challenge-2018\/","yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v27.3 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Tala: Providing loans for those without a financial identity - Technology and Operations Management<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/d3.harvard.edu\/platform-rctom\/submission\/tala-providing-loans-for-those-without-a-financial-identity\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Tala: Providing loans for those without a financial identity - Technology and Operations Management\" \/>\n<meta property=\"og:description\" content=\"2.5 billion people in the world don&#039;t have access to financial services. 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