The Irish entrepreneur working to make the Kenyan digital lending market more transparent
When Kenyans gained access to credit, lenders targeted them with a "land grab". They harvested data and blacklisted large numbers of people for small defaults, says Lorcan O’Cathain.
Morning everyone!
You can read my interview from Nairobi with Irish fintech entrepreneur Lorcan O’Cathain below. The article originally appeared in The Currency and explains how Kenya’s digital money revolution also led to a data privacy “land grab.”
Enjoy and let me know if you have any comments or questions!
Hannah
The Irish entrepreneur working to make the Kenyan digital lending market more transparent
Lorcan O’Cathain greets me at the co-working space in downtown Nairobi where his fintech company Money254 is based. The Athlone native and his American co-founder, Adam Versprille, are both at the office that day, working on the venture they started three years ago from the apartment they then shared in the Kenyan capital.
The concept behind Money254 will be familiar to Irish consumers who use Bonkers or Switcher to compare the cost and terms of loans, home insurance or utility providers. Money254’s website and app now have four million users (around 15% of adults in Kenya) interacting with them and using them to robustly compare complicated lending products with big pricing spreads in a market that has been, until recently, largely unregulated.
With 100 institutions on board and over 300 financial products available, Money254 is the most comprehensive online financial marketplace in Kenya.
“Our primary revenue driver is lead generation,”says 31-year-old O’Cathain who serves as Money254’s CEO. “We charge institutions a fee every time we successfully connect a user to one of their products. We also charge institutions monthly subscription fees for access to real time access to market and competitive insights within their product verticals.”
To date, Money254 has attracted $1.9 million in VC funding and grown to a company with ten employees.
O’Cathain and Versprille first met while they were neighbours in Rwanda’s capital Kigali, where O’Cathain was working as an economic adviser to the Rwandan government. “We started a fashion eCommerce company together as a side project,” says O’Cathain.
“I realised I was built for faster feedback loops than working on policy allowed for,” says the DCU and LSE graduate. Not long after meeting in Rwanda, O’Cathain and Versprille both joined 4G Capital and spent three years working for the start-up focused on SME lending in East Africa.
O’Cathain describes how Kenya went through a financial revolution in the early 2010s which saw the country go from half of the population having a bank account to almost everyone having one or access to digital money - “and as that was happening over 500 lenders entered what was already a pretty fragmented market.”
Mass-scale, short-term unsecured loans have become used by Kenyans in the same way that Irish people might use credit cards to smooth their consumption spending.
“Lenders are providing high yield loans for very short terms, for example, 21-day loans at 18% interest rate,” says O’Cathain. “Many people have five or six of these loans at the same time.
On top of high-interest rates, there’s a poor track record of transparency in the financial sector which means that consumers often don’t have a clear understanding of how much they will actually repay on a loan.
“People often see a loan marketed as having x% interest rate when in practice its 3x%,” says O’Cathain. “Or the loan will be marketed as having a 1% interest rate when in fact that’s a daily rate so that’s actually 365% per year.”
The Irish entrepreneur believes Money254 enables consumers in Kenya to make better financial decisions by verifying the terms of financial products i.e. the true cost of a loan and which type of loan makes sense for their needs. “Once that information problem is solved the market should radically correct over time,” says O’Cathain.
Money 254 also creates and provides access to financial education materials. “We produce financial literacy content, with over 80 articles every month,” says O’Cathain. “We found a blend of education and comparison tools to be a winning approach in terms of both marketing the business and the broader impact it has on users’ financial decisions.”
Until 2022, the digital credit-only sector in Kenya wasn’t licenced and “anyone could incorporate a business and start lending tomorrow,” says O’Cathain.
He described how when the lending market started to rapidly grow in the 2010s, the model used by many new entrants was to hand out a $2 microloan to anyone willing to take it with an understanding that the default rate would be around 50%. Anyone who repaid the $2 loan would be offered a $5 loan and so on, and this would allow lending companies to build their underwriting algorithms.
“We call it “learning-by-lending,” says O’Cathain. “It sounds cool in theory if you're sitting in San Francisco; it means that maybe it costs you $1 to get somebody to download your app and go through your KYC process - maybe when you absorb your loan losses, your cost of acquisition goes up to $7 or $8.”
“But what it meant was that there were around 3 million people here in Kenya who in a very short period of time ended up getting blacklisted on credit reference bureaus (CRBs) because they were being reported for defaulting on these very small microloans and paying the price for lenders to train their algorithms,” says O’Cathain.
“Companies were lending in order to build their underwriting models but people were left with limited access to financial services because of it.”
As well as reporting individuals to CRBs, companies used “shame-based” collection tactics. When users downloaded a loan app the company could often access the user’s contact list. If they stopped repaying the loan the company would use the personal contacts to publicly shame the person for not repaying their loan.
“That's less about the actual $2 loan and more about the fact that if too many people on your loan book default then you end up with a contagion effect where everyone thinks nothing will happen to them if they default,” says O’Cathain.
Foreign lenders from regions like the US and EU were particularly aggressive in their data harvesting because they used more advanced models.
“Companies were scraping your Facebook profile and your contact list, or reading all of your SMSs in order to try and begin to piece together an understanding of who you are and what factors make it likely that you're a better payer than somebody else,” says O’Cathain.
“Some of these big US companies ended up with factors like people who put first name and last name into their contacts are better repayers than other people,” he says.
Kenya has now implemented data privacy laws that are based closely on the EU’s GDPR and the regulator is working to enforce them - “what happened here was a land grab three years before that happened,” says O’Cathain.
“Now the space is regulated through this interesting blend of government regulation but also policy from primary distribution platforms,” says O’Cathain. “Google has a big impact on lending in Kenya because they don't allow apps to provide loans of less than 60 days on the Google Play store.”
O’Cathain isn’t the only Irish entrepreneur attracted to Kenya. Earlier this year, Umba, the digital bank founded by Tiernan Kennedy and Barry O'Mahony, launched in Kenya with plans to build on its success in Nigeria. (You can read The Currency’s article on Umba here.)
“Umba is a great example of another very successful business setting up here,” says O’Cathain. “Kenya is a really good place to do business, and there's a lot of Irish people around the world trying to do business. So it makes sense that some of us ended up here trying to make it work.”
“If you're building a business in the emerging markets, or if you're building a business in the African subcontinent, Kenya is a place that you have to be.”
We continue our discussion at the nearby Beer District, a bar and live music space recently opened by Eoin Flinn, another Kenya-based Irish businessman. The bar is stocked with beer from 254 Brewing Co, the craft brewery Flinn started in Kikuyu outside of Nairobi in 2020.
O’Cathain jokes about both Irishmen naming their companies after the country code for Kenya (+254) - “Perhaps we’re not that imaginative.”
“A lot of people end up coming to Kenya for a short time and they never end up leaving,” says O’Cathain.
“Yes, corruption is an issue but I wouldn't say on a large scale corruption is an issue,’ says O’Cathain. “On the ground, it's incredibly straightforward to set up a business; the tax structures are solid; and paying your taxes is incredibly easy.”
“Kenya’s got incredible people and an incredibly diverse climate from the Masai Mara to the Indian Ocean - it makes the standard of living here pretty hard to resist.”