Instant Loans Aren’t Cheap: The Cost of Convenience
By Melissa Luz T. Lopez, Senior Reporter
Imagine this: a family emergency arises, and with it comes the urgent need for a few thousand pesos to save the day. Who are you running to?
The instant loan providers hope that they will be the first thought of a troubled mind in such cases. You might think that these companies are small fish compared to the banks that have long dominated the industry, but the very fact that finance companies have remained alive for decades proves otherwise.
The demand for instant cash continues to grow especially in urban areas and is now being assisted by digital portals to meet the urgent demand. The need is so strong that international loan providers actually see the Philippines as a prime market and have rushed to take advantage of the huge opportunity here.
Consider the case of Robocash, a loan provider from Russia that chose Manila as its first foray into Southeast Asia.
Felipe Jose N. Zamora III, president of local company Golden Legacy Financing Corp., recalled how the Russian company approached them in 2016 with an offer they couldn’t refuse. Prior to the merger, their business focused on retirees and military retirees.
This then led to a formal partnership in September 2017, which saw Robocash set up lending booths starting with their first branch at Light Rail Line 2 Recto Station. They have since expanded to operate in other stations as well as supermarkets. , with their network currently at 42 cabins in less than a year since entering the Philippines.
“The real focus is really on unmet need. Most of the customers we serve are those that banks either don’t respond to or have trouble serving. Many of them have real, urgent needs, and where possible, we want to be the ones they go to for this need,” Mr. Zamora said in an interview at their humble headquarters in Quezon City.
Mr. Zamora later became president of Robocash Philippines.
Unlike banks which follow a rigid schedule from 9am to 3pm, instant loan counters are open until 10pm, while online applications can be made 24/7. About 75% of their loan volumes come from branches, while a quarter is generated online.
Robocash Philippines’ goal is to repay a loan in five minutes – something that may seem ambitious for banks, but which they claim is actually doable.
What makes instant loans more attractive to borrowers is access and convenience, as these providers eliminate the paperwork often required by banks.
Mr Zamora said Robocash loans only require one government-issued ID card (like a passport or social security) to secure a loan, worth up to P10,000 for newcomers. borrowers and P25,000 for regular customers. This would then trigger a computerized process of verifying a person’s identity, employment status and credit history which would eventually trigger the release of funds to a bank account, mobile or over-the-counter wallet.
Tala, another instant loan startup from California, has also recently ventured into the Philippine market. Their operations have remained purely digital as all loan processing, approval and release is done through 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 provide personalized loans that meet their unique needs,” said Angelo Madrid, country manager of Tala Philippines.
Madrid said the Philippines has become Tala’s second-largest global market and Southeast Asia’s largest as it takes advantage of the country’s tech-savvy population armed with smartphones and the internet.
Both lenders are using credit bureaus and artificial intelligence to assess loan applicants and process their lines of credit in a snap, unlike the usual practice of posting collateral.
Verification with their online portals requires creating an account, providing one’s government ID numbers, home address and contact number, employment details, contact numbers of two co-workers and two relatives as a character reference. A user must also sync their Facebook profile to confirm their identity.
As quick and airy as it is, it comes at a cost.
A Tala loan secured through the Lendr online portal should be settled within a month with 15% interest. The payments are divided into four weekly payments worth 2,875 pesos – making a total of 11,500 pesos.
On the other hand, Robocash charges a fixed daily rate of 2.5% for loans ranging from 1,000 to 25,000 pesos. For a P10,000 loan, a borrower must return and pay P17,500 within 30 days of getting the money.
These compare to commercial bank quoted lending rates for short-term loans, which ranged from 3.4 to 8.7170% for the week of August 13-17 according to central bank data.
Robocash offers a unique payment system for quick loans within 30 days of unlocking credit, hence the nickname “payday loan”. However, cash-strapped borrowers can apply for a longer repayment plan of up to one year, subject to additional fees.
Mr. Zamora said his typical borrower works in Metro Manila and earns between 10,000 and 20,000 pesos a month.
Although high, these margins allow the lender to gauge the cost and risk of serving this market segment, particularly to cover potential defaults – which Mr Zamora admitted to be “high”, but not unexpected.
Ronnel C. Mapaye, head of credit and collections at Robocash, compared their service to ride-sharing apps.
“Why do you take a taxi or an Uber if you have the choice of taking public transport? What advantages can you get — it’s accessibility, convenience and comfort. And you are ready to pay, nobody forced you to take a taxi when there is a jeepney,” Mr Mapaye said.
Although the rates may be astonishing, businesses are thriving as the need for instant cash persists. As with cash disbursements, loan repayments can also be made over the counter or through bank deposits and remittances.
Robocash and Tala are under the supervision of the Securities and Exchange Commission (SEC) as a regulator of finance companies.
The SEC has admitted, however, that it cannot impose a cap on the interest rates charged on these loans.
“Being contractual in nature, the specific terms of loan agreements (particularly interest rates and penalties) are outside the SEC’s regulatory authority,” Rachel Esther J. Gumtang-Remalante, Deputy Director and Head of Corporate of the SEC. Department of Governance and Finance, said via email when asked for comment.
“Unfortunately, although the Commission has regulatory and supervisory jurisdiction over loan and finance companies, it does not include the power to regulate interest rates or to convey controversies involving them, given the suspension of the usury law.”
For its part, the Bangko Sentral ng Pilipinas (BSP) said it sees loan companies as providing a complementary service to the public, especially for more than 52 million unbanked Filipino adults.
“There are funding gaps in the market that can be legitimately filled by players leveraging technology to enable them to provide ‘instant loans’, which may also be a potential case study for traditional lenders wishing to expand their customer base by leveraging technology across the board. credit process,” said BSP Deputy Governor Chuchi G. Fonacier, who leads the financial monitoring sector.
Ms Fonacier cited the advantage of borrowing from loan companies, 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 for some borrowers given the convenience and access offered, their exorbitant interest rates can trap the borrower in a cycle of costly informal debt. In addition, informal lending does not contribute to the establishment of the borrower’s credit history which may eventually promote access to loans on better terms from banks and other formal lenders”, a- she added.
Times may have moved on to give rise to more convenient solutions for accessing cash, and those who need the service are paying the premium for convenience.