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Editor’s note: The sale of microfinance institutions to fintech companies has broad potential repercussions for both clients and the sector’s overall development. Because opinions differ on whether this impact will be positive or negative, NextBillion is running multiple, comprehensive posts on the topic. At the authors’ request, the post below was reviewed by Opportunity International and MyBucks prior to publication, though it includes the authors’  independent analysis. Another post, independently authored by former MFTransparency CEO Chuck Waterfield, presents a more critical point of view. Opportunity CEO Vicki Escarra previously discussed some of these issues in this NextBillion interview, and the organization has contributed an additional post addressing Waterfield’s criticisms.

Back in November 2015, a press release briefly made the rounds, announcing that “Opportunity, Inc. . . . has entered into a share purchase agreement to sell six banks serving sub-Saharan Africa to the MyBucks Group, a Luxembourg-based financial technology (fintech) company.” This generated some comments on LinkedIn and a blog by consultant Hannah Siedek, who recognized how unusual a deal this was and wondered if she should consider it “a good (or not so good) operation.” But aside from this, reaction has been surprisingly muted.

By all accounts, this should have been bigger news for the microfinance sector. One of the major microfinance networks selling six subsidiaries to a fintech startup, and doing so in sub-Saharan Africa – the global hub of innovation in mobile banking. At a time when technology and mobile money are the talk of the sector, how does a story like this pass under the radar?

Were that not enough, the deal echoes another major topic for microfinance and impact investors: responsible exits, or how socially oriented investors can sell their equity stakes without undermining the social mission of their investees. As explored in the 2014 CGAP-CFI paper and debated at that year’s European Microfinance Week, the concern is especially relevant when the buyer is not a traditional microfinance or impact investor.

By any measure, this transaction warrants more attention than it has received. So we talked to the CEOs of both Opportunity International and MyBucks. And we did some digging. The opportunities generated by this deal are many, but the challenges are just as real. Here’s the story in our retelling.

The cast of players

Opportunity International is a long-standing member of the microfinance sector, having been launched way back in 1971, which currently runs a network of 42 microfinance institutions around the world. The six MFIs it sold to MyBucks are not huge, but nor are they small operations. According to MIX Market, as of 2015 (2014 for Opportunity Tanzania), they total nearly 2,200 staff in 136 branches, serving over 166,000 borrowers and 1.3 million depositors. Total assets account for $128 million. These MFIs are solidly in the mid-to-upper tier among MFIs in Africa, half of them among the largest 30 in the continent by number of borrowers.

According to the announcement and our interviews, this is not a merger, but a full transfer of control – MyBucks is acquiring these operations in full, even though Opportunity International will retain a minority stake in each.

MyBucks is a fintech organization based in Luxembourg, with its main investors in Mauritius and operational headquarters in South Africa. Its vision can be summarized as bringing about financial inclusion through technology that enables high outreach with low-cost operations. It pursues this via three channels: GetBucks (loans), GetSure (insurance), and GetBanked (savings). MyBucks counts lending operations in eight countries in Africa and two in Europe (GetBucks), insurance in seven countries (GetSure), and as of January 2016, deposit operations in Zimbabwe (GetBanked).[1] It has achieved all this in less than five years.

The company’s current online presence is its GetBucks portal, which allows clients to start their borrowing process entirely online, though MyBucks also has substantial bricks-and-mortar operations. Overall, 53 percent of GetBucks’ lending is done online, with the remaining 47 percent coming from physical branches. Indeed, in our conversation CEO Dave van Niekerk emphasized that physical presence is a key aspect of MyBucks’ operations, even when transactions are done online. And this is even more important for taking deposits, where the trust associated with a physical bank remains a critical selling point.

Opportunities and Challenges

For MyBucks, the opportunities of this acquisition come in several forms. First, savings play a major role in the deal. The six Opportunity MFIs all come with deposit licenses, years of experience on the ground, and a known brand – all key ingredients for taking deposits. To underscore the point, the agreement allows MyBucks to use the Opportunity brand during the first three years of operations. Those deposits would in turn help MyBucks raise low-cost, local currency funds for on-lending.

But deposits aren’t the sole objective. In our interview, van Niekerk also pointed out that MyBucks’ lending operations currently target wage-earners – a somewhat limited segment in sub-Saharan Africa. The acquisition allows MyBucks to immediately expand into the far larger informal sector, using Opportunity’s microcredit methodology. That doesn’t necessarily mean taking the whole lending package as-is. MyBucks sees a lot of opportunity to leverage its technology platform to substantially rationalize Opportunity’s cost structure, trimming branches and staff by 30 percent, which will allow it to gain a level of efficiency that Opportunity would struggle to achieve. The plan would thus support both increased outreach and higher profitability.

For Opportunity, the transaction helps shift MFIs burdened by high operating expenses to an operator whose key selling point is low-cost operations. It also helps pave the way for bringing technology into the sector, and learning from an exciting and well-financed startup. In effect, by handing the reins to MyBucks, Opportunity is creating a hypercharged test-case – how can technology reinvent traditional microfinance to bring about the next phase of financial inclusion? No partnership or minority-shareholding agreement could have created the level of integration that one can expect from this sale.

That said, the sale is not without significant challenges. Splicing fintech operations with a traditional microfinance institution has no real historical precedent. There are, of course, the basic issues of reorganization, staff training, client communication and the like. But in this case, the challenges go deeper.

As with all exits to “non-traditional” microfinance investors, perhaps the biggest challenge is the potential shift in the institution’s core mission. Though they are all regulated banks, the Opportunity MFIs still to a large extent operate as NGOs, within a parent network that continues to be an NGO. They have a strong Christian orientation, which is embedded within the operations.

MyBucks comes from quite a different place. Its roots are in South Africa’s consumer credit market (the CEO also founded Blue Financial, which during its time was one of the major consumer lenders in the country). More importantly, it’s a company that has a deeply commercial ethos, with a strong emphasis on profits and a substantially different approach to client protection than Opportunity.

Profits and Costs

In 2014, after just three years in operation, with rapid expansion continuing apace, MyBucks’ predecessor and current subsidiary, GetBucks (Mauritius), had a pre-tax return on average assets (ROA) of 21.9 percent. By comparison, in microfinance a return of more than 5 percent is unusual, and 10 percent is rare indeed. Less than 1 percent of MFIs on MIX Market achieved the returns that GetBucks was reporting while still essentially a startup. While lower, the returns of the new MyBucks company in 2015 remained high, at 12.9 percent ROA.

High returns continue to be a part of investor expectations for MyBucks. Its recent prospectus filing for an IPO in May 2016 implies a valuation of 4.6x post-issue book value, above the 4.2x valuation of the microfinance institution SKS in India in 2010 – itself well in excess of industry comparables at the time.

These high returns are generated despite high financial costs. In 2014 GetBucks floated a €30 million bond on the Vienna Bourse with a coupon of 11 percent – more than double the yield of high-yield corporate (aka “junk”) bonds. Meanwhile, returns on microfinance investment funds averaged 3.1 percent in 2014 – nearly four times lower.[2]

One could reasonably argue that a fintech operation can be expected to be more efficient and thus generate higher returns. Yet efficiency is not the sole explanation behind these high profits. There’s also the question of interest rates.

MyBucks’ online portal allows borrowing for small, short-term loans (typically 30 days or less). The monthly interest on those loans varies between 20-40 percent, depending on amount and duration – which in annual terms (APR) is equivalent to 250-500 percent.

These are high levels, very much comparable to the UK online lender Wonga.com, which has been subjected to extensive criticism for moving payday lending online. Indeed, that criticism has inspired regulation that now requires Wonga to feature multiple and prominent disclosures asking the prospective customer, “Is Wonga right for you?” It also features clear disclosures of the simple and compounded interest rates (APR and EIR). Despite its similarities to Wonga, the GetBucks online portal includes no such disclosures. And the similarities aren’t just in the eye of the beholder – in its 2014 annual report, GetBucks itself repeatedly referred to Wonga as its main competitor.

But the comparison to Wonga – though seemingly a strong one – may not be accurate. In our email communications, MyBucks has emphasized that its current focus has changed substantially since 2014, and it no longer views Wonga as a relevant comparable. Indeed, its 420-page prospectus from May 2016 mentions Wonga only three times, and then as just one among a large number of competitors in the markets where it operates.

The high initial rates on its GetBucks portal may also not be representative of the average rates charged across the entire GetBucks portfolio. Indeed, its single payment loans – of the type featured on the GetBucks public site – provide just 14 percent of GetBucks’ revenue, whereas long-term loans (over 12 months) account for 76 percent of revenue. According to MyBucks’ model, the “trust level” assigned to its clients is incrementally raised as they build up a record of on-time repayments, which also enables them to borrow larger amounts at longer tenors. The model would thus show interest rates decline over time. Based on information provided by MyBucks, the lowest current rate available to such clients is 31 percent in South Africa (a market which also has a regulatory rate cap in place).

In our conversation, Opportunity’s Global CEO Vicki Escarra shared her expectation that due to MyBucks’ higher efficiency, the interest rates after the transition would be lower than those under Opportunity’s current lending model. Despite not having the ability to do a detailed pricing review, it’s reasonable to conclude that the above figures probably do more to support than refute that expectation.

Social Responsibility

Interest rates can be a difficult and controversial subject. There are legitimate arguments for charging high rates to first-time clients taking out short-term loans. The key question is what happens after the borrowing begins. The primary critique of short-term lending is that it isn’t short-term at all – for too many clients, the first loan is simply the first step on a long and desperate journey into ever-deeper debt.

In our interviews, both Opportunity and MyBucks were clear – MyBucks has strict limits on such repeat borrowing, limiting short-term borrowing to no more than three times per year. While there is no mechanism for us to verify this claim, its prospectus shows that short-term loans (under 12 months) comprise just 20 percent of the company’s Africa portfolio, down from 35 percent in 2013. This pattern is consistent with its “trust level” model described above. Were MyBucks relying extensively on the payday-lending practice of repeatedly rolling over short-term loans, the portfolio share of its short-term loans would be holding steady.

Another emphatic point brought up by both MyBucks and Opportunity International is their strong support of the Smart Campaign’s Client Protection Principles. As part of the sale agreement, MyBucks has committed to receive Smart Certification for all six Opportunity MFIs within five years of the transaction, with half of the MFIs being certified in the first three years.

This is both laudable and impressive, though getting there is likely to be a challenge. A key question is whether MyBucks’ interest rates and high profits are consistent with Smart Certification requirements. But there are also other issues.

For example, given fewer touch-points in online lending, how will MyBucks establish the clients’ existing indebtedness levels? Such evaluation is an important component for preventing over-indebtedness. In our email communications, MyBucks has emphasized the role of its proprietary credit scoring systems in evaluating loan applications and client creditworthiness. We have no doubt about the potential value of such systems in improving operational efficiency and client outreach. That said, decisioning algorithms are limited by the quality and scope of data available. In the absence of credit bureaus – a situation prevalent in most of MyBucks’ markets – the ability to assess a client’s level of existing indebtedness is highly limited and must at best rely on uncertain proxies. Moreover, experience has shown that over-indebted clients can maintain excellent repayment histories over extended periods. What algorithm can detect if a client is skimping on food or borrowing from neighbors to make a loan payment?

A related concern is MyBucks’ reliance on external agents, who outnumber its employees three-to-one – a situation that weakens the company’s capacity to supervise appropriate lending practices (even if software algorithms can be deployed as a validation). Moreover, in our conversation van Niekerk emphasized that volume-based incentives will play a major role in staff compensation. Unfortunately, this is a practice that has been traditionally viewed as a risk to client protection.[3]

None of this is to say that MyBucks could not meet the high standards that it has set for itself and become Smart Certified. However, it won’t be a simple process. Smart Certification itself has not necessarily been designed with a company like MyBucks in mind, where many of its operations are virtual. Some of the indicators and compliance standards may well need to be adapted. But at the same time, a great deal of work will likewise be required on the part of MyBucks itself to demonstrate that it supports client protection in deed, and not only in word.

The organizations’ different missions and corporate histories pose a challenge, but one important vote of confidence comes from Opportunity International itself. As part of the deal, Opportunity will keep a board seat in each of the six MFIs, as well as in the MyBucks parent company.  Moreover, it will take board seats in MyBucks’ operations even in countries where Opportunity has no current operations, such as Zambia and Zimbabwe. These seats further come with agreements to provide support and expertise to train the MyBucks’ teams in microfinance methodology. Despite the sale, Opportunity leaders said they remain committed for the long haul.

What the future holds

In principle, the potential presented in the deal between MyBucks and Opportunity International is immense. If successful, it could well herald a new era for microfinance and shift financial inclusion into a new phase that can reach hundreds of millions faster and more efficiently than has been done before.

The key lies in how MyBucks’ mission will evolve over the next few years. Its current model of high-interest loans, high-cost funding, and high profits differs greatly from traditional microfinance practice. Does the transaction signal MyBucks’ pursuit of the vision – as it repeatedly states in its documents – to achieve financial inclusion through disruptive technology, while adhering to the Smart Campaign and its client protection standards? Or will it simply use technology to push high-cost loans in pursuit of high profits? Or will it create something in-between, and if so, how will the new structure balance client protection with financial return?

On the whole, we are optimistic. Many of the questions we have raised are serious concerns, especially with respect to very high profits that so often drive everything else. But high interest rates are an issue for traditional microfinance lenders as well, especially in high-cost markets in Africa. And much of the publicly-available data from MyBucks suggests that the company is indeed pursuing financial inclusion that is far broader than the simple payday lending its website at first seems to suggest.

The MyBucks model may well herald the future of microfinance, fintech and financial inclusion. We are both cautious and eager to see how that future unfolds.

Homepage photo credit: Neil MacWilliams via Flickr.

Daniel Rozas is a Sr. Microfinance Expert, and Gabriela Erice García is a Microfinance Officer at the European Microfinance Platform.

[1] MyBucks Company Presentation, Sep 2015

[2] Symbiotics Microfinance Index (SMX), Syminvest.com

[3] The Smart Campaign advises institutions to “Compensate employees at a level that constitutes a living wage and do not rely heavily on incentive schemes, such as bonus pay.”