Consumer lending business development in Philippines

Borrower description

VIA SMS Group is a well-known alternative financial services provider operating across Europe and Asia-Pacific. Since the company launched in 2009, VIA SMS Group has expanded its product portfolio and geography of operations acquiring a significant share of European consumer lending market. As consumer lending remains the core business of VIA SMS Group, the company has successfully other fields of alternative finance by developing such brands as digital payments platform VIALET (holding an electronic money institution license No. 16 issued by the Lithuanian Central Bank), investment platform VIAINVEST (in the process of acquiring the investment brokerage firm license in Latvia), payment card SAVA.card and others.

Following the successful partnership with financial services provider TWINO and the launch of joint venture - consumer lending brand VAMO.vn in Vietnam in 2019, VIA SMS Group continues to execute its Asia-Pacific expansion strategy by setting up the business unit in Philippines with an aim to provide consumer lending services.

While business in the Philippines is still in the early stage of development, VIA SMS Group has established a local business unit in the country and plans to provide consumer lending services under the brand name VAMO.ph. Expenses related to the business development amounted to 250 thousands EUR and were covered by VIA SMS Group.

Taking into account the growing interest from investors in financing promising projects carried out in the emerging markets, VIA SMS Group plans to offer VIAINVEST investors to participate in funding the business development in Philippines, offering investment opportunities with an annual interest rate up to 14%, while ensuring at least 20% of “skin in the game”. Once a quarter, a funding request in the amount of financing that’s necessary for the particular quarter will be published on the platform and will then become available for investments. Until the end of the current quarter investors are given the opportunity to invest in the current funding request on the basis of the Business Loan Agreement with the VIA SMS Group.

The term of the Business Loan Agreement is set to 24 months, however an early exit option is available within this particular loan.

Project description

The consumer lending business in Philippines will be conducted by the Vamo Lending Inc., a legal entity registered according to laws of the Philippines under the registration number CS20200000915, with its registered address at Unit 10A Net Lima, 5th Ave, corner 26th Street, E-Square, Crescent Park West, Bonifacio Global City, Taguig City. The company is controlled by the VIA SMS Group and will provide a full cycle of online lending services.

Product overview

VAMO.ph will provide online lending services by offering their customers short-term loans with duration from 7 to 30 days and the loan amount from 750 PHP to 30 000 PHP. Applying for loans will be available online via VAMO.ph website, but the business model also foresees loan payout in cash via convenience stores, as well as repayment option in cash using intermediaries like banks and convenience stores. It will be possible for customers to request payment deferral services.

In order to build a high-quality customer portfolio, the company is planning to apply a complex and innovative credit scoring procedure that will be developed based on application statistics, customer behavior trends and information received from external local credit data providers.

To prevent fraudulent activities, reduce the risk of threats and gain new clients while fostering sustainable portfolio growth, registration and customer verification process will include multiple validations, including verification of the validity of personal identification documents, device risk assessment, etc.

Overview of the economy of Philippines

The Philippines is considered to be one of the most dynamic economies in the East Asia-Pacific region. With increasing urbanization, a growing middle class, and relatively young population, the dynamics of Philippines’ economy is rooted in strong consumer demand, functional labor market and robust remittances. Blooming business area is dominated by the services sector including the business process outsourcing, real estate, finance and insurance industries. Having sustained average annual growth of 6.4% between 2010-2019 from an average of 4.5% between 2000-2009, the country is on its way to an upper middle-income country (per capita income range of US$4,046–$12,535) in the near term.

In 2020 the GDP of the Philippines contracted by an estimated 8.3%, due to the outbreak of COVID-19. Nevertheless, according to the IMF's October 2020 forecast, GDP growth is expected to pick up to 7.4% in 2021, subject to the post-pandemic global economic recovery. Key economic drivers include solid fundamentals, a competitive workforce, a stable job market, steady remittances, and investment in the construction sector. In its most recent January 2021 update of the World Economic Outlook, the IMF has revised its GDP growth projections for the Philippines to 6.6% in 2021 and 6.5% in 2022 (representing a difference from October 2020 WEO projections of -0.8% and +0.1%, respectively).

Although inflation is expected to increase in 2021 and 2022, it should remain at 3%, according to the latest IMF World Economic Outlook. Domestic consumption is expected to remain the main driver of the economy, accounting for 70% of GDP. Reacting to the global pandemic, the government has launched a 4-pillar socioeconomic strategy against the effects of the COVID-19, which includes support to vulnerable groups and individuals, expanded resources for frontline medical workers, as well as fiscal and monetary measures, such as a USD 12 billion fiscal package for low-income households, vulnerable workers, small businesses, and companies and workers in hard-hit industries, such as agriculture, transportation, and tourism.

The Philippines' economy is based on food processing; production of cement, iron, and steel; and telecommunications, among others. According to the latest rates by the World Bank, the agricultural sector employed 22.5% of the labour force in 2020 but contributed to 8.8% of GDP in 2019, a share that has been decreasing in recent years. The Philippines is the second largest producer of coconuts in the world. The Philippines are also one of the richest countries in the world in terms of minerals with an unexploited mineral wealth estimated at more than USD 840 billion.

Sources: World Bank, Reuters, Focus Economics, Nordea Trade

Overview of the consumer lending market in Philippines

Consumer lending business in the Philippines has grown the most in more than a decade, eclipsing credit growth among businesses and suggesting that households can help support an economy facing fallout from the coronavirus outbreak. Central bank data shows that consumer lending grew by 40,1% in January, 2021 compared to the last year, showing the fastest pace since at least January 2009. Credit-card and motor-vehicle loans rose 57% and 31.7%, respectively, according to the central bank’s data, while company loans grew by just 8.8% in the same period. Overall, bank loans grew 11.6% in January from a year ago, the fastest pace in eight months.

Sources: Bloomberg

Expansion into Philippine non-banking micro-consumer lending sector has also been very aggressive as market players have been drawn by the segment’s highly lucrative business potential, with nominal interest rates that could exceed 400% per year, and the country’s favorable demographics, driven by rising consumerism and a large underserved and unbanked population.

In particular, in recent years non-banking consumer lending has made its presence known, with more than 20 companies, both domestic and foreign-owned, claiming to provide micro-lending services to local citizens. Most companies provide short-term loans with duration up to 30 days, several companies provide installment loans up to 90 days with nominal interest rates varying from 350% to 700% per year. The main competitors are the following ones: