When Joe Michael needed a loan in 2021, he approached his bank to inquire about the process and requirements.
He was surprised by the extensive documentation needed for a personal loan, which included a completed application form, employee status verification, employment ID, valid means of identification, BVN, credit checks, and more.
Unable to meet these requirements promptly, Michael turned to a loan app, where the process was much simpler and faster.
After downloading the app, he completed his registration the same day and received the approved loan within 48 hours.
This experience is shared by many Nigerians who now prefer fintech companies and loan apps over traditional commercial banks for loans.
Disrupting the banking experience
Fintech companies have emerged as a transformative force in the financial industry, redefining how people access and interact with banking services, including loans.
Their focus on technology and user-centric design has made them a critical part of the modern banking ecosystem.
Fintechs operate as digital-only financial institutions, often without physical offices.
By leveraging technology, they provide streamlined banking services, including payments, savings, and loans, sometimes at lower costs and with greater transparency.
They enable users to manage finances entirely online, eliminating the need for traditional in-person visits. Their digital-first approach significantly reduces operational costs, leading to competitive fees and better rates for customers.
Demand for fintech solutions is growing rapidly as more consumers prioritize digital-first experiences, and businesses seek platforms to simplify payroll, streamline transactions, and gain access to real-time financial data.
With features like multi-currency accounts and seamless international transactions, fintechs appeal to a globally connected audience. In underserved regions, fintechs bridge gaps and foster financial inclusion.
“Loan app is easier. You don’t need to see anybody; it’s strictly online. You just download the app and apply, and they easily give out loans,” Michael, a school teacher, told Nairametrics.
The typical requirements for fintech loans include phone numbers of guarantors or relatives, BVN, and employment details.
More insights
In contrast, accessing a business loan from commercial banks involves rigorous pre-approval requirements, such as registering the business entity, providing full KYC documents, evidence of the company’s interest in the product, BVN and TIN of the promoter, proof of business existence for at least one year, and a minimum three-month relationship with the bank. Additionally, banks often demand collateral, such as property or car documents.
Sunny Udoka, a grocery store operator in Lagos, shared his brother’s experience with a top-tier bank, which required a property worth N25 million as collateral for a N4 million loan, with a repayment of N6 million within six months.
“I don’t like collecting loans because it gives me high blood pressure, but I have a brother who collected a loan of N4 million from a bank. They demanded that he repay with six million, that is N2 million interest on the loan, it was so difficult that they asked for documents of his property that is worth N25 million.
“They first find out if the property belongs to him before they then approached the Lagos State government to know the value of the property before approving the loan, and the condition is that the loan has to be paid within six months. How much are you making that you pay N6 million within six months? You can imagine now this January and February there is no market (sales). If I collected a loan in maybe October last year and I have six months to pay, how will I do it when there are no sales?” he said.
Challenges faced in providing retail loans
Commercial banks face several challenges when providing retail loans, including strict regulations like KYC and AML requirements, thorough credit risk assessments, and maintaining minimum capital adequacy ratios. These factors can increase the cost and complexity of lending.
“As commercial banks, we conduct thorough credit risk assessments, which can be time-consuming and costly. Also, traditional banks require collateral, especially for huge amounts which makes it difficult for individuals who do not have tangible assets to access loans, different levels of authorisations which are required also slow down the process. However, the traditional banks still hold an advantage because we offer long-term, lower interest, and larger loans which the fintechs don’t,” said a senior staff of a top-tier bank.
- Conversely, fintechs and loan apps have more flexible business models, lower operational costs, and greater agility in technology adoption. However, they also face challenges, such as regulatory uncertainty and competition from established players.
Michael noted that some fintech employees might continue deductions from accounts even after loan repayment, highlighting the need for physical offices for complaints.
“There is no challenge in the performance of the loan app, the only challenge is that some dubious workers in these loan apps can continue to deduct from your account even after you have completed repayment because they have your pin, BVN and account number, and unfortunately, there is no physical office to go and complain, you only complain on the app and most times it does not change anything. Also, the interest is too high and the refund period is too short. Some of them are seven days, while some are one month,” Michael said.
Way forward
Esther Ugwumba, a POS agent in Lagos, suggested improvements for fintechs, such as allowing customers to choose repayment schedules, incorporating non-traditional data sources, protecting customer data, offering financial management resources, and keeping customers informed about loan status and promotions.
“They should always protect customer data and ensure secure transactions, offer resources and workshops to help customers manage finances effectively, and keep customers informed about loan status, repayment schedules, and promotional offers.”
Fintechs have disrupted the traditional banking landscape, prompting banks to invest in digital transformation to remain competitive. The success of fintechs has led traditional banks to improve their online and mobile banking services.
To remain competitive, commercial banks now need to rethink their strategies and innovate. They also need to invest in digital transformation, improving their online and mobile banking services.
