Digital payments key to rural credit scoring in S-E Asia

LIKE any business, a small family-owned farm requires capital. Rice, corn, coffee and cocoa all require equipment, fertilisers and chemicals to grow and generate solid returns. Today, small farms in South-east Asia pay very high interest rates, often more than 10 per cent a month, to village-level lenders. These high rates constrain growth.

With global interest rates at all-time lows, there is a yawning gap between the prevailing cost of capital and the rates smallholders are paying to borrow money for fertilisers and chemicals. This gap - and the sheer number of farmers (over 70 million in South-east Asia alone) - presents a huge unmet need, and a compelling untapped market for lenders.

This high rate is partly due to repayment risk, but it also comes down to a lack of data that lenders have available to measure risk. A range of startups have emerged to fill this gap and provide the data that lenders need to tap this significant market and to serve the unmet need for capital.

Advisory services such as Impact Terra and Ricult provide free advice to farmers, and harness data from the interaction to allow lenders to offer loans to their clients. Adatos and Poladrone are training artificial intelligence algorithms to process aerial images of farms to determine which crops are performing well, which indicate which farmers are most likely to repay. TaniHub operates an e-commerce platform, harnessing the sales data from its farmer customers to inform lending. Lenddo is using mobile phone usage patterns to determine creditworthiness.

The non-government organisation and donor sectors remain hopeful that these innovations will collectively unlock new sources of capital on small farms, and provide the resources that the better managed farms need to grow.

However, a longer-term view suggests that it might not be agriculture-specific solutions that unlock this market, but rather the emerging digital payments platforms.

Take for example Indonesia, where GoPay (parent: Gojek), OVO (key shareholder: Grab) and Dana (key shareholder: Ant Financial) are locked in intense competition for dominance in digital payments.

The digital payments market today is very much urban, but all three firms view rural customers as a "long tail" market segment. China offers a glimpse of the future potential. It is not uncommon for farmers at roadside markets to refuse cash in favour of Alipay or WeChat payment. With so much rural produce shipped to cities, it seems inevitable that fast-growing digital payments services will extend from cities into rural areas in South-east Asia.

This is an exciting prospect for lenders, because digital payments provide high-quality data on income, expense patterns and behaviour. This data will outperform much of the credit scoring data that we have on farmers today, as much of the current data is self-reported or inferred indirectly.

Electronic payments present not just a great way to reduce the cost and inefficiency of cash, but to also unlock significant new sources of capital for families who largely fall outside the formal financial system. The question for policymakers is whether farmers will be able to share their transaction data with a range of different lenders, or whether the payment platforms will hold all the cards.