Consumer Finance

Pricing-costs approach

Pricing of consumer financing in developing countries could be calculated as a sum of:
a) NPL (non-performing loans, usually being overdue more than 90 days for every part being overdue).... a good company will try to keep it under 10%
b) administration costs, where it depends on marketing costs, costs of early collection, bonuses to retail stores (where goods are sold or money provided), salaries and bonus models for employees, office rent and controlling & risk provision costs (very different, around 30-40%)
c) COF...costs of funding (by this type of investment u have to consider 20% plus)
d) currency volatility (once u provide loan in volatile ccy it might be calculated as additional costs)....for this time we avoid this.

Therefore the final costs may reach up to 70% for a loan given for one year. We may try to decrease such a costs to minimum mainly focusing on admin costs. Challenging will than be how close to customer we would like to be & how long our customer would like to wait for a loan to be approved (thus how many documents we will need...). The above given numbers are for reference.

Costs for the client
It needs to be clarified are real costs for the client to receive such a loan. To cover the costs we can not simply say that the customer needs to pay 70% for his loan as extra interest costs. Therefore for one year loan in amount of 100 will the costs be 70. Once we confirm, that loan is paid as annuity (therefore instalment and interest every month for 12 months) we will come to conclusion, that this type of financing will charge 35%plus as extra costs. Therefore additional 35 units to obtain financing to cover costs.

Is it a lot?
Having the experience from sale business it is normal to purchase product for 100 and sale it for 400 to final customer. This os common for products as a toys purchased in China. It needs to be preordered, transported to Europe, stocked, sold to customer and received payment from customer. Whole process takes around 8 months, 20-30% of the products are not in good quality and 10% of customers will have payment problems.

If customer pays 35% extra on goods seems now as a cheaper choice for overtaking the risk.

Why banks charge lower?
Bank have additional ways to earn on customer for a 1 year 100 annuity loan and also lower costs to acquire the customer. Reason for being so is the limited locations of the banks. Also focus on higher loans and therefore decreasing the % of the admin  costs. Condition to send your salary on account where loan is given. Approval fee. Insurance. Monthly balance letter fee. Fee paid by salesperson for usage of credit card. Time to approve loan.

Will be consumer finance replaced by banking?
My opinion is that not. The most important in the model of consumer financing is to be close to customer. Much closer than bank wish to be. Especially with all the Basel II and Basel III limits. Consumer finance is willing to invest more in acquiring the customer. Whole process is more expensive. Also consumer financing is willing to overtake more risks. Banking can not as it is not allowed by Basel. Consumer financing heavily depends on collection. Especially on early collection success, so loans do not touch 90 plus.