The Financier Using AI to Help Make Loans to Migrants

The Financier Using AI to Help Make Loans to Migrants

More than 1.7 billion people in the U.K do not have a bank account and 40 percent of the working age population have less than 100 pounds in savings.

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Why you should care

Frédéric Nze co-founded Oakam to help the financially excluded access credit — not an easy task.

In the early 2000s, the U.K. government started pushing a new angle to narrow the inequality gap: getting people access to financial services, such as a bank account, money advice and affordable credit. It saw a strong link between financial exclusion and child poverty, and a 2004 Treasury report found more than 65 percent of the unbanked were on the lowest salaries.

That’s when Frédéric Nze had the idea that eventually led to Oakam, a small loans company with a mission to underwrite customers who typically struggle to get a loan. But how?

Even today, financial exclusion remains. In 2017, a parliamentary committee called on Britain’s financial regulator and banks to give it a greater priority. More than 1.7 million people in the U.K. do not have a bank account, and 40 percent of the working-age population have less than 100 pounds in savings. Many, the committee said, paid a “poverty premium” for services like heating bills and credit.

Nze decided to set up a middle way between the banks and loan sharks for low-income people and migrants.

It’s in this space that doorstep loans, payday lenders or loan sharks have thrived, offering small-sum, high-interest personal loans, with unfair fees that keep people in perpetual debt. In 2018, the firm Wonga became embroiled in a scandal with tactics such as scaring late payees with fake lawyer letters.

“The bank I was working for [Barclays] was really pushing hard to make bank accounts more accessible,” Nze recalls, but those small-time customers were using the accounts for cash only, and going to small loans companies or wire services to borrow or send remittances.

In 2005, Nze decided to set up a middle way between the banks and loan sharks for low-income people and migrants. He set up Risk Management Advisory Services firm Euristix Ltd. for seed funding and along with capital from one investor, Oakam was established in August 2006, with its first prototype store in 2007 in East London. Fourteen more storefronts and an app followed.

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Frédéric Nze at his office in London.

Source Ned Colin/OZY

Still, Oakam’s success in finding out how to finance those with little or no information happened by accident, when conversations with clients revealed a different approach to financial management.

A customer might have unpaid loans she had taken out for a neighbor or ex-boyfriend with bad credit. “But she doesn’t realize that by not paying it she’s seriously damaging her prospect of getting a mortgage,” Nze says. Another may be receiving welfare payments for her mom, so traditional credit underwriting would bypass her but a conversation puts her back in the picture. Oakam found it was underwriting through psychometric testing. In July 2017, it partnered with London’s City University to automate the approach, using artificial intelligence (AI). Among the unusual ways Oakam assesses creditworthiness are how they interact with the company’s customer service agents online.

Since 2006, Oakam says it’s provided more than 510,000 loans worth more than $500 million to customers with poor or no credit history. Now Nze wants to explore other markets like Nigeria, the Democratic Republic of the Congo or Ethiopia. “I picked lending because I’m looking at how actually financial services can help impact the development of a country.”

Nze, 49, was born in Brazzaville in the Republic of Congo. His father studied in France, married and moved back to Congo as a math teacher in 1965 but was always politically active and often imprisoned, so his mother took him and his two brothers back to France 13 years later. “I remember some painful periods of my childhood but some good times as well,” he says. Having studied math and science at an engineering school in France, he first went to where the work was and now lives in the U.K. with his wife and two daughters (18 months and 3 years old).

Rahim Nathwani, one of two other co-founders, says Nze’s standards are relentlessly high. “He naturally has lots of ideas about how we can do things better.… The challenge of working with Frederic is learning to prioritize,” Nathwani says. His strive for perfection doesn’t hamper his sunny disposition, and he’s still able to make time for family and running — he recently ran a marathon in Ethiopia.

What Oakam provides in access has drawn criticism for its expense. Take a quick look at Oakam’s website and the interest rate hits you at an eye-watering 1,421 annual percentage rate (APR). Nze bats off critics hooked on the APR as “uneducated observers,” pointing out the annual rate is a compounded daily interest rate of 0.7 percent and assumes one year of continuous borrowing. He also says it’s impossible to provide low APRs on small loans. Oakam’s loans are capped at 1,750 pounds (about $2,200) and can build to 5,000 pounds ($6,300), after which the credit history allows borrowers to go elsewhere.

“Unfortunately there is a bit of cost attached if you want to enter this sector and sort of stay there,” says Guy Shone, CEO of Explain the Market, a thought leadership agency for financial markets. Shone says it’s very different to service people who already have a lot of money because they have more resources to help them cope. “If you really want to be able to invest in this market, then you need to make use of AI and new technology to … replicate the human touch.”

People may well be cynical that Oakam is just another payday lender, and it’s often lumped in with companies with even higher APRs that politicians say fester in poor areas along with betting shops and pawnbrokers. Shone refrains from either endorsing or criticizing the company but notes that it was probably the first to approach microlending market more ethically, and he differentiates Oakam from bad actors like Wonga.

But with technology making this kind of microlending easier, Shone says far more players could emerge in the next 18 months. Meaning Oakam’s biggest challenge in the future won’t come from accusations of predatory rates — but from copycats.

OZY’s Five Questions With Frédéric Nze

  • What’s the last book you read? Instead of the last one, three that have marked me: 1. The Sellout, Paul Beatty. If I could write like that! Energy, full of humor and politically charged. 2. Good Strategy/Bad Strategy, Richard Rumelt. If you have time, read all of Peter Drucker. If you want one and only book on business strategy, this is the one! All else is a distraction. 3. Rules for Radicals, Saul Alinsky. Can read (and will) over and over and still find gold mine for action!
  • What worries you? I try not to. Things under my control I try to correct. Things outside my control, I meditate to open the universe.
  • What is on your bucket list? Being a great-grandfather.
  • Who is your hero? Miyamoto Musashi [Japanese swordsman and philosopher].
  • What’s one thing you can’t live without? A sense of humor.

Read more: Can fintech advance civil rights?

Correction: An earlier version of this story stated that Oakam uses LinkedIn connections to assess creditworthiness. It does not.

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