A fintech pioneer and change bringer in Pakistan, with Naureen Hyat
When Naureen Hyat and Humza Hussain joined forces with Nadeem Hussain, the founder behind the world’s second-largest branchless banking solution, they decided to pivot their B2B microfinance business towards the consumer, giving rise to Tez, the first FinTech in Pakistan to get a digital lending licence. They made mistakes quickly and learned from them, creating a scalable and digital lending model with risk at or below the levels of the OpEx heavy manual models of old.
Our first cohort was probably the best part of the learning journey for us, because we actually got over 50% defaults on that first cohort... And then the credit scoring engine started taking shape. And we started bringing defaults down from 50 to 40, 40 to 30, 30 to 20, 20 to 15. Then the tougher bit came because it was not only about the credit scoring, it had to be about the experience of the consumer, how is the product structured, from the first interaction of the consumer with the company till after he or she has been paid, everything matters... the latest cohort actually closed at under three percent default. This was uncollateralized cash lending to the masses, so yeah, it was quite an interesting experience and we learned a lot from it.
Tez, now ZoodPay Pakistan, is at https://www.zoodpay.com/pakistan (or visit the group page if your interest are more global)
ZoodPay is on LinkedIn, too, where you can also follow Naureen, with 50,000+ others that are learning from her journey (https://www.linkedin.com/in/naureen-hyat/)
If you're interested in the broader fintech ecosystem in Pakistan, check out the Pakistan Fintech Network at https://pfn.org.pk/
The early growth of Tez was supported by, among others, Accion Venture Lab and Omidyar Network who have both got indirect links to this show, via episode 42 with Jayshree Venkatesan (a primer on microlending) and episode 68 with Elena Botella (a lesson in responsible lending)
If you would like to participate in the show, reach out to me at https://www.howtolendmoneytostrangers.show/contact-us
You can learn more about myself, Brendan le Grange, on my LinkedIn page (feel free to connect), my action-adventure novels are on Amazon, some versions even for free, and my work with ConfirmU and our gamified psychometric scores is at https://confirmu.com/ and on episode 24 of this very show https://www.howtolendmoneytostrangers.show/episodes/episode-24
If you have any feedback, questions, or if you would like to participate in the show, please feel free to reach out to me via the contact page on this site.
Regards,
Brendan
The full written transcript, with timestamps, is below:
Naureen Hyat 0:00
Every second person in Pakistan has a smartphone, it tells us everything about you, proxies of your financial data, your behavioural data, your social demographic data, your geographic data.
So we started developing algorithms studying this data, on the basis of which we started lending.
Brendan Le Grange 0:20
According to some numbers from Findex, only 21% of adults in Pakistan had access to a bank account in 2021. I don't want to stoke any regional rivalries here, but that's compared to 53% in Bangladesh and nearly 80% in India.
So clearly, there is a need for some change. My guest today Naureen Hyat is one such change bringer.
Naureen is the co-founder of Tez, now ZoodPay Pakistan, the country's first digital lending platform, providing the unbanked and underbanked with access to easy, affordable and reliable financial solutions that fit their lifestyles, especially as those lifestyles embrace more and more ecommerce.
Welcome to How to Lend Money to Strangers with Brendan Le Grange.
Naureen Hyat, you're the co founder and CEO of Tez Financial Services, now also ZoodPay Pakistan, welcome to the show. You know, when we're talking about the subcontinent, India gets a lot of the headlines, and I haven't yet looked at lending space in Pakistan so I'm really quite interested in learning about what it was looking like and what changes are happening, what the future looks like for consumer credit in the country.
Naureen Hyat 1:49
Thank you so much for having me, Brendan, it's a pleasure to be speaking with you on a topic that's really close to my heart.
So you know, the journey to starting Tez, to be honest, I never thought I'd be getting into entrepreneurship, that was never the plan. The plan was always to bring the impact and working towards a purpose.
So you know, just to give you some background, the microfinance sector was created in Pakistan back in early 2000. And the mandate of the sector was to alleviate poverty. A lot of criticism was actually lumped onto the sector for having very high interest rates, but when you actually dwell deeper into studying the sector, you understand that the sector is very feild heavy.
In Pakistan, at that time, the numbers were even more bleak, but in terms of bank account ownership,about 20% 21% of people have a bank account; in terms of credit, it's under 5% of the population that actually has access to formal credit - at that, at that time, it was even much lower. Then we could talk about being on that credit bureau, only one out of 10 people in Pakistan are registered on a bureau. Well, now the numbers are increasing, but you know, the microfinance sector was actually created with the mandate to believe it poverty and enhance financial services, primarily credit, to the base of pyramid.
Banks don't lend to the masses. Why because, number one, there's no data on these consumers; base of the pyramid consumers do not have suitable collaterals. And many times, you know, the banks, at least then, you know, did not have suitable risk rating to understand credit or, you know, credit risk.
So, for microfinance, the models were structured such that it was all field intensive, where the field officer actually came from the field, from those communities, to lead generate consumers, to understand how those consumers behave, more so to be in contact with the consumer. So that, you know, it was easier to manage defaults or creditors - but it was not only costly, it was also time intensive.
On average, you know, it took anywhere between two weeks to a month to give out microfinance loan.
So what happened was that we saw that because of the high costs, most of these requests have to be passed on to the consumers, as a result of which interest rates, you know, they were higher. Contrary to the the belief of a lot of people that the margins of MFIs, the microfinance institutions were high. Well, they were good margins, but not as high as they supposed them to be.
The credit risk was actually manage very well. So the defaults were, you know, lower than 5%. But we thought that this was actually not going to be sustainable if this is how the costs would keep on rising. For the consumer, the average APR was around 45 - 50%, which was something that was going to become worrisome in the future.
So that's when my co founder Humza Hussain, who was also working with me at the credit rating agency, and myself, we founded our first startup, which was also fintech. And the name of that was Checkin Solutions. And the purpose of that startup was to digitise the entire credit disbursement process for these microfinance institutions.
And you know, per se, the focus was to make the process much faster, reduce errors and reduce the costs after meeting.
Brendan Le Grange 5:02
Yeah, it's an interesting point to pick up on because the traditional narrative is that microfinance, where we don't have a good credit data infrastructure is expensive to the consumer, because the risk is high. But actually, before the digitization, it was because the processes was so expensive. So yeah, even 5% loss rates are not exceptionally high. But then you see 40- 50% interest rates.
And some of that is sales margin. But a lot of it is just a really hard to scale process when you have to send an agent out into a village to speak to some people to give a few small value loans, and then to head across to another village.
Early on in my career, I did a project in Ghana with with a bank that was doing their very first rollout of digital lending. And we mapped out the processes, and it was less agent based so it was even a better starting point, but it was still the branch manager could sign off this much, and then it went to a committee, and then if it was large it went to another committee, and then it came down. And because it's all paper based, everybody had to have a supervisor to check they were doing and the supervisor needed a supervisor and you had this massive process. And we could say, well, before we build a credit score, let's not worry about anything predictive, let's just implement the system. And immediately we can track it, we can get rid of all the human errors. We don't need so many committees, and then let's worry about credit prediction in the future.
And that saved so much time and we can forget that, that, you know, a lot of the digital processes are saving the money or reducing risk, not necessarily credit risk, but they're setting the scene for that as well.
Naureen Hyat 6:29
Yes, that's pretty how it was in Pakistan as well.
You know, we thought Tech was gonna be the catalyst for the microfinance sector, but what happened was that at the time the microfinance institutions were not regulated in Pakistan, they were operating under the trust structure. Well, around about that year, the SECP here, they introduced new regulation whereby they were required to become regulated. So you know, I think for them, focus was, number one on the transformation. The digital focus was still, you know, it was still very early.
I think we were a little ahead of our times in terms of when we started that first startup, this is back in 2014/ 15. And that's when we actually got in touch with our third co-founder, Nadeem Hussain, who happened to be the founder of the largest microfinance bank in Pakistan at the time, and also the leading branchless banking provider - so Tameer Bank of EasyPaisa.
That's when we decided to join hands and when the model for CheckIn pivoted to a direct to consumer model, where we then got our own licence to lend. So this became the first FinTech in Pakistan to get a digital lending licence.
And we started off with nano loans, these were under $20 loans, given out for anywhere between 30 to 60 days. And we actually gave out these loans under 10 minutes for new users under 2 minutes for repeat users using, you know, their smartphone data and doing credit scoring on that.
So that's how Tez started.
The vision was always to be, you know, a full stack digital bank, but you know, with time developed into the the nano credit consumer lending space.
Brendan Le Grange 8:05
You talked about measuring the credit risks, as well as automating the process - what sort of data were you using? How are you building your models to be comfortable in the decision you were making, but still to be doing it so quickly?
Naureen Hyat 8:17
Well, in Pakistan, then and even now, one of the biggest challenges that digital lenders have is that there's very fragmented as well as scarce data, or access to data.
The holder of the data are either the banks or the telcos, and none of them are willing to really share this data because they believe that more than being just a custodian, the they're the ones who are supposed to just sit on the data, which is something that I think now that understanding is being developed. But you know, data for the longest time has been quite a challenge.
Now, when we started lending with Tez, it was an interesting journey because Pakistan while you know, the financial inclusion numbers are very weak, if I talk about when we started, there were about 60 million mobile subscribers now there were 100 million. So you know, it actually had been growing very fast.
Every second person Pakistan has a smartphone to smartphone, it's actually a few like a digital footprint take a biometric of your new life actually, tells us everything about you, has proxies on your financial data, your behavioural data, your social demographic data, or geographic data. So we actually started developing algorithms studying this data.
And on the basis of that we started lending.
From the SMS for example, we could find out any financial transaction that happened, the SMS is actually they give you that information so we could have developed cash flow statements from the SMS is that the customers received anything from you know, incoming outgoing calls, what kind of phone some one on ones, you know, why, what are the contact affinities distinguish that we actually got from the smartphone on the basis of which we developed our algorithms.
Before we started developing AI algorithms, we actually had to go into the market and understand how the consumers will end Interestingly, when we started lending over 70% of the people who came to us in our first cohort, they did not even have a bank account. So we literally had these people create bank accounts, like mobile wallets... and our first cohort was probably the best part of the learning journey for us, because we actually got over 50% defaults on that first cohort.
And this is when we went without any credit scoring without even any business rules. And we were like, you know, we should actually shut down this business, this seems to be flunking very badly.
And then we, we had this conversation with some experts, we tried to understand what was going on. And in retrospect, it was actually good for us, because that's when we learned about managing fraud the most, we had, you know, a couple of borrowers at the time, who were literally defrauding the system so well that we actually thought of hiring them once.
So it was actually quite a journey. And that's when we, that's when we started strengthening the business engine when those tools were developed.
And then then, you know, the credit scoring engine started taking shape. And over, you know, Covid, after Covid, we started bringing defaults down from 50 to 40, 40 to 30, 30 to 20, 20 to 15. And then, you know, the tougher bit came because it was not only about the credit scoring, it had to be a lot of engineering, then it's about the experience of the consumer, how is the product structured, you know, the first interaction of the consumer with the company till after he or she has repaid, everything matters. How the lead generation happened, how is the customer support interacting with the customer, or what has been experienced in app, what is experienced at the point of repayment, you know.
We've seen many times if the customer faces challenges in repaying whether or not it was our issue or an issue at the wallet side, the customers could turn rogue.
So there was so much to it that we learned over time. And you know, when we actually closed our lending book pre-acquisition, the latest cohort actually close it under three percent default. So this was uncollateralized cash lending to the masses. So yeah, it was quite an interesting experience and a lot that we learned from it.
Brendan Le Grange 11:57
And I wonder if your your background, maybe primed you a little bit better to understand that this is not the traditional banking model, but an ecommerce type of product approach.
Naureen Hyat 12:07
I think Brendan what also has changed over the last 20 years is that now consumers have many more choices, and they become a little more aware of their rights as well. Well, once upon a time, microfinance lenders could have gotten away with stringent recovery practices. Today, you know, they can't even think of because there are regulatory repercussions in them.
But also on the digital side now, with borders becoming more and more wiped off, it's, it's interesting how digital is playing a role in the understanding that consumers have, they become much more savvy. In Pakistan, consumers a very, very sharp in terms of managing digital fraud. While it's not a not a great thing to be known for, it's just smart. That's become a challenge as well, you know, while we're serving the masses and trying to support the wider COVID, they are elements within the ecosystem, where those challenges come from, and that can actually, you know, amplify the risk of loss.
Brendan Le Grange 12:52
You were the first in the market, but have you seen the market start to follow you? And is there a general modernising in a case credit, but more broadly, in in terms of things like access to bank accounts for consumers in Pakistan?
Naureen Hyat 13:19
So yeah, it's actually very refreshing to see to see in financial services, the different types of services that they're aware that there's been one says savings and insurance and opposes credit. Now, in terms of payments, you know, payments is it's a difficult business to grow because the margins are based on payments. And the cost infrastructure is usually very high. Unless you know, there's already some railroad that's been set, it has to be a high volume business to start making sense.
Now credit on the other hand, is a high margin business you know if it if it works, if the model works, so I think a lot of players have now started to understand that but understanding how to manage the phone is still an art and a science Why do you know you have every other day is coming up FinTech and that that will Indian content now, because they see the opportunity clearly see the opportunity.
And Pakistan, you know, you have 130 million population, over half of which does not have access to financial services - in terms of credit, even worse! That opportunity, a lot of people are following, not only local, but also international players and are coming into the market.
And you see less entering both the consumer lending and the SME lending space, you know, that very heartening to see nonetheless, you know, I believe that the ecosystem is still not completely ready to be conducive to digital lending at scale. And there are various reasons for this. You know, number one, of course, the kind of funding that you need to scale it, you can't keep on funding the lending business from equity, you know, they have to be sources coming in from debt, for example, in case of bank deposits, they resolved for that purpose, but that, on the other hand, is still very difficult, particularly local currency debt. So that's one challenge.
Secondly, the challenge of data still persists.
The State Bank said into that the Pakistan is developing a framework for open banking, but you know that, too, will probably take a year for things to actually fall into place, till players can actually start using that data because someone will have to actually report to that Bureau before you actually go and access that data, right.
So it's going to be a trial and error.
I encourage think, players themselves, I think everyone is going to go through their own journeys to learn, you know, how it is going to be for them. I think, even for us, you know, there's an entrepreneur ego, where you actually have to go through a journey yourself to know, okay, this is how it works. You experience it for yourself, the market is huge, the need is huge. And there's no really one single player that has been able to crack the nut or even can because the need is so huge that you need multiple players to be in this industry.
Brendan Le Grange 15:48
Yeah, well, let's pick up on that entrepreneur side, we talked a bit about the learnings in terms of credit and your risk modelling at tastes, but what's the the business story being like it six years ago, that you founded the business in a market that obviously has historically had a lot of gaps in there, so it difficult start then just as I guess, you're finding your feet, you've got COVID coming through, so it must have been quite an adventure, but you've done really well in growing the business. So what has that experience been like?
Naureen Hyat 16:16
That's a tough one, actually.
The last six, seven years, we've literally been eating, breathing sleeping Tez. And you know, it was was actually a roller coaster: we experienced some great times and then some very tough times.
I say this often, when COVID struck, you know, our investors they were like, 'it's a very uncertain market'. I was, 'when was it certain for entrepreneurs?'
We enter into it knowing knowing it's going to be uncertain, you never know if succeed in the next years, when actually the purpose that was larger than everything, you know, with larger than the company larger than the investor larger than the team. That's what kept us driven, you know, and I think to be very honest, things were not easy when COVID struck. And fundraising itself had become tougher.
I think it was easier for newer companies that came into the space for companies that had already some traction with them. It was definitely tougher, tougher to raise funding, and tht too on the lending side because it was a risky avenue.
But I think we were very fortunate how it panned out with Zood coming in. And I think it seemed very serendipitous upon how ultimately transitioned into his, then I think it was quite a great learning experience for us. We're still learning,
Brendan Le Grange 17:22
You're part of the ZoodPay family now, what does that bring both, I guess, to the business tastier, but also maybe your your ambitions in terms of regional expansion, more generally?
Naureen Hyat 17:32
So Zood's initial vision was actually they they started off as an e- commerce player, and then they wanted to BNPL player, it wasn't until the Tez deal happened that, you know, we actually learn to have the overall vision where they're transitioning more from an E commerce player to a lending Cluplayer. So they now you know, a digital lending platform for E commerce versus an E commerce company doing BNPL, right. So when the deal was happening, was for Humza and myself, you know, I think one thing that we were very certain of was that we weren't whatever we were going to set our hands on, it had to have a purpose.
And to be very honest, BNPL did not resonate with us a lot, because of whatever was happening in the market. So that was something that, you know, we were struggling to embrace. But then I remember Michael Khoi, who is the CEO, and the founder is what he flew to Pakistan, and we had a few conversations with him. And he shared his vision of how you know, the story was actually to bring impact on a wider level, which wasn't only the consumer lending space, but also the SME lending space, and to develop the overall ecosystem.
So I think that's when it started making sense to us. One thing that I very strongly believed in is, whatever you know, we want to do, it has to have a longer term sustainable impact. Unfortunately, for most companies started, you know, usually the view was very myopic, it's shut down, click returns. And that's it.
For us, you know, the impact for Pakistan, that's what we've always wanted, to have a player that can actually build an ecosystem, because that's the only way you can sustain and grow in a market like ours.
So I think Zood brought that, the alignment and the visions that mattered, the impact story mattered. And then, most importantly, for us, in terms of the tea, what mattered was how the team was going to get absorbed into the overall global tea that actually brought us a lot of carpet.
We actually literally hit the ground running because now the focus is the enablement of the SME to bring you know, the SME online for E commerce and then propel SME lending and then traction for the SME via BNPL on our own marketplaces, that ecosystem in Pakistan we have now in Pakistan, it's something that we did not have at the time at ease. And we understand the strength of that ecosystem because it helps you not only manage the consumer journey, but also the defaults. So that's, you know, something that we're really excited about.
Zood right now is in six countries. Uzbekistan is where they started from, so it is Uzbekistan, Jordan, Lebanon, Kazakhstan, Iraq, Pakistan, these countries themselves have huge potential, we right now have 10 million users globally. And so we're concentrating on what we have right now, this time right now, where it's not the easiest of phases to be in for any company. So the focus is to remain relevant and to remain rely, and of course, grow in a very smart and sustainable manner. So that, you know, we can then build a foundation where we can then grow on in the later years.
Brendan Le Grange 20:29
I don't know Pakistan isn't market very well, but I'm from South Africa. And they're talking to a lot of the lenders there. During COVID, there was a huge push towards e commerce. And we saw that in the UK as well. But it wasn't in terms of the kind of mindset, that bigger change, which is more people to take groceries online and things but they were really familiar with the Amazons and things whereas South Africa, we saw a lot of new people going on to e commerce and this big boost to lenders who could understand that. And I imagine you're Pakistan's in a similar position where to be able to allow both of those really important industries to grow simultaneously and together. Yeah, I think is a big a big win.
Naureen, if we talk about us, as you say, you've got a lot of a lot on your plate at the moment, a lot of focusing on on getting that settled. And in this market in Pakistan, which has so much potential, India gets a lot of the headlines, but obviously Pakistan, also a huge market, as you said, very untapped. So if people are listening, and they want to learn a bit more, they want to do some more research into the taste story or follow you as you pay now, where are the places they can go to connect with you, or to see what's happening in that space and keep a track of that story?
Naureen Hyat 21:42
We have a website now Tez is rebranded as Zood, you can contact us through our website (https://www.zoodpay.com/pakistan) , we also have our emails where you can contact us, personally, you can approach me on LinkedIn Naureen Hyat. So you can reach me out. And I'd be happy to share whatever you you'd like to know more on the story.
Brendan Le Grange 22:02
Great, thanks. Yeah, I'll add those in the show notes as well.
But yeah, I guess the Hyatt hotel brand probably confuses people. So yours is with the one tea. But yeah, thank you very much. As I said, like it's not a market, I knew well, but one that as soon as I started looking at just seems ripe for disruption is even if you look to the neighbours to Bangladesh to India, the gap in terms of access to banking is significant. And, yeah, 10 years ago, there would have been insurmountable in terms of logistics, whereas now with smartphones, it's not so yeah, I think there's a lot more to happen in that space.
And just I think overall a great story in terms of understanding the value of automation of digitising the understanding of very quickly learning how to make full use of alternative data and understanding their customer lifecycle. I think it's 2030 years worth of innovation that's happened in other markets happening just in a couple of years.
Naureen Hyat 22:58
Thank you so much, Brendan, totally enjoyed our conversation. And you know, it's great to know you know so much about the field itself. So a lot to learn from yourself as well.
Brendan Le Grange 23:07
It's a pleasure. Thank you.
And thank you all for listening.
Please do look for and follow the show on your favourite podcast platform and share the updates widely on LinkedIn where lending nerds are found in our largest concentration, plus send me a connection request while you're there. This show is written and recorded by myself Brendan Le Grange in Brighton, England. Show music is by Iam_wake and you can find show notes and written transcripts at www.HowtoLendMoneytoStrangers.show
And I'll see you again next Thursday.