Programming Note: The response to yesterday’s announcement was overwhelming. A week ago, I told my partner, Jesse, that I hoped to get 100 subscribers and 100 Twitter followers in the first week. Only one day after, and The Subtext has 358 followers (at the time of writing) and 238 subscribers! If anything, I’m now more convinced than ever that this product deserves to exist, and I’m working hard to make it worth your time.
Speaking of time, we (yes, we’re now a team) need to decide what time this gets published. My initial thoughts are to send out each edition around 7:00 pm (WAT) on Tuesdays and Fridays. By this time, subscribers who live in Lagos will be stuck in traffic after the day’s work, people in Nairobi will be home (9:00 pm), people in San Francisco will have started their day (11:00 am), and people in New York will be having lunch (2:00 pm). What do you think?
Hit reply or tweet at me to let me know and I’ll lock in a time by next week.
Onto today’s edition.
Nigerian consumer lending service, Paylater has launched a savings and investment product, clearly taking aim at savings apps like Piggybank and Cowrywise, because, obviously. They’ve called it ‘PayVest’ and promised user-investors a return of 15.5% per annum, so let me start by pointing out the obvious: this looks like a neat way to grow their supply side.
Paylater's core business can be described in three sentences:
a) figuring out who is most likely to default (+ getting better at it over time),
b) giving short-term, high-interest loans to literally everybody else, as fast as they can,
c) PROFIT 💰💵💸
After getting default rates sufficiently low, the company started raising debt at interest rates of between 17% - 26% per annum, according to an investment note by the parent company I got my hands on last year.
Now, they borrow from big ticket investors to lend to individuals while exploiting the difference in interest rates - borrow low, lend high, borrow low, lend high ad exitus. As I wrote last year, “The only question is whether Paylater can keep loan defaults low(er) *while* deploying more capital, faster. If the default rates go up, or if they cannot give out loans quickly enough, they are (to use the academic term...) screwed.” This is one of the reasons why an investment product targeted at their own customers makes sense: the float is a personal piggybank they can borrow from more profitably (‘up to 15.5%’ is cheaper than ‘17% - 26% per annum’).
What I find more interesting, though, is how this is framed. In April, they announced the product as a savings wallet to let users access lower interest rates for showing good financial behavior:
Coming this June, Paylater will launch a first-of-its-kind digital savings & loan product which will offer our customers the opportunity to save for targeted goals and earn high interest rates whilst unlocking smaller loans at lower rates.
Meanwhile, the launch post in July does not contain the word ‘save’ or ‘savings’ in reference to them. Two explanations make sense to me: 1) there is a regulatory cost to positioning itself as a ‘mobile wallet’, 2) this is a defensive play, designed to force a comparison between Paylater and savings apps (see image below) and make Paylater look more compelling.
But there is a much bigger story here: why would Paylater, a lending service, need to defend their business from savings apps? The answer is convergence and I alluded to it in this post:
Independent players are picking apart the “jobs” that used to be done by traditional financial institutions — money transfer, savings and investments, financial management, access to credit, insurance, etc. — and building products around them. Because they are built-for-purpose and operate a lean cost structure, these companies can provide a better user experience, faster, cheaper, and are better able to serve yet unserved consumers. The expectation is that they can ride their trojan horse (product) to scale and build another bundle of banking services around themselves.
Fintech companies’ entire value proposition is being able to specialize and provide a better consumer experience than traditional banks can. Especially in markets like these where the ceilings are low and hard, they must expand into adjacent businesses to glean more revenue from their user base. There is little doubt in my mind that we will see a Piggybank loans product rolled out in the coming months.
So, the question, dear friends, is this: Will Piggybank [successfully] become Paylater before Paylater becomes Piggybank?
(Ethics disclosure: Piggybank is a portfolio company of my employer, Ventures Platform. This has not affected my analysis meaningfully, but please apply whatever epistemic discounts bring peace of mind.)
That’s all for today. Please share this edition if you liked it. Thank you for reading!
With love in my heart and only a ham sandwich in my belly,