Microloans play an important role in supporting individuals or groups who want to start or keep their small businesses operational. Imagine the case of a small store owner in the countryside of a developing country. Suddenly the motorbike for delivery services breaks down and needs to be repaired very urgently for business to continue. The owner decides to replace the broken parts, which would cost $50 USD. The business does not have the necessary funds to repair it immediately and decides to take out a loan. Access to loans of just $50 USD can be impossible for the store owner, for several reasons:
- Not having a bank account (or history)
- Not having a credit score
- High-interest rates of small loans
These are hurdles potential clients face when taking out a loan from a financial institution. Such cases exist all around the world and can prevent people from being lifted out of poverty.
A common use case for microloans or so-called microcredits is to support low-income individuals to kickstart, expand or maintain business as usual.
How promising is the microloan market?
The global microlending market size was $134.35 billion in 2019 and is projected to reach $343.84 billion by 2027, with a CAGR of 12.6%.
A 2019 European Union market analysis showed a EUR 12.9 billion microfinancing market gap for the EU Member states .
Since 1.7 billion adults were unbanked globally in 2017 , and last year 45% of the world owned a smartphone , this gap remains untapped.
Why do financial institutions fail to cover this unfulfilled demand?
It is very costly for lenders to provide microcredits. Research found the following financial cost factors:
- High operating expenses
- High level of lending risks
What’s the solution, then?
Verso is aiming to enable the distribution of microcredits (and other products) to people across the world and within the existing relationships they have with their e-wallets.
How does Verso do it?
Financial providers register their microloan product and enter the campaign requirements at the Verso marketplace. After registration, the product will go through a validation phase. This step serves as quality assurance to ensure the highest standards for all parties. Validators earn VSO tokens as a validation bonus. The microloan is directly displayed in a pool, from which wallets can fetch suitable products and make them available to their users.
Customer details are sent to the financial service provider as soon as the customer chooses the product from their preferred wallet. A loan agreement is created to satisfy the final consumer onboarding requirements. The wallet provider credits the wallet account of the consumer in the respective wallet currency. At the end of the loan period, the smart contract triggers the wallet to debit the loan amount in USDC from the consumer wallet and returns it to the financial service provider.
The Verso network is not involved in the mechanics of the loan, apart from having visibility through the smart contract. When all clauses of the smart contract are fulfilled, it is automatically terminated and the loan agreement is closed.
Verso reduces the overall cost for financial providers, wallets, and of course consumers within the microloan environment.