“That’s always the way in this world. The chappies you’d like to lend money to won’t let you, whereas the chappies you don’t want to lend it to will do everything except actually stand you on your head and lift the specie out of your pockets”- P.G Wodehouse
The above quote is probably one of the most interesting dilemmas in the lending business. I had often wondered about the same during my stint with a large MNC bank (once the world’s largest, Alas those were the days!), on those eventful days in which we were completely focussed on building our lending books. The traditional lending belief has always been, build your book, price it right, identify the right risk, and then hopefully create the optimal processes for the business, unfortunately in that order.
Today’s hottest topic in the Fintech Lending Industry is about alternate lenders taking away potential market share from the traditional ones and create massive disruption to the space which will bring the traditional lending institutions to their knees, and either force them to upgrade or be doomed forever. This is a common discussion among entrepreneurs in this space, and from what I hear lately even bigger institutions are discussing them. I decided to put my views on the subject out there as well, and try to separate the noise from the substance on this point.
Let me start by talking about what alternate lending is all about, as it is perceived differently by different people. From my point of view, the very name is the definition, it’s alternate. There is a bevy of newcomers in the lending space, being tagged as alternate lenders who are either looking at increasing credit inclusion by focusing on the customers who are currently under-served, or are leveraging technology which can give customers access to credit instantaneously, creating new and innovative product programs to be more customer-centric, or are looking at reinventing the way the customers are underwritten for loan products. These alternate lenders, are the new boys on the block who are trying to make changes to a system which has been around for ages. As it is often said, that it’s impossible to stop an idea, whose time has come. This particularly holds true in the context of alternate lending as it moving quickly from the realms of being a myth to being a ground reality.
Couple of years back, and more so in the context of India, it was often believed that only people with poor or no credit history would be the target market for products from these lenders. It was surely the starting point of this journey, however that landscape has quickly changed with a lot of new lenders focusing on the mainstream as well, and also working on creating the best in class technology experience required to ensure that the customer is able to access credit as and when its required by them. Another myth that is often talked about is the since the cost of funds of these lenders is going to be higher than regular lenders, the play is only going to be in the below prime or subprime customer category, I wish to completely debunk that theory as I believe that alternate lenders will also play in the prime category as they have a huge selling point of convenience , which goes beyond the mundane paperwork of the bank, the inefficient processes that the bank follows, and just the sheer lethargy that banks show in processing credit applications. It’s my belief that customers would be willing to pay an incremental price for convenience, this point is further substantiated by the fact that when I look at the way some banks function (those who have some semblance of instantaneous products along with regular loan products), these products have a minimum 300 bps higher yield on the portfolio than regular products.
Another important point going in the favour of alternate lenders is the nimbleness with which they operate, which is possible when one is not bogged down by legacy systems and when one has the mind-set of embracing new information and newer ways of doing things. These are substantial advantages that the alternate lenders carry and hence one can safely say that this revolution is here to stay and is a reality of our times and of the future and not just a myth as some people would want us to believe.
However it’s not doomsday for banks yet, and let me say that traditional lenders (read banks) continue to add tremendous value to the entire lending space and are not going away anytime soon. On the contrary I believe, that the advent of Fintech will only make the banks stronger, as it will force them to embrace disruptive technology, create better customer-centric products and most importantly do away with a lot of mundane processes that are part of the entire game. Banks are run by smart people, and smart people get smarter by learning from the environment, and it’s my strong belief that very soon banks would embrace alternate lenders( and vice versa) to create a more powerful ecosystem which is beneficial for all and which leverages on the strengths each party brings to the table. In this entire battle between traditional vs. alternate lenders, the most important constituent was somehow not told about this potential battle, and it’s this constituent I believe who will play the important role in bringing these two closer together, the constituent I meant, is the customer.
Customer is after all King, and it’s duty of all and sundry to serve the king to the best of their abilities, however in the context of the lending business and in the words echoed earlier by Wodehouse hopefully we find the right “chappies” to keep this revolution going.
Parth Pande is co-founder of Finance Buddha, a Fintech start-up