Fintech: The rise of digital lending

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New Delhi | October 29, 2018 2:53 AM

What’s spurring the growth of fintech start-ups in India and will the possible entry of Google and WhatsApp in the lending space pose a threat to existing players?

Several lending apps that have mushroomed over the years offer quick financial assistance to customers who do not have the wherewithal, without any human interface.

For, say, a 25-year-old IT professional, it would be unimaginable to afford a top-end smartphone especially at the end of the month. But putting the funds for it together has increasingly become possible, and often, even overnight. Several lending apps that have mushroomed over the years offer quick financial assistance to customers who do not have the wherewithal, without any human interface.

According to The Boston Consulting Group (BCG), this newly internet-introduced 3-1-0 model implies three minutes to decide, one minute to transfer the money and zero human touch. The firm estimates as many as five million such loans have been disbursed to both consumers and small and medium enterprises. The total value of the digital lending business in India, it says, will exceed $1 trillion by 2023.

Lenders and buyers
In the digital lending space, consumer lending has emerged as one of the biggest constituents. Young professionals beat the cash crunch by merely downloading an app. Over the last seven years, BCG states, 1,000 fintech start-ups have been launched in India, raising over $2.5 billion. Consumer lending app EarlySalary, says its co-founder and CEO Akshay Mehrotra, has been downloaded over 600 million times. “We have disbursed more than 3.5 lakh loans so far, amounting to a total of more than Rs 550 crore. On a monthly basis, we are disbursing 40,000 loans and adding 20,000 customers.”

An average EarlySalary customer is 26 years old. Most are in their first jobs, residing in the metros typically, and earning Rs 30,000 a month. Any employee earning more than Rs 18,000 is eligible for a loan. “Around 40% of our customers may not be able to get a bank loan; either they are too young or their credit scores have not matured. Our biggest strength is the ability to lend real time. Even if someone comes in at 3 am, the money is credited by 3:05 am,” Mehrotra adds. Early Salary charges Rs 9 a day per Rs 10,000 as interest on the loans.

MoneyTap is another fintech start-up in the consumer lending space that offers a credit line to customers. “Our average customer is 30 years old, earning between Rs 30,000-40,000 per month, in need of a small amount to meet a basic need,” says Anuj Kacker, its co-founder and COO. The start-up is targeting Rs 600 crore worth of disbursement this financial year.

The demand for credit is huge in India, with limited loans available in the market — an opportunity area for fintech start-ups.

The hurdles
Currently, all credit models are built on the income side of transactions, but with the rise of fintech, the expense side is becoming important. Alternative data is acquired by tracking various shopping/spending behaviour and based on this data, a decision of whether to offer a loan or not is made. Although this alternative data gathering enhances inclusive banking, there are challenges too. Vivek Belgavi, partner & India fintech leader, PwC, says the regulatory and compliance umbrella needs to expand to ensure that these newer techniques are not misused. “Traditionally, risk models can be audited by the banker and there is a fair bit of consistency in the methods, mechanisms and back-testing of data. But the alternative data space is newer, with variety. Bringing in the same level of governance is a big challenge.” Moreover, how much of the data is acquired and shared after getting consumers’ consent is a question mark.

Furthermore, could Google and WhatsApp be formidable challengers to these players? WhatsApp, which has 200 million monthly active users, has expressed interest in entering the financial space. Meanwhile, Google recently rebranded its fintech offering Tez as Google Pay and has plans to offer short-term loans to its consumers.

“These players will act as a marketplace,” says Kacker. In other words, armed with their customer database, they will approach banks with a request to lend to these customers. “The focus could be on customers who need term loans as that would make business sense for them; whereas we are going after a completely different set of customers — those who need small loans for a short period of time. There is place for everyone.”

Manish Jain, partner – digital consulting, fintech and blockchain, KPMG, agrees. “Forget about tier II and tier III cities; even in tier I cities, there are a lot of borrowers who go to traditional bankers. The scale/size of this country is so huge that there is enormous opportunity for everyone,” Jain says.

Furthermore, the fintech boom could formalise the informal lending sector (such as jewellery stores and other shopkeepers lending money) in India. “Over the next two years, almost 400 million people are estimated to join the digital bandwagon,” Jain concludes.

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