Consumer Finance: The changes that may affect you in 2022

Consumer finance remains one of India’s (and the world’s) most innovative and well-funded industries.

Consumer Finance, Account Aggregators, Digital Credit Guarantees, Flexible EMIs, Earned Wage Credit, Credit Based Pricing, capital adequacy, credit quality, profitability, customer proximity
After a marquee year in 2021, and the broader economy strengthening, the growth is set to continue in 2022.

By Prithvi Chandrasekhar, President – Risk and Analytics, InCred

Consumer finance remains one of India’s (and the world’s) most innovative and well-funded industries. After a marquee year in 2021, and the broader economy strengthening, the growth is set to continue in 2022.

Along with growth, the pace of change will also accelerate. Here is my list of the top five innovations or trends that will change consumer finance in 2022.

Account Aggregators

This feature makes it easy for individuals to safely share their ID and financial information with bona fide service providers while providing clear and auditable consent. This has the potential to reduce one of the most frictional and costly parts of the industry’s on-boarding journey to a single click. In ten years, AA will be so deeply embedded into every business process we couldn’t imagine a world without it. Right now, it is on the brink of commercialisation. Expect it to take off in 2022.

Digital Credit Guarantees

Credit guarantees are super-common in India’s informal loan markets (e.g., “I promise to pay you if my brother/ son/ friend/ employee defaults”). They are also common as joint loans on big-ticket products like home loans. But these guarantees are surprisingly rare in the many excellent digital-first consumer finance products that have proliferated in the past five years. This is partly because of the user-journey frictions that such a guarantee would cause. As that friction reduces (because of increasing credit bureau coverage and innovations like Account Aggregation), and as credit costs start to matter more even to FinTech innovators, expect credit guarantees to become commonplace in smaller ticket consumer lending as well.

Flexible EMIs

India is one of the few emerging markets where an EMI-based personal loan, rather than a minimum payment-based credit card, is the most common first step in the credit ladder. This is true even in near-prime customer segments where gig-economy incomes are a very critical part of household finances. This doesn’t make sense. Credit hungry segments of Indian society need, and deserve, products that offer more flexibility in repayment. Smart companies are already catering to this need (e.g. Bajaj’s FlexiLoans). Expect this trend to gather momentum, as more lenders create hybrid products blending traditional EMI based loans with elements of credit-card-like flexibility.

Earned Wage Credit

Payday loans (small-ticket short-tenure loans that the borrower expects to repay when he gets his next salary) are now widely available. Leading FinTech brand names like EarlySalary speak explicitly to this use case. However, these products are still traditional loans, underwritten against the borrower’s repayment ability and intent, and collected from the borrower’s bank account. Innovators like UK based WageStream strengthened this use case by allowing workers to draw down wages they have already earned from their employers, for a fee. In this model, the actual loan is between the lender and the employer, not the worker, and so the customer on-boarding process is much lighter. A start-up called Refyne just raised $82 million to bring this business model to India. Expect others to follow suit.

Credit Based Pricing

In general, sellers offer buyers some combination of credit and discounts to promote their products. The amount of credit and the discounts are inversely correlated, i.e. a seller who offers more credit does so to defend his prices by offering a lower discount. This relationship has weakened in recent months. Cash rich FinTechs armed with new product formats (e.g. buy-now-pay-later) have been trying to attract shoppers to their platforms/ franchise by offering substantial amounts of both credit and discounts. Expect this to stop. As traditional metrics like credit quality and profitability come back into vogue, expect consumer credit to go back to being a tool used to defend prices, rather than a sweetener thrown in on top of already handsome discounts.

While we celebrate innovation in consumer finance, it is also worth remembering that this is one of the world’s oldest industries.

Consumer finance is (literally) as old as history itself. Humanity’s oldest written record – cuneiform tablets discovered in ancient Mesopotamia – are believed to be credit records. These were promissory notes exchanged between those with savings from previous crops and others looking to borrow to sow the next crop.

Genuinely new ideas are rare in such an old industry. Most innovation is about performing age-old tasks – sharing data, guaranteeing a friend’s loan, paying back as much as you can when you can – more efficiently using modern technology.

So, I’ll close with the thought that despite all the excitement about tech-led disruption and new business models, excellence at the age-old disciplines of capital adequacy, credit quality, profitability, and customer proximity will be the primary drivers of innovation and success in 2022 and beyond.

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First published on: 15-02-2022 at 22:56 IST
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