Consumer technology, digital platforms, and e-commerce are going to be the new lenders who can effectively channel credit to these new cohorts of borrowers.
It is no secret that India’s formal household credit penetration lags woefully behind some of the other comparable developing economies. When in need of credit, most individual borrowers tend to rely on family and friends or borrow from expensive informal credit channels. Traditional financial institutions, usually the banks we see around us, have been conservative with lending. They prefer lending to individuals with a high credit score, often leaving behind a significant chunk of the new credit borrowers. The impact of COVID-19 on traditional banks has further resulted in the tightening of credit norms, making affordable credit for the underserved even more elusive.
According to a recent CRIF report, public and private sector banks’ cumulative share of total personal loan sourcing volume dropped from 75.9% in FY 2016-17 to 31.63% in FY 2019-20. An exponential rise in small-ticket loans, primarily fulfilled by NBFCs and new-age Fintech lenders, is reshaping the market dynamics. They are trying hard to shoulder the burden, but the rising cost of customer acquisition and increasing cost of capital are creating headwinds for them to fulfill this demand profitably.
Who can then serve this fast-growing population of young millennials with unsatiated credit demand? Consumer technology, digital platforms, and e-commerce are going to be the new lenders who can effectively channel credit to these new cohorts of borrowers. Armed with a sizable customer base and valuable customer data, they are positioned perfectly to make this transition. The technology ecosystem around us has evolved rapidly and it is no longer a requirement to create a traditional financial institution set-up to become a lender. Smartphone penetration, evolution, and adoption of India Stack, and comprehensive API ecosystem have considerably weakened the entry barriers. Account aggregators and the recently announced OCEN (Open Credit Enablement Network) initiative will further facilitate the changing of the guard.
It is not only the technology ecosystem and the access to customers that will drive these consumer technology firms to pivot into lending. For years they have seen traditional banks make money on their retail customers at their expense. Parting with significant upfront subventions impact the operating margins of their core business. On top of this, they lose valuable customer data to financial institutions who then cross-sell other products to these customers. With the current technology ecosystem, negligible cost of acquisition, and having access to valuable transaction data of their customers, building credit solutions at attractive unit economics is now easier than ever before. Power is gradually shifting from having access to capital to having access to customers.
Take the example of WeChat, a Chinese super-app owned by Tencent. Launched in 2011 as a messaging app, it crossed half a billion users within 4 years. Leveraging its large active customer base, it launched its lending product WeChat loan in 2015. Remarkably, in just over 2 years it managed USD 15 billion in disbursements, an amount that exceeded few Chinese banks’ whole retail businesses built across multiple decades. There will be similar examples in India as well. Consumer platforms like Amazon, Udaan, Flipkart are already offering credit solutions for their customers. A digital behemoth like Facebook-owned WhatsApp, with its 400 million users, is readying their credit product for the Indian market. Big names aside, the interesting bit is even businesses with smaller customer base can now profitably explore lending as a business. Making this possible are innovative risk technology solutions available today. Everyone doesn’t need to wait to be the size of a WeChat or WhatsApp.
Millennials have become very comfortable with new-age platforms and their user interfaces. They will demand the same level of experience while applying for a loan as they get while shopping online, ordering food, or hailing a shared ride. Most of today’s banks are a little behind in providing this experience and risk becoming just capital providing partners to some of the new-age lenders. Consumer technology’s access to data is another variable that will separate them from traditional lenders. Over 90% of the data in all of mankind has been generated in the last 2-3 years, and it’s not the traditional financial institutions but consumer technology platforms that cumulatively have access to a large part of this big data. Their ability to use this data meaningfully through deep learning, modern computing power, and AI can be a complete game-changer in the delivery of retail credit.
(By Pradeep Rathnam, Co-founder & CEO, TERA Finlabs)