BACKDROP

India as a consumer market is fairly complex in terms of geography, cultural preferences and consumer behaviour. For any given product or service, there are multiple consumer segments, each with its own unique set of buying preferences. But a common unifying factor is the ubiquity of mobile connectivity and the rapid adoption of the internet as a data source influencing the buying decision.

The primary mode of accessing potential borrowers in need of credit, of credit underwriting and entering into loan agreements is offline through brick and mortar outlets supported by call centres. Banks and NBFCs rely heavily on hardcopy documents, on traditional data sources like income statements and credit scores, on face to face meetings and on wet signatures. This makes technology just another support system for the brick and mortar world of doing business. The full leveraging of technology and true digitisation in the lending business started with Fintech companies in India. The two segments that have been the focus of Fintech lenders are urban individual consumers and the MSME segment.

THE FINTECH LENDERS DISRUPTING THE UNREGULATED FINANCING MARKET

Traditionally the major block of unsecured lending in India is controlled by community finance – comprising family, community members and unregulated private lenders. This segment was ripe for disruption through technology and remains the segment of focus for Fintech lending start-ups in India. Even MSMEs in India are heavily cash starved in spite of being willing to submit to onerous processes and wait times. This credit gap is also the target of many Fintech lenders in India. Receivables financing, working capital financing and equipment finance are the solutions that Fintech lenders provide to this borrower segment.

Happy Loans is an example of how Fintech lenders address the needs of the MSME segment. Happy Loans in its current business model provides loans against receivables to retail merchants. Happy Loans focuses on retail merchants who have been acquired by merchant aggregators. Aggregators have a record of electronic transactions of their merchants done through open loop payment systems, mobile wallets, remittance mechanisms etc. Aggregators are also the channel through which merchants receive their dues through daily settlement. A tie-up with such aggregators gives Happy Loans access to electronic transaction data used for credit underwriting. The aggregator also enables the repayment of loans disbursed through daily split settlement of electronic transactions at a merchant outlet. The entire value chain of prospect acquisition, credit underwriting, loan disbursement and repayment is completely digital thus bypassing the need for brick and mortar stores, physical documents and lengthy wait times. Happy Loan’s business model is supported by an AI engine which performs credit underwriting based on transaction data thus making redundant data points like income statements, credit history and credit score.

BUSINESS MODELS

Today the Fintech lending business in India is experimenting with different models:

Point of Sale transaction based lending This is the model that Happy Loans works on today. Credit is extended using data of electronic transactions at POS and against future receivables at POS.	Bank Fintech partnership model In specific segments (travel, food and hospitality for e.g.) banks have tied up with Fintech companies that source and underwrite potential borrowers for banks. Indifi is an example of the same.
Invoice discounting exchanges Some Fintech companies like KredX operate exchanges where unpaid invoices can be discounted by SMEs to a network of financiers (Banks, NBFCs), wealth managers and retail investors.	Marketplaces Marketplaces like Paisa Bazaar connect borrowers with financial institutions. They provide the value add of digitizing the entire supply chain to provide borrowers with a seamless digital experience.
Captive models Companies that exist in entirely different businesses are entering the lending space in order to lend to their captive customer base either directly by setting up NBFCs (like Flipkart) or by partnering with financial institutions (like Ola)	P2P model Companies like Faircent have set up P2P lending platforms in order to connect borrowers to affluent individuals with excessive liquidity. The Individual nature of lenders as opposed to institutions separates this model from marketplaces.

FUTURE EVOLUTION

For winning business models and successful companies, the payoff is huge. The underlying product – credit, is essentially a commodity. Companies that will succeed are companies who innovate in customer acquisition and servicing. Some likely future developments within this industry:

• Traditional lenders will form exclusive or near exclusive tie-ups with Fintech companies
• The use of alternative data for credit underwriting will increase
• Trusted third party data platforms will emerge

The future for this industry is one of growth and profitability while at the same time closing the crippling credit gap in India thus boosting economic growth and creating social impact. Fintech lending will gain market share initially in segments underserved, and progressively in adequately served segments transforming the traditional lending business model completely.

This Guest post for TKWs Institute of Banking and Finance is written by :

Manish Khera is an entrepreneur, investor and banker who specialize in microfinance and micro payments. He is the founder of FINO and has been on the Board of Airtel Payment Bank.