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Indian Fintech Space - What will Separate the Men from the Boys in Alternate Lending

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Anubhav Jain, Co-Founder & Head of Risk, Qbera Anubhav is a successful entrepreneur and Credit Risk professional with a decade of experience in Banking having worked for multiple issuers across the customer life cycle - Under writing, Acquisitions, Customer Management and Loyalty.

Over the past two years, Indian Fintech Industry has seen tremendous growth, with multi-million-dollar capital being raised by start-ups in the past year. Payments, Alternate Lending, Wealth Management, Banking Technology and Insurance Technology are all growing rapidly in the country. The hottest among these with respect to opportunities and potential for growth in the next couple of years would be the Alternate Lending space.

Alternate Lending can be broken down into two broad categories based on the target segment or group of customers they cater to – Consumer and Small Business or SME. Within Consumer Lending, there are various business models that exist today – P2P Lending, Aggregators, Payday Lending, Micro Lending, Merchant Financing and Marketplaces.

If one looks at this space from the first point of categorization, the way Indian Fintech Space has evolved clearly highlights the opportunity and potential. While the US and China saw large and successful business models in Consumer Lending area, which grew faster and bigger than SME Lending companies by large, India has witnessed the opposite. While SME Lending led the Fintech wave for the country, Consumer Lending is yet to have its first large, poster-boy start-up, which creates ripples and set the stage for others to follow.

One may wonder, why has India not seen the kind of scale or growth that US/China witnessed in the Consumer Lending space. The answer is multi-fold and is going to become a differentiator in a space that has seen hundreds of companies emerge in a short period of time.
a. Distribution –Where most Indian Fintech companies struggle today is their Distribution. Realistically, every Consumer Lending company wants to become Bajaj Finance when it comes to Distribution(Bajaj Finance once said– “we are not a lending company, we are a distribution company using that channel to lend”). Today, all Consumer Lending Fintech companies are fighting for the same customer, in the same top-10/15 cities of the country. It is critical for them to build a distribution strategy to reach the next 300 million consumers in the Tier-II/III cities and towns of the country.

b. Acquisition – It is not hidden knowledge that during initial stages, start-ups struggle when it comes to Cost of Acquisitions, even if they achieve fast scale or growth by bleeding money. Alternate Lending is no exception. To ensure a true digital experience, most Consumer Lending companies rely on Digital Marketing to acquire customers and thus burn a lot of cash with regards to Cost of Acquisitions. Reducing the Digital Cost of Acquisitions is critical for them to succeed. Using Omni-Channel approach to bring down the blended Cost of Acquisitions is yet to be explored on a large scale in Consumer Lending in India and might hold the key for the next phase of growth in this space.

"To ensure a true digital experience, most Consumer lending companies rely on Digital Marketing to acquire customers and thus burn a lot of cash with regards to Cost of Acquisitions"

c. Collections – Ultimately, Alternate Lending companies are in the business of giving money, and it is absolutely important to get it back as well. Building Collections capabilities is going to be a game changer in this space. Ensuring efficient and cost-effective collections is going to drive profitability and positive unit economics for the start-ups looking to be in this space for a longer run. Whether these Collections are Centralized or Decentralized, Digital or Feet-On-Street, is yet to be tested and validated by the companies. However, focus on reducing the Net Losses in comparison to the Gross Losses with higher Recoveries and low Cost of Collections is going to be a key metric in any start-up’s pitch deck when they go on to raise the next round of capital.

d. Skin-In-The-Game– While aggregators and pure marketplaces with limited skin in the game will continue to evolve and improve(their unit economics is still in question),start-ups working on a more loss/revenue share or building their balance sheets will hold an edge over others. Flexibility in product, process and policy is important, and that comes with having significant skin-in-the-game. Whether it makes sense to lend your money through an NBFC or whether to work with Banks in an FLDG (First Loss Default Guarantee) model is a question that could be at the core of which company leads the Alternate Lending space in the next 12 months.

While the Aadhaar verdict, Google’s revised security features and the reduced liquidity with NBFCs draws clouds in the horizon, it is the right time and opportunity for the start-ups with robust business models to shine – get your basics right!We will soon see consolidation in Alternate Lending space, and time(next 12 months) will tell that which of the existing players emerges the Winner. The men will be separated from the boys very soon.