New Age Lending
Fintech players are making a mark in the lending business but need a sustainable business model.
Financial technology firms are making inroads into the lending business dominated by banks. Though they are not in direct competition, some are in partnership with banks and NBFCs. Others are finding niche segments like first time borrowers, students, self employed people and SMEs which are not fully served by banks.
Three alternate lending platforms have emerged. There are fintech players who lend from their own books; marketplace lending or aggregators and peer to peer (P2P) lenders who bring lenders and borrowers under a single platform. All models use technology - AI, machine learning and robotics - to reach customers seamlessly. Customers prefer these platforms due to simple documentation, automated decision making and better customer service.
Do they have a future?
Banking models are not static. Traditional banks, especially private banks have turned digital with Apps and robotics. They are set to serve digital savvy customers, play the small ticket loan market and finance durables. These fintechs are in direct competition to banks, though not on large loans, but in funding SMEs and MSMEs. Some cater to niche segments - KrazyBee offers small-ticket loans to students, while GyanDhan provides education loans for higher studies outside India and RedCarpet provides instant credit to students for online purchases which can be repaid in instalments. Don't be surprised if banks enter these segments if it makes business sense.
There is the marketplace platform where fintechs offer leads to banks or work as partners. Customers can search, compare and apply for financial products. It offers products from multiple banks and NBFCs covering personal loans, credit, protection, and investments products. In recent years, P2P lending has grown with different models from classical crowd sourcing to promoters using funds to lend. The RBI was quick to issue prudential guidelines for P2P, which many countries haven't done. After seven years, China introduced registration guidelines for P2P players. Thanks to the tough RBI prudential regulations for P2P, many existing players may not to apply for a license.
Unlike HNIs or NBFCs, P2P players have to reach out to a wider set of investors willing to lend up to Rs 10 lakh. Many P2P players say funds would flow from mutual fund investors who look for higher returns and are willing to take risks. But to create a bank like trusted institution, P2P players will need strong systems and processes, management teams, professional board and a secure technology platform. This bank like framework will be crucial for P2P because the entire responsibility of KYC lies with the platform. They also have to recover loans in case of defaults. In case lenders / investors have a bad experience (not getting promised returns), the credibility of the platform will be impacted.
In the short term, these platforms may thrive on higher costs for bankers. In the longer term, they have to build a sustainable business model. Direct fintech lenders are funding the business through equity funding, which is not sustainable in the long run. There will be challenges to raise funds from the market based on the balance sheet strength. Similarly, marketplace players are distributors with thin margins. While banks are digitizing operations, these aggregators have to keep innovating. For P2P, the risk is recovery of loans to gain the trust of lenders or investors. But for now, both models of lending (banking and fintech) may co-exist for some years.