The consumer finance industry is expanding to new horizons with various developments
2022 has the signs of becoming a terrific year for the consumer finance industry.
Most lenders and their business partners are confident about their risk metrics and bullish about growth, with good reason. The 2020 and 21 COVID worst-case scenarios were successfully mitigated. Omicron-related lockdowns were much less disruptive than the previous equivalents.
Loan delinquencies seem to be back at, or better than, pre-COVID levels. The broader economy is bouncing back in a robust fashion with incomes, consumer spending, and credit demand rising.
While there is certainly genuine good news in the air, CROs should be worrying about how things can go wrong from here, because the seeds of each risk downturn are sown in the preceding boom times.
Here’s a list of the top five topics that CROs – from across the diverse consumer finance ecosystem – should be thinking about presently:
- Gig Economy Incomes: The COVID lockdowns have accelerated a longer-term trend towards gig-economy jobs. While most people in these jobs are both credit-hungry and credit-worthy, traditional salary-oriented underwriting metrics like fixed obligation to income ratio (FOIR) or product structures based on EMIs are less relevant. Creating new credit tools and product structures for the gig-economy has never been more important.
- Loan Stacking: In the last few months, the rise of buy-now-pay-later (BNPL) products have highlighted long-standing questions about consumer indebtedness. In fact, many BNPL products are understood as “payment” products rather than “credit” products by both providers and users. Doubtless, industry norms on BNPL bureau reporting and related consumer protections will emerge. But until then, the industry will need to manage the transition.
- Partner Ecosystems: The consumer finance ecosystem is dynamic and innovative today partly because FinTechs, and players from many other industries – ranging from payments, to e-commerce, to transportation – are looking to monetize their assets through lending. This also means the complexity of the ecosystem, and the risk and revenue sharing business models between partners, have never been higher. A key challenge for CROs will be to harness this complexity, to ride its energy and creativity while still staying safe.
- AI/ML models: AI/ML models are super-powerful, especially in data-poor contexts like India. Many ecosystem players are looking to harness this power, especially to manage credit risk. However, using AI/ ML models effectively and responsibly are very advanced skills. Many firms are struggling to build these skills in a red-hot job market. CROs need to be simultaneously building organizations with these skills, while also preparing for some of these models going horribly wrong.
- India Stack: While many things can go wrong, an even greater risk is in failing to take advantage of the terrific new tools that are becoming available through the India Stack and related initiatives.
I learnt to manage risk using advanced analytics in my time at Capital One, one of the most respected pioneers in this field. My best advice to CROs managing advanced analytic models is something I was taught at Capital One: “If your judgment tells you to do one thing and your model tells you to do something different, trust your judgement.”
India’s Aadhar ID system, UPI payment system and credit bureaux infrastructure are already among the best in the world. The recent launch of the AA (Account Aggregator) and OCEN (Open Credit Enablement Network) frameworks to facilitate seamless and consented data access is possibly the most powerful element yet of the Stack. Admittedly, some elements of our public infrastructure have taken longer to mature (e.g. credit analytics using GST data is still lagging expectations); no matter how you look at it, the foundations of a truly world-class consumer finance ecosystem are falling into place. In that context, the work of CROs is to seize the moment, to use this infrastructure, to tap this unprecedented market opportunity.
As a CRO, it will still be your job to say ‘No’ to the thousands of flaky, daft, or irresponsible ideas that will inevitably cross your desks. That comes with the territory. Risk people are meant to be unpopular, lonely. But let history look back on your many Noes and think, to paraphrase Churchill, “Never before have so many owed so much to so few (naysayers)”. Because those Noes made possible the few Yeses which then safely and securely powered India’s growth story.
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[author title=”” image=”http://”]Authored by Prithvi Chandrasekhar who leads InCred Finance’s consumer lending business and brings with him 25+ years of professional experience. He has previously worked in retail finance at Capital One and Experian, and in management consulting at Accenture and McKinsey.[/author]
Disclaimer: The views expressed in this article are those of the author and do not necessarily reflect the views of the Economic Times – ET Edge Insights, its management, or its members
