The last four months have been nothing but a roller coaster ride for digital lending players in India. Not only did the country go through the most severe lockdown (and associated demand shock) in the world, the RBI announced a moratorium on loan repayments that added to the uncertainty. At the same time, this period has unearthed an enormous opportunity with demand for contactless and digital credit reaching an all-time high. With an uncertain economic outlook, people are increasingly looking to avail EMI options to tide them over these tough times. Similarly, retailers, manufacturers and e-commerce platforms have never been more keen to offer easy, cost-effective EMI and affordability solutions to their customers.
It is now evident that a digital means of credit is the new order and all lenders who touch the Indian consumer will need to adapt their products and services for this ‘new normal’. Consumers are, now more than ever, keen to avoid branches, agent-driven models and are looking for easy, selve serve options. As a result, traditional lenders are upping their digital game and we expect to see increasing levels of partnership between tech companies (including fintechs) and traditional banks and NBFCs.
COVID-19 has been a wake-up call for many industries and it’s ongoing effects have forced all sectors to reimagine their operations for a more digital autonomous world. The financial services industry is no different and, thanks to advancements in payments and data infrastructure in the country, there has never been a better time to digitise products and offerings.
For many in the BFSI industry, when we talked of digital lending, this was synonymous with digital acquisition – for example having an app in the app store.
At ZestMoney, digital lending always meant more – it meant an end-to-end platform that digitised every part of the lending business, from acquisition to KYC to fraud management to loan creation, collections and servicing (as well as a lot more).
COVID-19 has exposed the need for players to look beyond basic digital hygiene and make the move towards an end-to-end digital business model themselves or work with a technology player that already does so. A lot of banks are now interested in knowing how fintechs, like ZestMoney, were able to navigate the complexities of the moratorium and lockdown.
This is the first time we are seeing technology and consumer demand coming together at this scale in our industry. This will play out strongly in the years to come, with a lot of the shifts we’ve seen potentially becoming permanent business maneuvers, such as digital collections.
Shift in consumer behaviour
While digital payments and especially UPI were rapidly growing in adoption, the last five months has sped up this trend to unprecedented levels.
Sectors like healthcare, education, grocery shopping, insurance are seeing massive shifts to digital models over the last five years and this will drive further investment from players in the space – and eventually even drive adoption outside of major cities – increasing last mile access to digital money.
Similarly, in credit, a fully automated loan platform which is contactless and paperless with a quick turnaround, can drive adoption and importantly democratise access and enable last mile distribution where a more physical or branch based model is commercially unviable.
In physical stores, Indian consumers are now becoming used to paying with an app or via QR code. This will soon reflect in their EMI behaviour as well – we will see a raft of completely digital app and card-based EMI options that will not require in-store agent assistance. KYC norms that previously required a lot of paperwork have evolved so that self-service is becoming a reality for consumers and retailers both in order to cater to the pent up demand at their stores.
Looking beyond a CIBIL score
Banks and lending institutions have long relied on credit scores to map the credit worthiness of a customer. In times of economic uncertainty, that data cannot and should not be the deciding factor on the credit worthiness of an individual. In addition, strict rules governing how a lender can report to the bureaus regarding its moratorium opt-in customers means that credit bureau scores will be less reliable going forward. Lenders will need to rely on their proprietary data on a customer or find alternative ways to underwrite in a post-moratorium world.
At ZestMoney, we offer our lender partners a platform that uses mobile technology, Artificial Intelligence and machine learning to analyze dozens of factors besides a traditional credit score to underwrite risk both quickly and accurately. These data models in underwriting will play a crucial role in lending responsibly, as they not only look at a customer’s likelihood to repay but their ability to do so as well – both of critical importance at times of income shock and uncertainty. ‘Cash flow based lending’ will become more common and replace the traditional methods such as credit score plus salary slip. Initiatives like OCEN and the Account Aggregator framework will further enhance this, providing data to lenders in a safe, secure and consent-based architecture.
Cardless credit: The big opportunity now
Credit card penetration and usage is extremely low in India, with a mere 20-30 million unique users and this number has grown slowly over the last decade, despite strong growth in cards issued and loan books outstanding (basically, the same people are using multiple cards)
All over the world consumers, especially younger and more digitally savvy ones, are turning their back on credit cards, which come with all sorts of hidden fees and costs. Retailers are also not usually fans, given the high cost to accept. Millennials in many markets now prefer to use ‘Buy now, pay later’ or POS finance products, what we call cardless credit (or Digital EMI) in India.
We believe now is the time for these products to take off in a major way. New credit card issuance will be low for some time in India and cost-conscious consumers will look for more affordable and transparent EMI options whilst shopping. Credit options that can be embedded within the shopping journey and pay later solutions offering instant, seamless affordability will see a huge surge in the coming months.
Now, a person sitting in a remote town can apply for a credit limit online, complete KYC formalities and get access to a line of credit for shopping, in a matter of minutes. What used to take hours in a line at a bank now takes mere minutes on your phone. All barriers of location and physical infrastructure have been overcome with mobile data servicing customers. 70% of our customers are from tier II and III markets, the majority of them being new-to-credit. It’s here that alternate data sets help democratize credit and drive financial inclusion.
Partnership with Banks, NBFCs the way ahead
We have always believed that the only way to build a scalable and sustainable digital financial services industry is via ecosystem development and collaboration. We believe that only when technology players, NBFCs and banks work together can mass market scalable adoption truly happen. We also support and participate in the build out of infrastructures such as OCEN and Account Aggregator, which will make such collaboration easier and more plug-and-play.
At ZestMoney, we have achieved growth only through partnerships with banks and NBFCs and this will accelerate in the current environment as traditional lenders look for digital partners to help them build out digital business lines. In the long run, these partnerships lead to the best solutions for the customer and the cheapest pricing – critical to drive mass adoption. Addressing the diverse and complex customers in a country like India can never be done alone so it’s incredibly important to build a thriving and collaborative ecosystem by fostering promising partnerships.
Leapfrog moment for India
There are several reasons why economists are forecasting that the Indian economy will revive faster than other markets. Apart from the demographic dividend and lower levels of household debt, a burgeoning digital economy will be the key differentiator.
According to a study by Boston Consulting, the Indian digital payments industry alone has the potential to contribute 15% to the country’s GDP by 2020, amounting to a staggering $500 billion. The same study estimates that digital lending in India can easily be a trillion dollar industry by 2023.
India not only has some of the best digital infrastructure in the world and some huge white spaces, but it also has a population that’s willing to embrace the change and adopt new ways of doing things. I am confident that India will be the biggest global fintech market in the next 5 years.