These days every other Fintech struggling to find a sustainable revenue model is trying to become a lending company. While the bigger ones with enough capital are going with their own NBFC, smaller players are using credit lines from other NBFCs. However even when these start-ups are using credit line they end up offering FLDG (First Loss Default Guarantee) up to a certain degree to the NBFCs, thus actually owning the risk. This phenomenon has become so common that many pundits of the start-up ecosystem have proclaimed lending a feature.
As the title of the post suggest, two key models emerge:
Phone pe Loan: This model involves user downloading the app of the lender and then lender using various data points collected from the phone to underwrite the loan. Linking the lending to a mobile app gives lender access to multiple non-traditional data points like SMS, Call logs, Location etc, giving lender information like users finances (through SMS), your social connects (through call logs), your home and work address (through location data) etc providing lender enough information to underwrite the loan even without traditional credit score. This works well in Indian context considering only a small population in India has credit history. This also gives user anytime-anywhere access to the loan thus closely mimicking the credit card business. These loans are usually low ticket short duration loans where the lions share of lenders income comes from processing fee instead of interest. Multiple loans taken and paid back over a period of time constantly feeds into your profile with the lender and helps in the underwriting.
Start-ups like SmartCoin, MoneyTap, Early Salary are some key names in this space. Nowadays even companies like Ola and PayTM have come up with Postpaid offerings, which can be categorized in this category with difference being access to certain proprietary data like your activity in Ola Cabs and your PayTM app transactions respectively.
Loan pe Phone: Other prominent model perfected by Bajaj Finance and Home Credit is consumable financing i.e. offering loan linked to a purchase giving customer an option to pay in EMIs instead of upfront payment. In this model lender usually strikes a deal with either the merchant or the manufacturer to subvent the cost of loan thus making the loan to customers practically interest free. Since the subvention money is paid to the lender by merchant or manufacturer onetime makes this much more lucrative to the lender, when compared to the interest paid by customers as part of EMIs. When you get into the details you will be able to see the interest rate applied and the amount subvented by the manufacturer or merchant.
Merchants or manufacturers in this process effectively let go of some of their margin in the interest of gaining a transaction, which they may have ended up loosing due to customer’s inability to make upfront payment. Entire credit card industry had been built on this very concept. Originally one of the key reasons merchants had agreed to pay MDR from their margin because credit cards increased customer’s capacity to pay. (Merchants pay higher MDR for American Express or other premium variants of Visa, MasterCard and Diners, because of the belief that these cards offer higher capacity to spend)
In fact nowadays most of the credit card companies have also started offering EMI option under similar arrangements to its customers. Recently I have seen many banks extending this option through their debit cards.
This model is not new though, many manufacturers of high value goods like cars run their own lending companies to finance the purchase. This was later adopted by bike manufacturers. Now when your phones are as expensive and sometimes even more expensive than a bike why would phone manufacturers stay behind. That is why now we are seeing companies like Xiaomi (Mi) getting into lending business adopting “loan pe phone” model.
Online variation of similar model is nowadays popularly being referred as “pay later” and companies like Zest Money, Lazy Pay (PayU) etc are operating on this very model with varying degree of subvention.