Fintech start-ups see gold mine at bottom of pyramid

A bank is a place that will lend you money if you prove that you do not need it. Bob Hope’s joke on how stringently banks adhere to credit scores, might not be relevant anymore if fintech start-ups have their way.

The traditional methods of credibility assessments by banks rely primarily on repayment data of loans and credit cards. These methods deny loans to 90% of creditworthy individuals, which is a large chunky market that banks have left untouched.

Fintech start-ups have devised clever ways to find diamonds in the rough like consumers with no credit history or no history, or even those rated default scorers by traditional methods. They also cater to the unique needs of small borrowers with short and medium-term loans that few banks oblige with. The key to their ability to address this market is the alternate data that these start-ups have evolved, to assess the worthiness of a consumer, according to a report by Ernst & Young, titled, The battle for the Indian consumer’.

The alternate methods of assessing creditworthiness include data points obtained from social media sites, device data, digital footprints, social media accounts, bank account statements, etc. For example, a traditional method would check the credit card history of a borrower to check if the person is in the habit if repaying on time. Alternate methods use social media portals to check educational and professional backgrounds, track lifestyle spends and payments behaviour based on the apps they use for behavioural scoring, and their activity on e-commerce portals to assess payment behaviour and spending patterns.

“The data so gathered is, run on proprietary algorithms to assess the consumer’s willingness and ability to pay. A rule-based decision engine takes the underwriting decision,” says the report. Lean IT infrastructure with agile loan management systems and analytical engines allow startups to address large volumes, quickly and efficiently, building a business model of its own.

“Digital lending is growing since mainstream banks cannot cater to small borrowers due to their own high loan processing costs. Since digital lenders use online data, it is feasible for them to cater to loans of all sizes,” said Aparajit Bhandarkar, Chief Acceleration officer at ISME Ace (fintech accelerator), speaking at India FinTech Forum. Fintechs automate processes like e-verification of bank statements, use Aadhar and other government databases and real-time credit scores and reports, allowing them to keep their costs low.

College-going students are the low-hanging fruit for digital lenders, as they are yet to build their credit history. Yet, they are constantly in need of small loans. A micro-lending platform called Slicepay that caters only to students, provides them with credit lines upto Rs 60,000 without asking for a collateral. A Mumbai-based startup Simpl, that calls itself an anti-wallet provides, worthy customers with credit at no additional cost, to provide a consolidated bill on fortnightly basis.

Apart from facilitating online purchasing, fintech start-ups are also catering to smaller businesses. They are not wary of using data like invoices that a business has raised or dealer and vendor invoices that are yet to be paid, transaction invoices and billables, to assess the up-to-date creditworthiness of a small company where every penny matters.

Lending to unaddressed markets is also a financially rewarding proposition for most lenders. The interest rates that such lenders can demand falls in the 16-24% range, whereas traditional markets’ interest rates are in the 10-18% range, with formidable competition in the market. More importantly, fintech lending has a slow customer adoption rate of 20%, yet this market with tremendous potential, is awaiting disruptions from innovative start-ups.

DIGITAL LENDING

• New creditworthiness calculation ways include data points obtained from social media sites, device data, social media accounts, bank statements
   
• Lending to unaddressed markets is also a financially rewarding proposition for most new-age fintech companies