Why Consumer Finance is Attracting Fintech Startups
Digital retail lending will touch $1 trillion by 2024
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Banks and other financial services companies have mostly ignored retail customers in a bid to lure business clients, both SMEs and corporates. Hence, we have to initiatives like banking the financial inclusion and last mile delivery to support the underbanked and unbanked population of the country.
Nonetheless, the winds are now changing its course. For new age financial services company or fintech startups, this downside is the chance to scale up and become million-dollar business while catering to the masses.
The Indian consumer finance segment is forecasted to touch $2.5 trillion mark by 2025, while on another hand, as per Boston Consulting Group's report, digital retail lending will touch $1 trillion by 2024. So what makes this segment so lucrative?
Experts explain why consumer finance has elbow room for other companies to grow:
Increase in Income and Focused Policies
As per the Ministry of Statistics and Programme Implementation, in FY 2017-18, India's per capita income grew by 8.6 per cent to INR 1,12,835 from INR 1,03,870 in FY 2016-17.
Increasing per capita income supports the consumer's spending power. This clubbed with initiatives like Pradhan Mantri Jan-Dhan Yojana (PMJDY) and Pradhan Mantri Awas Yojana (PMAY) makes financial inclusion a feasible plan.
Abhishek Gandhi, Co-Founder, RupeeCircle says the unsecured consumer finance segment is speculated to lead the market owing to growing consumer preference towards credit cards and EMI repayments. The biggest example of this would have to be the 83 per cent rise in consumer durable loans in March 2018 compared to the previous year.
"This presents a huge opportunity for fintech companies to make credit accessible to individuals," he pointed out
Increase in New to Credit Population
According to a World Bank report, India's credit bureau penetration stands at 56 per cent. This according to, Manu Sehgal, Head of Business Development & Strategy, Equifax represents the percentage of the adult population who have ever taken formal credit and has a record in credit bureaus.
"Although this metric has improved significantly over the recent years, what it also shows that there is still a large new-to-credit individual population, those who have never availed formal credit from banks, NBFCS, MFIs etc. Just like under the financial inclusion initiative, a large segment of the Indian population which was unbanked got to open a bank account. Now in the next phase, this banked population will be amenable to get credit," he added.
Additionally, what Gandhi finds interesting is that Indian consumers have exhibited good loan repayment records in the previous financial year so much so that the non-performing loans has decreased from the previous years.
"This is a good sign for the consumer lending space especially for P2P lenders like us who are trying to make credit accessible to the un/underbanked individuals. We are witnessing a substantial growth trajectory in consumer finance but the next 2-3 years are crucial to mould it into an all-encompassing, pan-India financial behemoth," he noted.
Lower Cost of Acquisition
Cost of acquiring new customer has always been a challenge for the financial services industry which made it difficult for the sector to cater to customers in the smaller towns and rural area leading the segment to the underbanked and unbanked space.
Sehgal says with the advent of mobile and tech-based apps, fueled by fintech companies, the business model of offering microloans to these customers has become viable. What also hindered the granting of formal credit to these new-to-credit consumers was lack of any credit history, lack of any proper documentation to support income and cumbersome paper-based KYC.
"Again, technology has made it possible for firms to use alternate data to generate credit score of the consumers, assess their incomes or paying capacity thus enabling them to underwrite within controlled risk metrics. Paperless KYC has made digital lending cost effective and almost instantaneous. These technological breakthroughs have meant that a large hitherto untapped white space of consumer lending has opened up every financial institution worth its salt, wants to get into it," he shared.