Praveen Patil, 25, a working professional in Bangalore, lost his mobile phone in the last week of April this year. He could not live without one. At the same time, he also did not have enough money to buy a new one. He soon browsed various e-commerce websites and searched for a deal where he could buy a mobile phone worth 10,000 in 12-monthly installments. Not to his surprise many of the portals offered micro-lending.
E-commerce websites had partnered with the existing banks to offer this service. Also, there were private micro-lending platforms which offered such services for nominal interest rates. Many of these companies target young customers in the age group of 18-35.
Of late, India has seen several startups booming in this segment with accessible and affordable credit using AI algorithms for risk management.
Companies like Krazybee, Redcarpet, Quicklo, Slicepay, Gyandhan, Eduvanz offer small-ticket loans to students and working professionals to purchase mobile phones, e-gadgets, two-wheelers and education loans. For instance, Krazybee offers loans for mobile gadgets and two-wheeler purchases. GyanDhan provides education loans for students who want to pursue higher studies outside India. Similar is the case with RedCarpet which provides instant credit to students for online purchases which can be repaid in easy installments.
For Patil, rather than going through the mainstream banks, the hassle-free service lending offered by these new-age lending platforms was a better option. The cost of these loans is projected very minimal and articulated in a way students understand it easily.
“I am being charged close to 1% interest every month. Collectively, it is not a burden for me when I think of it as a monthly payout. And since I had less cash for down payment, and because these service providers do not make run around for loans, this (micro-lending) option works better for me,” Patil said.
Upcoming fintech companies in the lending space are attracting significant attention from investors. Recently, marketplace lender SoFi received USD 1 billion in funding from Softbank and the company has been profitable since 2014. The global market for P2P lending is expected to grow at a CAGR of 60% to USD 1 trillion by 2025 from USD 9 billion in 2014, according to a KPMG report.
In India, alternative lending is the second most funded and one of the fastest growing segments in the FinTech space. According to a PwC consulting firm report, there were more than 158 new startups in the space as of 2016. While 27% of founded companies obtained funding, as of October 2016, alternate lending in India received $199 million in funding across 33 deals, almost doubling 2015’s funding of $103 million across 21 deals.
Recently, KrazyBee.com, run by Bangalore-based Finnovation Tech, attracted funds from China-based mobile vendor Xiaomi last year. The company has partnered with Xiaomi to offer exclusive credit service to its customers.
“We primarily target Xiaomi’s users who have created Xiaomi accounts because our “express” mobile applications can directly connect to that. The first app is news-centric and this one is called KreditBee that has been integrated with Xiaomi’s MIUI,” Wang Hong, co-founder and Chief Business Officer at Krazybee told The Passage.
Xiaomi has grabbed close to one-third of smartphone market share in India and hence it provides an ample opportunity for a player like Krazybee to capitalize its marketshare.
“When users purchase Xiaomi’s smartphones, they can pay by installments via the service, and if they have borrowing demands after getting the smartphones, they will be able to take the loan internally through Xiaomi’s smartphones. The lending process is much convenient and swift than external resources because Xiaomi’s smartphones can collect and analyze their user data more straight and comprehensive,” Wong said.
Meanwhile, Aditya Singh of CreditMate startup believes that productivity asset financing like that of two-wheeler financing is more secure than the mobile financing or that of weekend vacation space financing. CreditMate is funded by One97 Communication Ltd, which runs mobile wallet firm Paytm.
“India is the largest two-wheeler market. So, we’d stay focused on lending for that segment. The mainstream bank processes are documentation heavy and rely on traditional data and credit history. But they ignore a lot of social data, micro-economic situations and they tend to shy away from such lending. But non-banking financial institutions have adopted technology faster, and are finding a lot of innovative ways for collection which is helping them to thrive,” Singh said.
In the US too, market potential is huge with student lending being a $1.2 trillion market. A handful of startups are approaching the student debt market with different approaches and solutions. Companies such as Sofi, Earnest, Credible and Upstart have developed successful business models out of lending to students and millennials.
SoFi has taken a community-building approach to increase its sphere of influence, sponsoring local social events to help break taboos around money. Earnest offers a two-minute submission process for students to consolidate and refinance their debt.
While the market is the West is growing tremendously, the Indian market is not far behind. Even in China, the use of installment payments is on the rise and is expected to grow in the next few years.
The trend is increasingly seen not just as a way to satisfy an urgent need, but also as a normal method of shopping, according to a report published by LexinFintech, the micro-lending platform.
Installment payments usage is shifting from a low-frequency form of consumption to a high-frequency form of routine consumption. The use of Installments are no longer limited to more costly consumer goods, such as computers and smartphones, but are increasingly involved in all aspects of life, such as travel and catering.
The platforms are not just focusing microlending, but are investing heavily in technology to smoothen the process. Speaking about the process, Wong said, in terms of product design, the company has investigated India market and compared other companies’ products with theirs, to improve the user experience.
“Advanced technology, including face recognition system and systems that connect to India's personal ID, identity recognition, and credit collection enterprises, must rely on our licenses to function. Therefore, our license holders can apply for permission to use such resource and obtain it within 10 minutes, which gives them a great user experience, Wong added.
However, the micro-lending is fraught with risks, which analysts are flagging to proceed with a cautious approach.
“The most important part about lending to students is ensuring you give enough education about credit scores and maintaining creditworthiness, and to warn them against starting off with a bad credit score,” Naresh Makhijani, Partner and Head of India Financial Services Sector at KPMG said.
“We believe that lending is risky business and the student lending segment is among the riskier portfolio to build. While these startups facilitate e-commerce purchases business model for student lending startups but there is no parent guarantee involved. So while the risks are high, the companies are betting on the future.”
Makhijani notes that these companies want to retain the young educated customers for the next to eight years and even if there is a high loss rate of as much as 5% in the first year, that they should be able to recover the loss with majority of the customers would have proven their intention to repay over the years.