Lending A Helping Hand to Fintech Businesses The market demand for lending services is on the rise and fintech startups are leaving no stone unturned in capitalizing on it

Many fintech startups are today pivoting to lending or adding a lending layer or prioritizing lending over other verticals. For instance, CRED has acquired Creditvaidya to focus on lending. BharatPe has a separate consumer lending business PostPe. PhonePe was also reportedly planning to acquire Buy Now Pay Later (BNPL) startup Zestmoney, but the deal fell through. Lending has become a significant growth driver for many startups. An interesting point to note here is how lending became a key driver towards increased revenues and share price of fintech giant Paytm. According to the latest financials, Paytm has grown their disbursals by more than 250% to INR 12,554 crore in Q4 FY 2023 from INR 3,553 crore in Q4 FY 2022.

Besides, startups with digital lending as a core business model from the beginning have also been raising funding and scaling fast. A case in point is Indifi, which operates an online lending platform that offers business loans to micro, small and medium enterprises, raising Series D funding recently. Cloudbankin (formerly known as Habile Technologies), an end-to-end digital lending software company also raised $400K in funding from angel investors recently.

Why lendingtech is gaining momentum

Fintechs predominantly make money either by investments and deposits side, like banks, or by lending, like banks and NBFCs. But, the investment side is more challenging, which makes lending a natural choice. "The investment side is dominated by the presence of established large banks and wealth management firms in the Indian markets. However, India being a perpetually credit-deficient society, innovative lending solutions by fintech present a relatively easier play for personal needs and corporate lending," said Ashwani Singh, managing partner, 35 North Ventures India Discovery Fund.

Also, even for the traditional finance sector, the lending business brought in more profits than other verticals. Now, the same trend is being seen in digital. "The neobanks have used various services to build their customer base. But most other services, are not monetizable and now at the pressure of profitability, they are all resorting to lending," said Bhaskar Majumdar, Managing Partner, Unicorn India Ventures.

There is also a huge demand for credit services, especially among underserved segments. This allows startups to tap into the demand and reach a large customer base while generating attractive revenue through interest income and fees. This has given rise to different business models within lending, as mentioned below:

"The success of lendingtech business models in India can be attributed to the untapped market of unbanked individuals and the country's improving digital infrastructure. Startups leverage technology, alternative data, and innovative approaches to bridge the gap and cater to a wider customer base," said Teja Ramineni, co-founder, Avenue Holdings.

According to Market Data Forecast, the peer-to-peer (P2P) lending market size is forecasted to be $10.5 billion with a CAGR of 21.6% from 2021 to 2026. P2P lending platforms offer attractive returns of 9%-14% for investors, along with borrowers having processing fees of 2-4% and interest rates exceeding 15%.

"The flexibility provided to investors is another reason for the success of P2P lending. Investors have a range of options to choose from, including loan duration, secured or unsecured loans, and different types of borrowers (business or individual). With non-market linked products like P2P lending gaining popularity, especially in a year when equity markets underperform, the high flexibility and returns make them appealing to investors," said Ramineni.

The appetite for credit in India is expected to grow further. Be it in the private sector or the domestic household front, the demand for easy access, low-cost, and highly diversified products to suit the needs of the Indian market continues to grow at a rapid pace. According to the World Bank, India's domestic credit to the private sector at 55% of GDP in 2020 is remarkably below the world average of 148%, and lowest among its Asian peers — China at 182%, South Korea at 165%, and Vietnam at 148%.

"The penetration of household credit in India is far behind in comparison to its Asian and broader peers, illustrating the need for innovative solutions. The democratization of public digital infrastructure, for instance, of the rails powering UPI, have also unbundled digital payments in a way that unfair arbitrage opportunities which were being used for some time earlier are no longer viable. Fintechs now can build on the infrastructure laid down and focus on innovation in revenue & cost models and customer journey," said Richard Pinto, principal, 3one4 Capital.

Many new-age fintech players are also entering this space through acquisition as it helps them to expand their target consumer base. "By addressing pain points in traditional banking like faster loan approvals and a more seamless digital lending experience, they are able to differentiate themselves against traditional players. And when done effectively, the revenue stream via lending can provide a stable and consistent source of income compared to other verticals that may be more reliant on transactional or subscription-based models," said Vinay Bansal, partner, Physis Capital.

Ankur Bansal, co-founder and director, Blacksoil Capital sums up the factors that can be linked to growth in lendingtech.

• Increase in Financial Inclusion: The proportion of Indians having a bank account has increased from 35% in 2011 to 78% in 2021.
• Internet and Smartphone Adoption in India: India has experienced significant growth in internet and smartphone usage. As of 2021, India had over 650 million+ internet users and is expected to reach 1.3 Bn by 2030. Smartphone usage has also increased by 10.2x from 91 million in 2012 to 931 million in 2022.
• Fintech Adoption and Increased Digital Credit and Payments: Demonetization acted as a catalyst in India to promote digital transactions which in turn accelerated the use of fintech platforms, including lendingtech solutions as an alternative to cash-based transactions.
• Increase in Embedded Credit and AI-driven Lending: Embedded credit has gained traction in recent years. Many digital platforms have added lending as a feature thus increasing the credit supply which is still lower than the demand. Also, AI-driven lending makes the underwriting of customers a more seamless and faster process thus, motivating customers to use digital credit avenues.
• Collaboration and consolidation in the industry: RBI has also played a major role in overall market consolidation caused by the digital lending guidelines. This has also helped the players to ride out the compliance burdens.

The success story of Paytm

Paytm, one of India's leading digital payment platforms, has played a significant role in pushing other startups towards lending. It has influenced other startups to explore lending by demonstrating its potential and profitability. While the exact impact on Paytm's financial situation may vary, lending has become a significant growth driver for many startups. "Paytm's expansion has demonstrated the potential for fintech companies to leverage their existing user base and digital infrastructure to offer lending services. Paytm's move into lending has contributed to its diversification strategy, allowing the company to generate additional revenue streams. Since Paytm already had a large user base they were able to capitalize on that as well," said Bansal.

However, Singh feels that even though there has been an obvious change in the financial situation of Paytm because of their focus on lending products, the company faces strong headwinds from other established players and a common fallacy among all lending startups, i.e., their inability to recover bad loans at an acceptable cost.

The advantage of higher margins

Fintechs playing on the lending side of the business often have higher margins, typically ranging from 200–600 basis points more than their counterparts on the investments or wealth side. "This business advantage of higher margins allows startups to absorb the costs associated with learning as their business models evolve. It also helps them to withstand the higher cost of client acquisitions in the nascent stage of business," said Singh.

While the payment potential in India is huge, the business is a low-margin business that has further been impacted by the introduction and growth of UPI. However, over the years, payment startups have spent big amounts on building a huge customer base. "This customer base can be used to cross-sell many financial products one of which is credit. Lending businesses operating with strong underwriting processes can generate much higher margins than payments due to which we see many payments, specifically wallet businesses, moving towards lending to strengthen their bottom line," said Ankur Bansal.

UPI in India clocks INR 126 trillion in terms of the value of transactions in 2022. It has witnessed wide adoption in the country, allowing users to transfer funds from bank accounts digitally. "However, the UPI space is crowded and dominated by players like PhonePe, Google Pay, Paytm, and other apps. Users have trust in these UPI providers, and it might be challenging to convince them to switch from these existing platforms," said Vinay Bansal.

In conclusion, experts say that the combination of market demand for lending services and India's digital infrastructure offers compelling opportunities for fintech startups. And, by addressing challenges and embracing innovation, these startups can thrive in the lendingtech space.