How Alternate Lending Players are Banking the Unbanked Banking the unbanked or serving the unserved, in other words, with every financial service provider aiming at financial inclusion, it is considered as one of the hottest topics of today. But, what exactly does it convey?

According to the Chairman of Committee on Financial Inclusion Dr C. Rangarajan, it may be defined as the process of ensuring access to financial services and timely and adequate credit to the financially weak at an affordable cost. As per census 2011, only 58.7 per cent of households are availing banking services in India. Moreover, the number of people who have access to credit is not very impressive – which is less than 10 per cent.

This suggests, the majority of the population, with ambitions beyond their capabilities, is hungry for credit. For which, they have to look for informal sources such as private lenders. This is because not many traditional financial institutions, both banks and NBFCs, are willing to serve them as the tickets size of the loans are small and considered to be too expensive to service. This is where the fintech start-ups have found their sweet spot and an entirely untapped market to cater too.

As a part of a fintech fund that looks into start-ups that are serving the underserved segment, Varun Malhotra, Vice President, Quona Capital, opines the whole concept of financial inclusion has gone beyond just solving the problems of numbers. It has become nuanced and the problem is a lot more complex. "It's not just about sanctioning a loan but also how do you create an entire ecosystem or culture, understanding the client's needs and handholding them through their journey rather than it just being a transaction relationship," he says.

Awareness Per Se

Majority of the underserved population are not very educated about financial terms – they don't understand how the credit works, what credits scores are and what are the repayment structures. In such a milieu, Paysense believes in handholding their customers through the entire process and its sales and customer executives act like advisors to them. "An advisor should bring a friendly connotation along with having an authoritarian voice.

The key is to explain to the customers how they should manage their finances and educate them about the necessary processes and how it improves their income," shares Sayali Karanjkar, Co-founder and Chief Operating Officer, PaySense, adding, " It not just about the conversion process of the loan but explaining what is the right product for the customer."

While on the other side, Happy Loans, a digital lending platform, has tied up with volunteers, remittance players and payment banks to use their channels such as online platform, telecalling or even SMS services to spread the word. "Most of these people are not touched by banks or traditional NBFCs. At times, banks don't serve these segments at all. This, according to us, is very large in terms of volume. We offer them a product, which they otherwise take from private lenders on a daily repayment model, with proper education and communication through the aggregators," Saurabh Soni, Business Head, Happy Loans, explains.

The Repayment Model

No matter how robust your business model is or how many multiple touchpoints you invent to reach out to your customers, if you are unable to collect the lent amount then you are most likely to fail. Here is when R Balaji, Senior Vice President - Marketing & Strategy and Head – SME Lending, Mahindra Finance, comes to your rescue.

According to him, for this category, you need to actively reach out to them for repayments. But the reaching out process too has got a cost. Therefore, you need to have two differentiated models. Suppose your lending size is at least Rs 2-4 lakhs, then it makes sense for an executive to reach out to the customer to understand the requirements, in case there is a non-payment issue. However, if you are financing a small ticket size, like Rs 25,000 to 30,000, then the executive visits become expensive and it turns out to be a loss-making loan.

"For such small loans, you need to build it into your pricing. Add an appropriate model - where your actual delinquencies are in sync with your forecasted delinquencies and then price it appropriately so that even if those customers do not repay - it doesn't matter as your operating model is still viable and sustainable," Balaji advised at the IAMAI's Fintex forum in Mumbai. The other route to get it right is to make EMI date flexible, wherein technology and data analytics can come in handy.

For example, institutions tend to follow a standard EMI date across the board. However, if somebody's salary gets credited on 20th of every month and the EMI date is on 3rd of the month, then the attempt to get the instalment is likely to fail. But if you are try on the 21st, then the chances of success are higher. Customer First Attitude With fintech and now traditional financial institutions looking at various kinds of technology like artificial intelligence, machine learning, robotics, blockchain and open source, it is important that organizations do not forget the motive behind the adoption – seamless customer experience.

As Malhotra concludes, the customers don't really need to know whether it is fintech or financial services or traditional FIs they are consuming service from. It is all about the customer journey.

(This article was first published in the August issue of Entrepreneur Magazine. To subscribe, click here)