Consumer credit: Changes that could affect you in 2022
Consumer finance remains one of India’s (and the world’s) most innovative and well-funded industries.
By Prithvi Chandrasekhar, President – Risk and Analytics, InCred
Consumer finance remains one of India’s (and the world’s) most innovative and well-funded industries. After a pivotal year in 2021 and the strengthening of the broader economy, growth is expected to continue in 2022.
Along with growth, the pace of change will also accelerate. Here is my list of the top five innovations or trends that will change consumer finance in 2022.
This feature allows individuals to securely share their identity and financial information with bona fide service providers while providing clear and verifiable consent. This has the potential to reduce one of the most frictional and costly parts of the industry onboarding journey to a single click. Ten years from now, AA will be so deeply embedded in every business process that we couldn’t imagine a world without it. Right now, it’s on the verge of commercialization. Expect it to take off in 2022.
Digital Credit Guarantees
Credit guarantees are very common in India’s informal lending markets (eg, “I promise to pay you if my brother/son/friend/employee defaults”). They are also common as co-loans on expensive products like home loans. But such guarantees are surprisingly rare in the many excellent digital-centric consumer credit products that have proliferated over the past five years. This is partly because of the user journey friction that such a guarantee would entail. As these frictions diminish (due to increased credit bureau coverage and innovations such as account aggregation), and the costs of credit begin to matter more, even for FinTech innovators, expect credit guarantees to also become commonplace in low-cost consumer loans.
India is one of the few emerging markets where an EMI-based personal loan, rather than a minimum payment-based credit card, is the most common first step up the credit ladder. This is true even in near-prime customer segments where gig-economy income is a very critical component of household finances. It does not mean anything. The credit-hungry segments of Indian society need and deserve products that provide more flexibility in repayment. Smart companies are already responding to this need (eg Bajaj’s FlexiLoans). Expect this trend to gain momentum as more lenders create hybrid products that combine traditional EMI-based loans with credit card-like flexibilities.
Wage credit earned
Payday loans (small, short-term loans that the borrower expects to repay when they get their next salary) are now widely available. Big FinTech brands like EarlySalary explicitly talk about this use case. However, these products remain traditional loans, taken out according to the borrower’s ability and repayment intention, and drawn from the borrower’s bank account. Innovators like UK-based WageStream have bolstered this use case by allowing workers to withdraw wages they’ve already earned from their employers, for a fee. In this model, the actual loan is between the lender and the employer, not the worker, and so the client onboarding process is much lighter. A startup called Refyne just raised $82 million to bring this business model to India. Expect others to follow suit.
Credit based pricing
Typically, sellers offer buyers a combination of credits and discounts to promote their products. The amount of credit and discounts are inversely correlated, i.e. a seller who offers more credit does so to defend their prices by offering a lower discount. This relationship has weakened in recent months. Cash-rich FinTechs armed with new product formats (e.g. buy now-pay later) have tried to lure buyers to their platforms/franchise by offering substantial amounts of credit and rebates. Expect this to stop. As traditional metrics such as credit quality and profitability come back into vogue, expect consumer credit to once again become a tool used to defend pricing, rather than a sweetener added to already attractive discounts. .
As we celebrate innovation in consumer finance, it’s also worth remembering that it’s one of the oldest industries in the world.
Consumer credit is (literally) as old as history itself. Humanity’s oldest written records – cuneiform tablets discovered in ancient Mesopotamia – are believed to be credit records. These were promissory notes exchanged between those who had saved on previous harvests and those who were looking to borrow to sow the next harvest.
Truly new ideas are rare in such an old industry. Most of the innovations are about doing age-old tasks – sharing data, securing a friend’s loan, paying back as much as you can when you can – more efficiently using modern technology.
So I will end by thinking that despite all the excitement around technological disruption and new business models, excellence in the age-old disciplines of capital adequacy, credit quality, profitability and proximity customer will be the main drivers of innovation. and success in 2022 and beyond.
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