With new licenses being proposed and new mergers being announced nearly every month, consumer is bound to have more options
December 2020 is finally here.It would be fair to say that consumer lending and financial services industry has been dramatically impacted in the last three quarters, if not more, and not quite in a good way. Yet, the hopeful green shoots of recovery are seen in every industry, as they adapt to the new normal.
Increasing deregulation and pressure from seemingly higher rates of NPAs post moratorium, along with a need for a low-touch customer engagement is disrupting consumer loans market. Changes that artificial Intelligence and blockchain were to bring in 4-6 year, may now happen in 18-24 months. So, given all this, what should we expect in 2021?
Let’s look at four trends that may impact consumer lending in 2021:
Changing face of the customer
As migrants moved back to their hometowns, they brought in behavioural changes. And when we say migrants, it includes people working in software/ tech companies as well, who are now working remotely from the comfort of their parents’ homes. Amazon and Flipkart saw their Great Indian Shopping festivals being dominated by tier 2 and tier 3 cities. As younger (and older) consumers in non-urban centres become digitally savvy, the need for access to consumer loans goes up.Even in urban centres, the demand for (short-term) loans is on a rise on the back of increasing ecommerce in various categories.
Smaller amounts & lower loan tenures
Pandemic has had two key impact on customer behaviour:- need for white goods/ consumer electronics (link)like laptops, washing machines and dishwashers has fuelled the ecommerce industry. On the other hand, a significant percentage of population has lost stable incomes. Both these factors will lead to increase in small sized(less than 50k) consumer loan books. This also would correspond with shorter settlement periods of 3-6 months. While a share of this market would go to credit card customers and existing pre-approved customers converting their large value transactions into affordable EMIs, it would also create an opportunity for new age and innovative lenders to leverage real-time AI enabled underwriting models.
The fintech revolution - Smaller players to lead the way
The lenders would have to refocus and align their marketing outreach to correspond to this shift in demographics. The recent RBI directive to HDFC to stop sourcing is a great example of the pressure consumer facing tech has started putting on business accountability. This brings us to the era of fintechs. Smaller fintechs have been knocking at the heels of larger financial institutions. They are creative, agile, risk taking, and hungry for growth.The primary differentiation of a fin-tech is the organizational supremacy “tech” gets to disrupt “fin”. Unfortunately, the first phases of fintech players were not as much fin-tech as they were tech-fin. Their financial depth and expertise could often be questioned. The current phase will lead to a crop of true fintechs where seasoned bankers would build truly innovative financial products.
We are seeing new age players reimagine credit in an insignificant number of significant ways; from their focus on new to credit segments to completely digitized onboarding and underwriting processes as well as some truly inspirational financial products. The almost biggest IPO of 2020, Ant Financial’s3-1-0 formula pretty much encapsulates the direction in which this industry is moving. 3-1-0 can be expanded as this - 3-minute application, 1-second approval, and 0 human touch. For traditionalists, this may be appalling but this is the world we live in. Hence nimble fintech have a major advantage and next few years will see some of them garner major market shares. This will be at the cost of the current banking leaders who fail to adapt.
With new licenses being proposed and new mergers being announced nearly every month, consumer is bound to have more options. There are several regulatory twists in action right now – the emerging role of Account Aggregators, NUE for Payments, Personal Data and Non-Personal Data Protection Bills, Open Credit Enablement Network, Healthcare Data Policy, and much more. All these will drive a set of new technology investments, and new customer engagement models and opportunities. Healthcare loans, Education loans, short-term checkout financing for new to credit, use of Computer Vision and AI in secured lending, refinancing, early warning signals and portfolio risk management – these are just some of the immediate segments that we can foresee going transformative change. The advances in AI, ML, and data-driven practices would also mean a newer (and alternative) credit risk paradigm, and a more inclusive market. The comfort with remote onboarding would also open the hitherto underserved geographical segments such as North-eastern states.
Credit (and instant credit) is one of the oldest industries in the world. Yet, in December 2021, we will have a very different product, competition and capability landscape in this industry.
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