Consumer Finance: The changes that may affect you in 2022

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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 marquee year in 2021 and the general strengthening of the economy, growth will continue in 2022.

With growth, the pace of change will also accelerate. Here is my list of the top five innovations or trends that will transform consumer finance in 2022.

account aggregators

This feature makes it easy for individuals to securely share their ID and financial information with reputable service providers while providing clear and verifiable consent. This has the potential to reduce one of the smoothest and costliest parts of the industry’s onboarding journey to a single click. Ten years from now, AA will be so deeply embedded in every business process that we can’t imagine a world without it. It is currently close to commercialization. Expect it to kick off in 2022.

Digital Loan Guarantees

Credit guarantees are common in India’s informal credit markets (e.g. “I promise to pay you if my brother/son/friend/employee defaults”). They are also common as common loans for large products like home loans. But those guarantees are surprisingly rare with the many excellent digital-first consumer finance products that have proliferated over the past five years. This is partly due to the friction points in the user journey that such a guarantee would create. As this friction diminishes (due to increased coverage by credit bureaus and innovations like account aggregation) and as the cost of borrowing becomes more important even for FinTech innovators, expect loan guarantees to become commonplace even in smaller-ticket consumer lending.

Flexible EMIs

India is one of the few emerging markets where an EMI-based personal loan, rather than a minimum payment credit card, is the most common first step up the credit ladder. This is true even for prime customer segments where gig economy income is a very critical part of household finances. That does not make sense. Credit-hungry segments of Indian society need and deserve products that offer more flexibility in repayment. Clever companies are already serving this need (eg Bajaj’s FlexiLoans). Expect this trend to gain momentum as more lenders develop hybrid products that combine traditional EMI-based lending with elements of credit card-like flexibility.

wage credit

Payday loans (short-term small loans that the borrower expects to pay back when they get their next salary) are now widely available. Leading FinTech brand names such as EarlySalary explicitly address this use case. However, these products are still traditional loans that are underwritten and drawn from the borrower’s bank account against the borrower’s ability and intention to repay. Innovators like UK-based WageStream amplified this use case by allowing workers to retrieve wages already earned from their employers for a fee. In this model, the actual credit lies between the lender and the employer, not the employee, and therefore the client onboarding process is much easier. A start-up called Refyne has just raised $82 million to bring this business model to India. Expect others to follow suit.

Credit Based Pricing

Generally, sellers offer buyers a combination of credit and discounts to promote their products. The amount of credit and discounts are inversely correlated, i.e. a seller who offers more credit defends their prices by offering a lower discount. This relationship has weakened in recent months. Well-funded FinTechs, armed with new product formats (e.g. “buy now, pay later”), have attempted to lure buyers to their platforms/franchises by offering significant amounts of both credit and discounts. Expect this to stop. As traditional metrics like credit quality and profitability come back into fashion, you can expect consumer credit to once again be a price defense tool, rather than a sweetener thrown on top of already sizable rebates.

As we celebrate innovation in consumer finance, we should also remember that it is one of the oldest industries in the world.

Consumer finance is (literally) as old as history itself. Mankind’s oldest written records – cuneiform tablets discovered in ancient Mesopotamia – are believed to be loan documents. These were promissory notes exchanged between those who had savings from previous crops and others who wished to borrow money to sow the next crop.

Really new ideas are rare in such an old industry. Most innovation is about doing age-old tasks—exchanging data, guaranteeing a friend’s loan, paying back as much as you can when you can—more efficiently with modern technology.

So I close with the thought that despite all the excitement about technology-driven disruption and new business models, excellence in the age-old disciplines of capital adequacy, credit quality, profitability and customer intimacy will be the key drivers of innovation and success in 2022 and beyond.

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