Will Affirming credit and KLARity of pay later make the Indian consumer Lazy?
Few years back the only thing which you could look forward in fintech was payment gateways and wallets/mobile payments. Searching through angellist for possible ideas and researching on google few startups I used to keenly follow was Klarna and Affirm. I always was excited about their business models and I always wondered how can this model be tailored to Indian market. Though there were financial credit providers like Bajaj Finserv which used to offer EMI creditline their solutions were targeted at the physical retail.
Circa 2016, the fintech revolution have paved way for the birth of credit lending startups — The Indiastack, evolved alternative credit scoring platforms (Credit Vidya, Lenddo, Hello Soda), online income verification APIs (Perfios), availability of Bureau score APIs combined with partner hungry NBFCs & Banks to lend their books and investors who don’t want to miss the fintech bus gives you the perfect ingredients to start a lending business. No wonder the cheer leaders of the neo-fintech bandwagon are credit lending startups which is estimated to be more than 50+ trying to win consumers in niche categories from payday loans to student financing to gadget financing.
Since the focus of my article is on consumer credit startups similar to Affirm, I would limit the blog covering few consumer credit startups, their models and challenges. The key startups which are directly focussed on this niche segments are ZestMoney, Lazypay by CitrusPay (my favourite for an obvious reason:) ), Simpl, Cashcare and epaylater. Adding flavour to these players are the digitally transformed Bajaj Finserv and MoneyTap which also indirectly focus on this market.
If I had to split the above players into segments I would like to categorise them into the following
- Digital consumer finance ( Equivalent of Affirm+Klarna internationally) : ZestMoney, Cashcare, Kissht
- Pay-later solutions ( Equivalent of Affirm internationally) : Lazypay, Simpl, epaylater
- Digital Credit line ( Equivalent of Blispay internationally) : Bajaj Finserv, MoneyTap
Digital Consumer finance :
The digital consumer finance providers offers consumers an easy way to pay using ZestMoney or Cashcare or Kissht at their partner ecommerce merchants and pay off their purchases in hassle free EMIs ranging from 3 to 12 months. The credit eligiblity is decided based on a number of factors that include your income (fetched online from your bank account or e-statement provided by players like Perfios), bureau scores (provided by partner NBFC or bank) and alternative credit scoring (provided by companies like Lenddo, Hello soda or Credit Vidya) and your identity is verified using the eKYC (Indiastack, NSDL PAN card verification API). The creditline offered ranges from Rs 10,000 to Rs 300,000 and the interest rates vary from 2.00% to 2.75% per month depending on various factors like provider, product or EMI tenure. Though all these players have been successful in offering an instant credit decisioning the process is not fully online and some of the players approve the loan only after an offline verification of the KYC.
Though the product look like a killer proposition for consumers and merchants (Yes it is!) the key challenges are on the distribution side. Though the CEOs, Business guys and product managers wanted to offer a digital EMI option to their consumers on checkout, integrating the solutions to an existing checkout flow many a times takes anywhere between 6 to 9 months. Either the integration gets sidelined by the technical teams in the roadmap or reliance of merchants on a hosted payment checkout by a payment gateway provider makes it difficult to add an new payment method separately. Though Klarna and Affirm have cracked this challenges (Klarna also has a virtual VISA card), this is a key challenge which the Indian players would need to solve for.
In terms of customer acquisition most of the players rely on their partner checkout pages rather than acquiring customers inorganically which also means the customer acquisition costs are comparatively less compared with other b2c fin-tech startups.
Pay later Solutions
Pay later solutions are more relevant for the Indian context as these products help users solve the pain points of two factor authentications. These players offer a short creditline (14 days to a month) for purchases at their partner ecommerce stores through a single tap/click checkout experience. The key players operating in this space include Lazypay from CitrusPay (now part of PayU), Simpl and epaylater.
The product is similar to post paid telecom bills as consumers would receive a consolidated invoice for all their purchases through a 14 day billing cycle.The service is offered for free for consumers wherein the merchants are charged a normal transaction processing fee for every transaction. The eligibility for credit is decided basis on the past transaction behaviour of the buyers with out any KYC/physical documentation which makes these service seamless.
While the solution helps consumers with a frictionless checkout experience, the merchants would benefit from increased success rates leading to an increase in sales. However the challenges would remain the same distribution. This is where Lazypay has its advantage compared with its peers as the product can ride on the 300000+ merchant distribution network of PayU and CitrusPay. By enabling Lazypay as a payment option, the service can go live across 3 lakh merchants without any technical integration at the merchant end.
Currently the pay-later services offer credit for small value transactions like movies, food ordering etc, however once the service attain critical mass can compete the consumer credit providers with an option to convert the purchases into monthly instalments for repayment.
Digital creditline providers
Actually there is a thin line of difference between the digital creditline providers and digital EMI startups, the difference being the former offers a creditline to lend money when in need along with an option to make purchases using a linked co-branded credit card, where as the later focusses purely on offering EMI for consumer purchases.
The first mover in this space was MoneyTap which offers a creditline upto Rs 500000 which can be availed any time by transferring the required loan amount into a bank account that can be repaid in 3 to 36 month EMI. The service also offers a credit card that is linked to the creditline which can be used for converting purchases into EMIs. The Onboarding process involves income validation (e-statement or online pulling of account provided by Perfios), alternative credit scoring , eKYC (Indiastack), Bureau score (provided by RBL Bank) based on which a pre-approved credit line is issued to the customer (the creditline and attached co-branded credit card is offered by RBL Bank). The process also involves physical verification which is being carried by RBL Bank. The other player in this space is Bajaj Finserv which has also partnered with RBL Bank for an equivalent product (digital creditline with an attached co-branded credit card).
Though this product is slightly different from a ZestMoney or Cash care, the product solves the problem of EMI payments at ecommerce merchants and the key advantage they have over all their players is the open VISA card that can be used across any VISA accepting online or physical merchant. The key challenge for the players however would be to acquire consumers for which the cost can go anywhere between Rs 2000 to Rs 5000 depending on the channel and can go down once the brand starts growing organically.
The way forward for Affirms and Klaranas of India
- Sort out distribution : Partner with distribution channels (eg. payment gateways) to increase reach and reduce dependency on merchant integration. This is where products like Lazypay has a distinct advantage over all it’s competitors.
- Introduce Virtual card : One way to solve the distribution challenge is to issue a digital VISA/MasterCard that would give the product access to any VISA/MasterCard accepting merchant. Here again this would not solve the two factor authentication problem for consumers.
My take away from the above is that Lazypay if executed well is best poised to lead this segment due to its strategic advantages like distribution and access to consumers (30 million CitrusPay consumer users and 10 million PayUmoney users).
Disclaimer: I have been previously part of the senior leadership team at PayU and CitrusPay.