In previous blog posts, we have seen different payment systems and its impacts on consumers in different attributes such as ease of use, low cost and entry barrier etc. While we continue to dive in digital payments and it’s penetration, we will also explore how innovative financial products are leveraging this advancement in digital payments. In this post, we will shed some light on the role of Digital Payments in Lending with our co-author Rohit Sen (founder of NIRA).
Digital platforms have revolutionised the lending experience for retail consumers across the country, especially in tier 2 and tier 3 cities. It addresses a market need for lightning speed loan approval and disbursement based on your creditworthiness. This transformation has brought a larger chunk of the audience under the umbrella of the formal credit system, even those who were rejected by the traditional banks.
Today a large part of the economy has been left out of the formal credit system. Digital lending has proven to be the way ahead as it increases access and availability. Digital lenders are rapidly filling the gap between formal and informal lending by providing consumers to access a larger pool of service providers, which allows them to choose from the most convenient banking partner and provides access to capital faster than any traditional banking institution. Next-generation of digital products are being created in a competitive environment leading to hyper customized financial products for the borrower, and from the lender’s perspective with smooth digital payments, collecting the EMIs of the loan has become a lot easier than earlier.
Who should use digital lenders:
Before understanding the benefits of digital lending, let’s understand the consumer. This should help you visualize the use cases and the benefits of easier access to capital.
As unpleasant as it sounds, COVID-19 has hit the deepest roots of India and the disruption in everyday life is just unavoidable. In the picture, we have Suresh (a typical consumer persona for NIRA), who is a 30-year-old emergency support worker in Pune. He has been employed with a local municipal corporation for a couple of years now and was recently introduced to the concept of UPI, which helped him pay utility bills, recharge his phone etc. without much of a hassle.
He’s been actively providing medical supplies to his parents staying in rural parts of Maharashtra. When the pandemic hit, all of the emergency workers were called up on the job and the stress and anxiety of operating with the utmost care and yet keeping the family safe was challenging. As the precautions to elderly increased, so did medical expenses. That’s where small ticket digital lenders come into the picture to provide small loans of Rs. 15,000 for a family’s medical expenses in a matter of minutes, as opposed to a bank where Suresh would probably spend days to choose the right bank for this, based on the interest rate, access to the branch etc. only to realize that minimum ticket size for a bank is 1L.
Since digital lending is distinctly different from traditional lending with ease provided there’s an impact on customers’ lives. Let’s change the angle of our digital lens and dive in.
Impact of Digital lending:
Entry to the formal credit system
India is a country where 90% of Indians cannot get a loan from a bank, due to factors such as:
- Low/ Unavailability of CIBIL Score
- General eligibility criterions like Salary Levels, Credit history, length of employment etc.
- Minimum loan amount (typically 1 L)
These restrictions typically result in borrowers moving away from the formal credit system and getting attracted to unorganized lending which oftentimes is exploitative with tremendous interest rates and unfair terms as a result of low negotiating power.
Digital lenders are solving these problems for the masses. While users discover digital lenders through an online search, consumer education in regional languages is helping them to establish trust in the formal credit system. Consumer education coupled with digital processes at lower costs is making digital lending of small ticket loans viable, releasing millions of people from the grip of informal lenders. Now digital processes with lower interest rates, the debt is much more sustainable with a marginal barrier to entry in the formal credit system. Digital lenders like NIRA are making products convenient to access over the internet, leading to better discovery and adoption in every state of this country.
Reduced Cost: Traditionally unsecured loans are deployed by loan sharks, which applicable interest rates on average 8 to 10% per month depending on the case and location. Here, most digital loans are between 1.5% — 3% per month.
Faster turnaround time: In digital lending, the decision times are barely in minutes and the cash disbursals happen within 24 hours, this helps not only in emergencies but also takes away the pain of running around to collect the documents.
The market penetration for the next 400 million users from Bharat, will happen through educating and empowering them about financial institutions and use case driven lending. NIRA has been heavily investing in consumer education, let’s look at some of the attributes of that.
Use case driven education: Small ticket loans for house repair, medical expenses or to buy home appliances etc. Before this, the consumer mindset was to save the cash before any big expense, which used to hamper the financial progress of the family as well. Introduction and education of use case-specific microloans reduce the barrier to entry. E.g. Here’s how NIRA helped Imraan when he struggled to get money for his house repairs
Most of India has to turn to informal financiers at their time of need. Digital lenders can offer them MUCH cheaper rates, and make their debt sustainable instead of causing vulnerable people to fall into a debt trap. With an ever-growing footprint of payment systems like UPI, BBPS etc. consumers are moving away from cash to digital transactions while growing 10 times every year. This wild growth of digital transactions is enabling consumers to circulate the money faster and safer. This transformation in consumer behaviour is leading to the rapid adoption of digital lending which leverages the digital payments ecosystem to offer new products, to new borrowers, and gives them a better experience than was ever possible before.