What Indian Fintech Industry needs to learn and know – perspectives from Lendit, San FranciscoAnubhav Jain
Indian Fintech Industry has started picking steam in recent years. In last 24 months alone, more than 40 platforms have sprung up following different business models. However, with less than $5 million in cumulative originations in unsecured consumer lending, there is still a long road ahead for the industry when compared to the big giants like LendingClub and Prosper. Fintech leaders from around the world got together for two days of extensive knowledge sharing at Lendit USA in San Francisco. Here are some perspectives for the Indian Fintech startups:
- Next generation underwriting: A lot of Indian companies are focusing on analysing 1000s of data elements using advanced techniques, such as machine learning, to come up with the next generation of underwriting strategy. However, as pointed out aptly by Dave Girouard, Founder and CEO at Upstart, "Far fewer variables are required to make an informed decision about lending to a consumer." He mentioned how Upstart is using Education and Employment information to increase approval rates from 40 per cent with a FICO driven model to north of 80 per cent. Not just that, a 40 per cent sample underwritten using the two techniques had loss rates as different as 12versus 5 per cent. It is important for Indian Fintech companies to take note of such innovations and try and move towards a robust and simpler underwriting strategy.
- Risk compliance and regulation: Alternate lending is hugely regulated in economies like the US and Europe. With the RBI's recent announcement about a note on regulations related to P2P lending in India being released soon, it is important for Fintech companies to understand compliance much deeper than they currently do. US Lending companies like LendingClub and Prosper clearly point out towards how they ensure that there is no bias in their risk strategy and that the disparate impact analysis is true and confirming to the regulatory standards. According to Peter Thiel, Co-Founder and ex-CEO of Paypal, “So many people are discouraged by regulation. If you can get through hoops it can be lucrative.”
- Benchmarking to an index and providing returns: Indian E-commerce players have started a revolution with immense growth and traction, though profitability is still a way to go. Fintech companies need to follow an altogether different approach. Investors in the Fintech space are wary about the returns promised by the various alternate lending models – P2P, I2P, Marketplace or Hybrid. It is important that the loss adjusted returns for these companies are clearly benchmarked to an Index, as done by companies in US with respect to how LendingClub is publishing its numbers. According to a panel at Lendit consisting of David Snitkof, Co-Founder at Orchard and Rupert Taylor, Founder and CEO at AltFi Data, "Even with a change in Credit or Risk policy, such benchmarking would provide a way for investors to measure the return on their investments."
- Securitisation and Hybrid Models: With ambiguity around the taxation and regulation related to securitisation, this remains an untouched territory for Indian Fintech companies. It is not surprising that compared to US, where almost 25 per cent of all the loans originated are securitised, the number for India stands at a dismal 1 per cent. As pointed out by James Paris, EVP at Avant, "Hybrid Lending Model provides flexibility to align investor expectations with their returns, since they originate loans on their books and then securitise 50 per cent of the loan, holding on to the remaining 50 per cent." Such hybrid models would mean that the platforms could have skin-in-the-game, thereby providing more comfort to their investors.
- Customer acquisition: This is the trickiest piece to the puzzle. A lot of Indian Fintech companies started with a vision but have defaulted to being a lead-generation business, a digital DSA for banks or NBFCs. This could help them gather the data that they want to develop their models, but would defeat the entire purpose of ensuring creditaccess to the nearly billion new-to-credit people in the country. Both offline and online customer acquisition is expensive. Moreover, as pointed out by leaders from Propser and LendingClub at Lendit, "Customer Acquisition for Fintech companies works differently than customer acquisition for Amazon or Ebay."
- Information verification: Any next generation, cutting-end credit scoring algorithm is driven by the quality of data. If you feed dirty or junk data to even the best and most sophisticated algorithm, the output is expected to underperform. As per Dave Girouard, "We do not use Facebook or LinkedIn data, as we cannot verify the authenticity of that information." Upstart today does a five-minute verification phone call with every customer and uses only verified information in its models, thereby ensuring that every version of its machine learning algorithm output is better than the previous one.
With close to 2,000 alternate lending platforms in China and multi-billion dollar originations by LendingClub in US, India is a significantly smaller entity in the Alternate Lending and Fintech space. It is crucial for Indian startups to take cues from the success stories around the world and ensure the right mix of underwriting and operations to build the next big Lending company for the next billion.
(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of YourStory.)