Online Lending Business Models
Every newspaper that you flip through, any online website you browse you are bound to have read something about Online lending, P2P lending, alternative lending and the multiple variants of those terms.
Either newer start-ups are getting founded, or they are getting funded. I am sure each of us know or has met someone who is either working in a fintech start up or is bootstrapping one or is thinking about starting one. So what’s all the noise about? What is Online Lending? The few paragraphs below aim to describe the various types of business models that operate in the space and the expected changes going forward.
Online Lending in its most basic form enables the process of availing a loan online, essentially leveraging technology in some shape or form to ease the borrower or the lender journey. Given that the process of availing a loan is lengthy and involves many steps; start-ups have emerged that address one or a few steps of the process. Based on what part of the process they address; these start-ups can be categorized as:
a) Discovery & Lead generation platforms: Pure play information sites that help you compare the rates and types of loans at offer from various financial institutions. These companies capture basic information of the loan requirement and pass on the lead to lenders on its platform. This is a marketing heavy business model, requires lot of digital marketing spends to direct traffic onto the website. Low lead conversion ratios and customer dissatisfaction are some of the major issues faced by such companies
b) Pre-filtered lead platforms: A few companies go a step further and do some basic level of filtering of leads basis policy filters shared by lenders like income cut offs, age of applicant, salary levels, etc. These platforms have a better chance at getting the loan approved from the lenders than the pure paly lead aggregators.
c) Credit Platforms: A few platforms have emerged that are looking at lead generation from a credit point of view. They ask consumers to come on their platforms to improve credit scores or to get a free credit report to know their scores. These companies get a better understanding of the customer profile and are able to better match the consumer with a lender. This is an intelligent version of filtering out leads and has the potential of building greater borrower and lender affinity.
d) Online Lending marketplaces: Some select start-ups have created an end to end platform that have taken most of the credit decision process online and have built a full stack that includes lead generation, customer loan application, customer data validation and authentication, online risk assessment using credit algorithms and API integration with lender scorecards. While such platforms are limited but they are doing cutting edge work on mining traditional data sources like banking and bureau as well as non-traditional data sources like social media, transaction data from other platforms. These credit algorithms are on a continuous learning process and rely on machine learning technologies.
e) Online lenders : There is another set of players that have decided to become lenders themselves. The focus of such players has been on cutting the cost of loan processing by using technology wherever feasible and also improving the customer journey. While such an approach has helped them scale up faster, these new age fintech NBFCs face challenges of a higher cost of capital and limited geographical reach.
Another ways of looking at these start-ups is through the source of capital that they rely on. There are two primary sources of capital that exist, one is the institutional capital (banks, NBFCs, MFs) and the second is retail capital (individuals like you and me). Within institutional capital some of the start-ups have become NBFCs themselves and are raising equity capital, leveraging it to lend and then there are other that are marketplaces and lend through existing banks/NBFCs.
a. P2P Players : The most talked about and globally popular model that relies on retail capital lending to individuals or businesses
b. Balance sheet Lenders: New age NBFCs that rely on technology to improve customer journey and reduce cost of operations
c. Marketplaces: Online platforms that are lending to businesses or retail consumer through traditional Banks /NBFCs by leveraging on their lower cost of capital
This space is evolving almost on a daily basis and there are many ways and cuts by which you can look at this space. Yet another set of companies are focusing on very specific financing needs and are targeting a clearly defined niche like payday loans, pay later loans , bill discounting platforms, consumer durable financing, user car financing etc. These players are creating products customized to that specific customer segment and/or need and hoping to build viable scale and loyalty.
Online Lending is in its infancy in India and it will take at least another 5 years before business models attain enough traction and early viability for them to become self-sustaining and long term bets. As we have seen in other sectors like e-commerce, cab aggregation, food tech ; models that have worked globally haven’t always been successful in the Indian context. Incremental tweaks in the models haven’t worked that well; grounds up transformation of business models are required to be successful in India. Which of the above models will work in India, we will have to wait and watch.
But the sector is poised for a lot of excitement, evolution and transformation over the next few years. There are only a handful of global player that has entered the Indian online lending market so far. But that should change soon and that should spice up this space even more. So watch out!