Is Peer-to-Peer Lending Disrupting Banks?
Banks were supposed to be the most incumbent and immovable authorities in financial sector. No one ever thought that some startups with little money, tiny team strength and not very significant business experience would disrupt the finance sector with incomparable power of technology. A lot has already happened in our senior countries in terms of startups –US and China. Of the $12.21 billion invested in 2014 in fintech sector, the US makes up the lion’s share, but Europe experienced the highest level of growth, with an increase of 215% (year-on-year). Now it is India’s turn.
Venture Capitals are betting good amount on theses startups as the Global investment in Fintech Ventures grew at a whooping 200% in 2014 as against 63% in overall venture capital investments, according to a report by Accenture. According to the survey conducted by Accenture, 72% of the senior executives of Fintech Labs believe that their bank has only a fragmented and opportunistic strategy of dealing with the digital innovation, and 40% believe that the that the current time taken for their organization to deploy new technology was either negatively impacting its value, or providing no net benefit at all.
There are startups that compliment the banks’ offerings like the Online Payment Solutions and on the other hand there are startups that are competing with banks’ real business like lending loans, managing wealth etc. There is no other way out for the banks than innovate either organically or through acquisitions.
Edelweiss, the financial services firm created a board to evaluate ideas such as peer-to peer lending to avoid being disrupted. It is also evaluating distributed transaction database technology Blockchain, which could power the digital currency Bitcoin in its business.
Payment- Digital Wallet, Online Payment Solution, Bank License
On grant of the Payment Bank license to 11 competitors, SBI could not hide its concern over expected loss of business due to payment banks. However, Crisil reported that Payment Banks will not eat up the Bank’s business rather they can benefit from their partnership as Payment banks will majorly focus on the under-banked areas of East, North-East and Central regions in a cost effective way and Banks need not have to worry about them.
It is true that a rising business gives boost to 100 other ancillary businesses and that holds true for online money transaction as well. The concept of mobile wallet has enabled users to have their bank in their pocket. One can easily transfer money, pay bills and make purchases on various online marketplaces. Since India suffers from a high transaction drop rates, as high as 30-40% on web and 50% on mobile devices, a lot of innovation in fintech has already started taking place. Read ‘PayU Launches One Tap Technology’ and ‘FreeCharge innovates alternative to SMS based OTP’. Few players in this segment are CitrusPay, RazorPay, PayU, Instamojo and Stripe, with Instamojo focusing on the individual payment.
The concept is new in India but as said earlier much has already happened in this domain in countries like US and China. While US has now few big players in this market with valuations in billions like Lending Club and Prosper, China has a much-fragmented industry with many small players. In China more than 100 peer-to-peer lending companies have shut down their businesses and few still hopes to make it a bigger market than US.
In India there are majorly two ways of getting investment either through banks which involves a lot of paper work, hassles, documentation and time or for less privileged we have micro-finance, chit funds, community lending etc., There was a lack of platform for the urban middle class which is increasingly in need of easy money.
Lenders who want a greater return on their investment are attracted towards this concept just like the people who want easy money for their business purpose or some other purpose. While the lender choose whom they want to invest in, the user decides the interest rate which he agrees to pay on a monthly basis through a post dated cheque.
There are about 15 such companies operating in India in Peer-to Peer lending space, making lending and borrowing easier and hassle free. It is still an unregulated market but the regulators- RBI and SEBI have shown their interest in the sector. Till date it is the respective company policy that regulates the process.
Companies have their own parameters to qualify investors as well as the users. Faircent allows only people with ‘property’ and ‘experience in share trading to become lenders, reports ET. “It is a risk based investment, a complex product where people need to have a certain level of financial acumen to invest” said Rajat Gandhi, Faircent Founder to ET.
|Company||Location/ year founded in||Min Loan Amount||Max Loan Amount||Average Rates||Evaluates Borrowers on|
|Lendbox||Delhi, 2015||Rs. 25,000||Rs 5,00,000||as high as 36%||more than 120 variables using Big Data Intelligence|
|Faircent||Gurgaon, 2014||Rs. 30,000||Rs 5,00,000||22-23%||CIBIL score, salary ,bank account data|
|Lenden Club||Mumbai, 2015||Rs. 25,000||Rs. 3,00,000||15-20%||third party credit score, salary and other parameters|
|i-lend||Hyderabad, 2013||Rs. 25,000||Rs. 5,00,000||16-21%||social behavior through social network data|
In an interview with Exploring Startups, Lendbox team shares their views about the sector.
Do you believe Fintech companies would be able to compete with incumbent banks, if the bank’s start upgrading their technology?
“Fintech companies can be much more dynamic and fast paced when it comes to adapting to change and customer needs. This is a huge competitive advantage they have over banks. Banks tend to be slow when adapting to change and bureaucratic in their approach when it comes to decision making.
The approach a bank uses to assess its user base is restrictive and hence alienates a large population of its total prospective customer base. Fintech companies on the other hand act as aggregators and marketplaces and also use a non-traditional and data driven approach to assess and serve their user base hence serving a much larger market.
Fintech companies also offer a convenience, which banks cannot as Fintech players can be reached through any device which has internet connectivity and all of their services can be availed online. For Fintech companies their websites serve as their primary point of interaction with their customers while for banks the websites only serve as a support system to service their branch networks and the net-banking system. This is why customers find it tedious to visit branches for services which can easily be served through an online medium.
Banks are trying to bolster their online presence but they are still heavily dependent on Fintech companies to divert traffic to them if the need arises.
Fintech companies which offer financing through NBFCs and through retail investors are now offering stiff competition to banks as they offer a much faster and more convenient service to the end user.
Firms like Lendbox which offer P2P loans and a non-traditional credit assessment process all from the comfort of your home are bound to gain popularity over banks as they make finance more accessible.”
What are the key challenges in Fintech in India?
“The lack of regulation presents a significant challenge to Fintech companies in India. RBI and SEBI have still not given a clear regulatory framework for fintech companies across different market segments. There now exists some regulation for payment systems and online wallets but a large number of startups which act as aggregators or financiers do not get covered under any specific regulation. This leads to a large amount of uncertainty for both the companies’ promoters as well as equity investors and the users.
The Indian population is still learning and getting comfortable with online transactions, majority of the people are do not have credit or debit cards a large population still does not operate net-banking account. So market penetration and customer acquisition is a big challenge.”
What is the expected growth rate of the sector.
“If we look at just the personal loans market of India. As per RBI data, as at June 2015, unsecured personal loans including credit card loans, consumer durable loans and other personal loans totalled to Rs 3.6 trillion and is expected to grow at a CAGR of 17% till 2017.
Due to the growth of e-commerce industry, more and more people are becoming comfortable with transacting online. The online spending behaviour is a great metric for assessing the risk of users too.
With rapidly growing Internet and mobile penetration as well as the current government’s drive for financial inclusion and digitization, the market potential for Fintech platforms is huge and growing.”
Exploring Startup’s Take:
So now you must be thinking that if next time you need a personal loan then whom should you approach? A P2P lender or a bank? Answer is pretty simple as of now. If you are a person with good credit background (good CIBIL record) and you have all the documents ready then definitely you are going to approach a bank where you can easily get a personal loan at interest rate of approx. 12-15% depending on the risk profile. If an individual is having problem for getting loan from a bank due to any minor issue then the person can approach these P2P sites where he can get a loan at a rate of around 15-30%.
Now Since there is a greater probability that borrowers with not a good CIBIL record are coming to the P2P sites, the toughest task for these companies is to filter the sub-prime borrowers so as to minimise the risk of the investors. Investors have to be very cautious while determining the risk and return in their lending.
I believe conservative investors should stay away from such investments, as higher return also brings itself higher risk which is the basic fundamental of finance. Also, the material security for the loan amount given on P2P sites are the post date cheques submitted by the Borrower. If the Borrower’s cheque gets bounced then he is liable for the trial under Negotiable Instrument Act. As on date I don’t believe that the P2P companies has any arrangement with CIBIL for reporting of defaults through their channel. CIBIL reporting can be a major factor in reducing the defaults, as once a person’s name appears in CIBIL as defaulter than it is almost impossible for him to get any future loan from any bank of financial institution.
Also, unlike US where fixed deposits rate is very low, India has a decent FD rate of around 7-8%, depending on the tenure. In India, people are very conservative when it comes to their savings and even hardly invests in equity market when compared to the western countries. Hence, P2P companies have to do some serious work in both, changing the mindset of people, and filtering the sub-prime borrowers from their site.
As far as the competition with banks is concerned, it is not a head on war between the banks and the startups, but thousands of high tech companies have started attacking incumbent banks from different angels at the same time. No doubt it is highly difficult for these startups to emerge as a big competitor to banks, unless we see a behavior change in Indian consumers and a major consolidations happening across verticals to form a big one place solution, as banks own customer’s trust to their credit and much more.