July 16, 2018
The global lending landscape is going through a wave of disruption. While growing internet and smartphone penetration coupled with the rise of FinTech has challenged incumbents to go digital and look to incorporate innovative technologies in the way they do their businesses, the newer, nimbler business models are looking to bridge the gap in the traditional lending ecosystem by serving the underserved, thin-file customer segments such as SMEs and unbanked customers. Furthermore, the non-FinServ, non-traditional internet players, and TechFins are now joining the bandwagon, offering lending products to their vast customer and merchant base.
Post the global financial crisis, there has been a reduction in the risk appetite of banks, especially for the SMEs. Typically, 80% of SMEs that apply for commercial bank loans get denied.
Meanwhile, the evolution of the internet economy and the e-commerce/sharing economy boom has brought several smaller merchants online. The likes of Amazon and Uber now support millions of small businesses.
With the reduced risk appetite of banks for SMEs creating a gap in the market, the evolution of online businesses had a solution lurking around. The key to a successful lending business is not in the capital but in the credit decisioning capability.
For decades, incumbents have over-relied on the traditional data sources for assessing creditworthiness – the credit score, financial statements, etc. As online businesses – just like consumers – leave a vast digital footprint behind in form of their order history, cash flow, consumer reviews, etc., these marketplaces are now identifying the potential beneath the sea of merchant data. As the data of this kind can be a rich source of information for credit-decisioning, several of these online marketplaces (e.g. Amazon, Grab, etc.) have identified the enormous lending opportunity lurking within this data – e.g. Grab’s alternative data sources include driving behavior and telematics for credit assessment. From short-term credit to working capital loans, these marketplaces now offer several innovative lending products to their customers.
Amazon has five million sellers on its platform, most of whom are SMEs. Amazon lending offers business loans from $1,000 to $750,000 to registered Amazon sellers. Shopify launched Shopify Capital, a cash-advance service for its merchants in the US. Singapore’s e-commerce giant Lazada partnered with CIMB Bank to enable Lazada’s online merchants to avail microcredit. GO-JEK has partnered with Indonesian bank BNI to provide microlending services to its MSME customers in the culinary industry that are registered partners of its Go-Food service. Intuit has launched small business loans ‘QuickBooks Capital’ for its SME clients, who can avail up to $35,000 for six months right from inside their bookkeeping software.
While marketplaces are leading the charge for SMEs, tech-giants, and consumer electronics players are leaping ahead in the consumer lending space by cashing on their humongous customer base. Ant Financial and WeChat are clearly the marquee players. Ant Financial has more than $95 billion in loans outstanding as of March 2018, which is roughly three times the loan book of China Construction Bank.
On the other hand, WeChat Loans originated more than $14.7 billion as of August 2017. Xiaomi, the Chinese smartphone giant, introduced microloan services for its smartphone users in September 2015 with two products – cash loans & installment credit. In Nov. 2017, Xiaomi launched MI Loans, a mobile app-based lending platform, and in May 2018, launched a microlending product in India in partnership with KrazyBee. As of Nov. 2017, Xiaomi had $1.4 billion in loan origination.
Indian e-commerce giant Flipkart has applied for an NBFC license to focus on consumer lending. It is expected to take a hybrid approach by taking a good chunk of the loan book, as well as creating a curated marketplace for lenders.
While these are some of the leading examples of how global lending landscape is being diversified with the behest of non-traditional, non-FinServ, tech, and TechFin players, there are many more opportunities waiting to be explored. In the coming years, we can see this trend pan out much more with many more businesses brought under the credit spectrum with the power of internet and data.