A recent BCG-Omidyar Report on digital lending highlighted that the unit cost of the collection via DSA-led traditional channels for an INR 1 million unsecured business loan for a one-year tenure is 0.8%. The same report estimated the unit economics to be 20% more efficient for digital channels that automated collections.
Lending is a “spread business” and as such, there is a premium on efficient collection (& onboarding) that keep the spread sustainably viable. The role of greater automation of collection practices, therefore, cannot be overstated. At present, automation of collections appears to be happening through two models; the “anchor platform” approach where the lender collects at source from borrower revenues; and the NACH model where the lender sets up a “pull” on the borrower’s loan account. The NACH product is offered through the NPCI. However, both these models have limitations in terms of the nature of business use cases they can serve. This article will make the case that UPI 2.0 with a recurring mandate feature can potentially facilitate financial services use cases where there are repeat collections of defined amounts at defined intervals.
Bottlenecks in the Prevailing Models
At present, the digitization of collection appears to be taking place through two channels; there is what one might call the anchor platform or the “collection at source” approach. In this model, the borrower sources his/her business from a platform and the lender partners with the platforms to lend basis data and then collects directly from the account the borrower retains with the platform. The anchor platform model also facilitates customization in collection practices in that the lender can collect daily/weekly/biweekly rather than wait for an interval of 30 days to collect. Moreover, collection at source forecloses fraud risk.
However, the number of business use cases that the anchor platforms model will serve is necessarily limited:
Firstly, retail-focused platforms like Amazon or Flipkart are not open platforms where a business can just plug in. There are (rational) entry barriers in terms of minimum turnover and the nature of merchandise that the platforms require. So, smaller businesses or businesses with atypical merchandise are unavailable for discovery through these platforms.
The other type of aggregation has happened in service-based space like intra-city transit/retail logistics where the nature of loans that can be made is narrow (i.e., in this case, auto-loans/PLs/two-wheeler loans). In other words, as effective as the anchor platform is, it has limitations in terms of the reach of “discovery” it can offer to lenders.
The other approach is the NACH model where the lender auto-collects by installing a “pull” mandate on the loan account of the borrower. The EMI will be deducted at a defined interval. Since not all borrowers/businesses can be enlisted on platforms, the NACH model appears to be suitable for non-platform businesses/persons. However, even with the NACH product, two limitations appear to surface:
Registering a physical mandate takes anywhere takes anywhere between 30-45 days.
The e-mandate via API option is instant but as of now, only three banks are offering it. Furthermore, the authorization requirement for registering a mandate using this option requires net banking. That may also be a constraining factor for proliferating along this route. This is because according to a BCG- Facebook Survey, banking applications lag along all three critical vertices; app installs, average daily active users and average daily usage time, to e-commerce and FinTech applications.
UPI 2.0 as a Potential Solution
At present, UPI 2.0 has a one-time mandate feature. In other words, the feature does not allow for any “frequency.” While this feature can help digitize cash that entered the system through the COD route in retail logistics, UPI 2.0 can be optimized for the recurring defined interval collections by adding the recurring mandate feature. UPI appears to have several advantages over the prevailing auto-collection modes in this regard:
UPI has intermediated 3 billion transactions with INR 1 trillion in value based on December 2018 estimates. The familiarity of the mode especially for the P2P use case suggests behavioral friction to adoption may be minimal.
A total of 49 banks are both payment service providers & issuers; overall, 134 banks are live on the UPI platform.
Access channels to UPI go beyond the banking applications. These custom UPI apps hold out the promise for offering intuitive user interfaces/UX. Although active user bases across competing platforms at an identical timeline would be difficult to verify, a high percentage of UPI traffic is routed through custom applications. So, this would be critical for the new-to-banking borrowers.
Finally, with the RBI enabling PPI-bank account interoperability through UPI in October last year, the NPCI can also potentially offer a facility to install a recurring pull feature directly to the PPI of the user.
Empowering UPI as a collections platform has a financial inclusion dimension. Easing the cost of collections may facilitate viable lending to the addressable fraction of the 40% of micro and small entrepreneurs that presently borrow from the informal sector. The Nilekani Committee constituted by the RBI recently should be pushed by the industry stakeholders to recommend the NPCI working with RBI to enable a recurring mandate feature on UPI 2.0.
RupeePower is a leading CreditTech company in India. RupeePower’s platform “CreditOn” is a comprehensive digital-first product suite that enables banks & lending companies to transform themselves into state-of-the-art digital lending enterprises at scale. CreditOn provides lenders with flexibility & scale to manage in real time their credit decisioning criteria, sourcing channels, customer onboarding journey, underwriting workflows, and digital partner ecosystem – across the whole range of SME/retail credit. The product suite enables seamless online & offline origination with its acquisition platform, loan CRM, customizable BRE with instant decisioning and loan origination system. Smart AI/ML-powered tools like KYC Box, Address Match & decisioning based on non-traditional sources of data enable paperless loan origination within a robust credit assessment framework. The CreditOn suite has consistently demonstrated a multifold increase in origination throughput for banks & lending companies while preserving (if not enhancing) portfolio quality. CreditOn has created client success across banks & lending companies with names like the State Bank of India, Kotak Mahindra Bank, Standard Chartered, RBL Bank, YES Bank, Mahindra Finance, Fullerton India, AU Small Finance Bank, Edelweiss, and Ujjivan Financial Services. The platform has enabled these lenders to disburse over USD 4 billion in retail and SME credit to roughly 2 million customers over the last four years.