How online lending platforms are penetrating Tier II and III cities

Nitin Agarwal, our COO shares his thoughts with YourStory Media on the penetration of online lending platforms in Tier II & Tier III cities in India.

Digital payment platforms have penetrated Tier II and III cities by familiarising consumers with faceless financial transactions, which have increased their comfort levels of managing finances online.

 

Be it uploading selfies, shopping online, or making a cashless transaction, India is smitten by digital proliferation. And with good reason. Phones are getting smarter and data is getting cheaper. Apps and other platforms are serving comfort and convenience right at their doorstep.

While urban cities have primarily been the growth drivers, consumer aspirations and purchasing power is now growing exponentially in Tier II and III cities and towns. A report by EY[1] states that apart from the eight classified metros, a new class of 42 cities is emerging that are as aspirational and consumerist. EY dubs these as India’s “new wave” consumption hubs.

 

What is heartening to see is the growing comfort between modern technology and Tier II and III consumers. The smartphone is to them what radio and television once were. They rely on it to be informed about news and events, to be entertained, to shop, and to even access multiple financial products online. Digital payment platforms have also paved the way by familiarising Tier II and III consumers with faceless financial transactions, which have increased their comfort levels of managing finances online.

Branch-based lenders vs online lending

Lack of infrastructure, high capital investments, long break-even periods and other regulatory challenges prohibit traditional branch-based lenders to expand their network. Even where there is expansion, to keep the cost of operations low, the branch is staffed with minimal resources and services. As a result, consumers miss out on the benefits that the full product portfolio could offer, as well as on a wider choice of lenders, as most banks hesitate to launch in these segments.

Online lenders, on the other hand, enjoy significant advantages over traditional lenders such as banks and financial institutions:

  1. Wider reach:

The lack of need for a physical establishment enables online lenders to reach even the remotest corners of the under-served locations and, hence, offer a wider bouquet of services.

  1. Lower service costs:

Digital distribution proves to be more cost-effective when compared to physical distribution. This enables online lending platforms to save time and serve customers at lower costs.

  1. Big Data and advanced analytics

Data analytics provides significant advantages to the online platforms. It allows them to better design their products as well as delivery mechanisms based on a deeper, more accurate understanding of consumer needs and behaviour.

  1. Customised offerings:

Online platforms have the advantage of customising their products for the audience they are serving. They can effectively serve the unmet needs of different segments, be it the under-banked, the un-banked or the MSMEs, as opposed to the ‘one shoe fits all’ approach, of the legacy banking firms.

  1. Simplified paperwork and processes:

Online platforms have enabled simplification of paperwork and this will continue to be a big advantage, both from a consumer as well as an internal cost and efficiency perspective, till their traditional counterparts re-look their processes.

  1. Better risk assessment through machine-based learning and AI:

The Digital India initiative is solving the challenges around remote credit underwriting. Most of the information from government sources (tax filing, identity etc.) are available online with user-secured digital consent. Users are increasingly using digital platforms for banking and transacting. Lenders are relying upon digital footprints for risk assessment and bureaus are becoming data rich. Risk assessment is now gradually moving from traditional person-based to data-based, machine learning AI-powered risk assessment. The assessment not only considers the usual data points like earning, liabilities and other factors, but also other crumbs of information that users leave digitally like browsing habits, travel schedules, bill payment habits and of other such points.

Online lending platforms deliver big benefits for the under-banked, SMEs and MSMEs

  1. Easy accessibility:

Online lending has the advantage of reaching the farthest corners of the map – a huge opportunity that will boost the growth of SME and MSME segments that were previously restricted by traditional financial constraints.

  1. Wider bouquet of products and services:

Apart from credit availability, these businesses will also find a choice of products that best meet their requirements.

  1. Shorter timelines:

Online lending platforms have added speed to their service with streamlined and simplified processes.

According to a PwC report, there is a large amount of unmet demand for loans from MSMEs, with a gap of roughly USD 200bn in credit supply. Online lending platforms with their wealth of benefits are likely to help fuel exponential growth of businesses in Tier II and III cities and propel them to the national stage.

Growth is inevitable but it will come with its own challenges

Connectivity:

While connectivity has often been a concern in most Tier II and III locations, the speeds seem to be improving. This is evident in the fact that on an average, almost 50 – 55 percent of e-commerce business comes from Tier II and  III cities. A few telecom service providers are also combating the issue by providing smartphones with lifetime-free plans and attractive data options.

Regulatory framework:

While digital lending will continue to grow in Tier II and III cities, there are still challenges in the legal and banking framework, which the government is working on to resolve. An urgent requirement for an enforcement law for digitally signed documents still exists. There is still a limited precedence of enforcement of digital contracts in the court of law. Dishonouring of digital payments does not still face the same law enforcement both in terms of speed and severity, as physically signed checks or instructions. Hopefully, the solutions will arrive soon.

While online platforms are gaining popularity, traditional institutions also seem to be gearing up for change. The near future will see both entities collaborating, to serve the needs of evolving consumers that are growing significantly.

(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of YourStory.)