The Consumer Credit Evolution

Last decade has been a whirlwind in terms of technology development, and its impact on all walks of life. Especially notable has been the impact on BFSI industry and the rise of Fintech across almost all services, which further underwent a rapid growth and transformation in 2020 due to the pandemic.

Covid-19 has undoubtedly changed the world view in a drastic and unalterable manner, including the way consumers today perceive or consume a product or service, and how service providers design or deliver those products and experiences.

Here, I have tried to examine the impact of said changes on consumer credit industry and the evolution trajectory on both the short and long term. These changes are happening in almost all parts of the consumer credit setup right from the physical form factor of the instrument, to distribution channels, underwriting methods or even bundled services.  

The core thought of this wave of transformation is that the credit need of every individual for each transaction is different and hence needs to be assessed and delivered differently. Let us evaluate some innovations that are fronting this evolution of businesses across the globe.

Buy now pay Later- Arguably the most famous form of consumer credit phenomena sweeping across the world. Buy Now Pay Later or BNPL allows a customer to break down payment for their purchase into one or more interest and processing fee free installments. Consumers love it as its on demand credit; Retailers appreciate it as it brings in new sales and increased ticket sizes; Creditors value the use of alternative data that helps customers tide over bad credit history. BNPL challenges the way consumer credit is delivered to the customer, or how a customers’ credit worthiness is evaluated, instead of looking at their complete financial history. The consumer is assessed for that particular transaction, and instead of offering them a large spending limit (like a card limit), they are extended a sachet version of credit that is required at the time. BNPL has gained traction rapidly in 2020 and is here to stay, though questions on regulatory aspects of it and ultimate profitability still need to be answered, and shall be addressed in due course.

Credit assessment using alternate data- Assessing a borrower’s repayment capability using credit reports is the accepted norm, but this approach leaves out a large population especially in places like China, India, African nations where financial inclusion is still a task. In such cases banking services are being provided by institutions like banking correspondents or digital wallets, hence using alternative credit data like digital wallet transaction data, mobile phone usage data to assess a customer’s credit worthiness become viable models, lending services by Alipay and Wechat in China, Mobikwik in India, M-PESA in Kenya and more fintechs that are experimenting with various data variables like mobile data consumption to facial recognition and analysis, merchant transaction data sitting with PSP’s and acquirers is a gold mine which is now being used to drive models like cash flow based lending for small businesses.

P2P lending- All of us remember borrowing money from friends and family in time of a crunch, P2P lending is doing just that electronically. These platforms bring a willing lender and a borrower together and manage the credit assessment of the borrower and repayment of loan to the lender, though the initially pioneered to address SME loan and working capital requirement they are finding increased acceptance in individual short term lending as well with product offerings targeting niche segments such as students.

Digital cards- Customers today demand instant gratification, hence waiting for 15 days for the card to be delivered after filing the application is unacceptable, hence the digital cards. One can apply online in less than 10 minutes, cards are provisioned instantly and delivered to the user digitally via an app or a similar interface and is ready to use immediately. Perfectly in step with today’s digital and mobile lifestyle, the idea was first pioneered by banking fintechs and now fintechs and banks across the globe have such products.

Purpose specific or tailored credit cards: Unlike banks which have credit cards designed to address the masses, fintechs are coming up with focused credit products addressing niche segments and needs. Some examples include:

-         Credit card products created specifically for teenagers that come with a nifty mobile app and parental control;

-         Card products designed to help companies manage employee expenses which was traditionally catered to by corporate card products from the banks, where HR can assign limits to various employees as per requirement, block un block credit limits, merchant category, monitor usage real time,

-         Card propositions focused on specific use case like paying rents.

To sum it all up, from small bite sized highly contextual credit products, to digital distribution, alternate data based underwriting, hyper personalization and segmentation, consumer credit is slated to evolve beyond plastic cards and staid personal loan products. It is all set to become more savvy, inclusive and extremely exciting as a space, where digital technology and data combine in myriad ways to create magic.

Note: The views expressed here are entirely personal