Unlocking Opportunities: Fintech Strategies for Entering the Lending

Lending is the number one business in India, with a wide range of players from informal lenders like the local moneylender 'Sahukar' to regulated banks and NBFCs. Despite the many participants in this industry, there's still a significant gap and unmet demand.

While there's plenty of information out there about market sizing and loan types, this article aims to explore how fintech companies can break into the lending market. Here are some popular methods that can help fintech players start a lending business, whether they already have a customer base or are looking to build one.

Imagine you have a fintech company with a customer base that you want to leverage and monetise through lending.

Step 1: Partner with Lenders

Identify Your Target Audience ??

First, understand your target audience. Are they individuals or businesses? Once you know who you're targeting, find lenders who provide loans to that group.

Establish Partnerships ??

Reach out to potential lenders—typically, you’ll be talking to their sales and marketing teams. Let them know you want to generate leads for their loan products. Starting with 2-3 lending partners is a good approach to diversify your options.

Ensure Customer Qualification ?

Lenders will want to ensure that the leads you provide are high quality. This means the customers need to be pre-qualified based on certain criteria, such as credit score, financial history, and demographics.

Understanding Customer Qualification ??

To determine if your customers meet the eligibility criteria of the lenders, you need to perform an internal check. Lenders will provide specific qualification criteria, which you can cross-reference with the data from your app. For any missing information, integrate with external solutions like credit bureau companies to obtain credit scores and assess the credit health of your customers. This internal vetting process helps ensure that only qualified applicants are sent to the lenders.

Commercial Terms ??

Typically, lenders offer a success fee on the loans disbursed. This means that once your customers qualify, accept the offer, and the loan is disbursed, you will be eligible to receive a success fee. The success fee is usually a percentage of the loan amount, typically ranging from 2% to 5%, depending on factors like the loan product and amount.

Step 2: Types of Partnerships

Affiliate Marketing ??

One of the simplest and most effective ways to enter the lending market is through affiliate marketing. In this method, the lending company considers you as a marketing partner and provides you with a dedicated link or unique tracking code.

Here’s how it works:

• Dedicated Links and Tracking: The lending company will give you a specific URL or tracking code that you can use to refer your customers. This link can be embedded in your app, website, emails, or even shared via social media. When your customers click on this link, they are redirected to the lender’s application page.
• Lead Generation: As customers fill out loan applications through the dedicated link, the lender tracks these leads back to you. This ensures that all the leads you generate are properly attributed to your marketing efforts.
• Qualification and Conversion: The lender will process these applications, qualify the leads based on their criteria, and proceed with loan approvals and disbursements. Since the leads are coming through your referral, the lender might also provide you with regular updates on the status of these applications.
• Earnings through Success Fees: For every successful loan disbursed from the leads you generate, you earn a success fee. This fee is typically a percentage of the loan amount, which can range from 2% to 5%, depending on the agreement with the lender.

Advantages of Affiliate Marketing:

1. Low Barrier to Entry: You don’t need to handle the loan application or disbursement processes yourself. Your primary role is to generate leads.
2. Scalability: You can scale your marketing efforts without worrying about the complexities of loan management.
3. Focus on Core Strengths: It allows you to focus on your core business activities while monetising your customer base through lending.

This partnership model is beneficial for both parties: the lending company gets qualified leads, and you get a commission for every successful loan disbursement.

Loan Service Provider (LSP) ????

Engaging as a Loan Service Provider (LSP) is a more involved and integrated approach compared to affiliate marketing. This method allows you to create a highly personalised loan product tailored specifically to your target audience, ensuring better alignment and fitment.

Understanding the Use Case and Loan Policy ??

• Identify Target Audience Needs: Begin by deeply understanding your target audience's needs and financial behaviours. This involves analysing customer data to identify gaps and opportunities for tailored loan products.
• Align with Lender: Approach lenders with a clear proposal that outlines the specific use case and loan policy tailored for your audience. The goal is to get the lender on board with the idea of creating a customised loan product that fits the unique needs of your customers.

Creating a Customised Loan Journey ???

• Design Loan Journey: Collaborate with the lender to design a loan journey that aligns with the target customer’s profile, available data, and the loan policy. This journey should include specific steps from application to disbursement, ensuring a seamless experience for the customer.
• Data Utilisation: Leverage the data available within your fintech app to enhance the loan application process. This may include pre-filling application forms, using transaction data to assess financial behaviour, and integrating external solutions to capture additional necessary information.

Mitigating Risks with FLDG (First Loss Default Guarantee) ???

• Understanding FLDG: The lender may require a First Loss Default Guarantee (FLDG) as part of the agreement. This means that your fintech company will bear the initial losses if any loans default. Essentially, it serves as a risk-sharing mechanism to reassure the lender about the quality of the leads you provide.
• Negotiating Terms: Negotiate the terms of the FLDG carefully. Understand the percentage of the loan portfolio that you will be liable for in case of defaults, and ensure that this risk is manageable for your business.
• Risk Management: Implement robust risk management practices to minimize defaults. This includes thorough customer vetting, regular monitoring of loan performance, and proactive measures to address potential issues before they escalate.

Commercials and Revenue Sharing ??

This partnership model involves a different commercial approach compared to affiliate marketing. Here’s how it works:

1. Flat Percentage Cost to Fintech: The lender provides a flat percentage cost to the fintech for facilitating the loan. This cost is essentially the interest rate that the fintech pays to the lender for the loan capital.
2. Customer Interest Rate: The fintech then charges a higher interest rate to the customer. The spread between the lender's rate and the customer's rate becomes the fintech’s earning. For example, if the lender’s rate is 14% and the fintech charges the customer 24%, the fintech earns a 10% spread.
3. Revenue Share on Processing Fees: In addition to the interest spread, there is also a revenue share on the processing fees charged to the customer. The processing fee is typically a percentage of the loan amount, and this revenue is shared between the lender and the fintech. For instance, if the processing fee is 2% and the agreed split is 50/50, both the fintech and the lender would each earn 1% of the loan amount.
4. Higher Earning Potential: Given the deeper integration and the higher level of involvement in the loan process, the earnings from this model can be significantly higher than those from simpler affiliate arrangements.

Advantages of LSP Model:

1. Customisation: Tailor loan products specifically to your audience, increasing the chances of acceptance and satisfaction.
2. Deeper Integration: Enhanced control over the customer journey and experience, leading to better customer retention.
3. Higher Revenue Potential: Potential for higher earnings through success fees and revenue-sharing models.

By engaging as an LSP, you can offer more personalised and relevant loan products to your customers while also building a stronger and more profitable relationship with lenders.

Conclusion ?

I hope this information provides a useful starting point and a basic outline on how you can embark on your lending journey as a fintech company. The lending market in India is vast and filled with opportunities, and with the right approach, you can tap into this potential and create a successful lending business.

To recap, we explored two primary methods of entering the lending market: Affiliate Marketing and the Loan Service Provider (LSP) model. Each method has its unique advantages and commercial structures, allowing you to choose the best fit for your business model and target audience.

For the past 15+ years, I have been working in fintech, consulting, and helping build successful lending businesses for fintech companies and lending institutions. If you are looking to venture into this space and need guidance, feel free to reach out to me. I can help you understand the intricacies of the lending market and get you started on the path to success.

Additionally, here are a few more tips to ensure your lending business thrives:

• Leverage Technology: Use advanced analytics and AI to assess customer creditworthiness and tailor loan products. ??
• Customer Experience: Focus on providing a seamless and user-friendly experience to retain customers and build trust. ??
• Regulatory Compliance: Stay updated with the latest regulations in the lending industry to ensure compliance and avoid legal issues. ??
• Continuous Innovation: Keep innovating and adapting to market changes to stay ahead of the competition. ??

Starting a lending business requires dedication, strategic planning, and a thorough understanding of the market. With the right approach and partnerships, you can build a robust and profitable lending platform.

Thank you for reading!