Ironically, the hoopla around fintech lenders was that their algorithms and machine learning could accurately identify the creditworthy, resulting in lower NPAs. Similarly, tech would reduce operational costs.
If tech and underwriting prowess were the markings of a true fintech, the one successful lending fintech to emerge out of 2019 has been the 10-year old Bajaj Finance Ltd.
Bajaj benchmarks itself against Amazon, Netflix, say former employees. It studied Netflix to see how the streaming company uses algorithms to serve different content to different users. Similarly, Bajaj starts all users with consumer finance loans and then puts its algorithm to work to see which would be the best loan to cross-sell to its borrowers.
Although consumer finance loans account for only 12% of its income, Bajaj is able to leverage and sell other consumer loans, which make up 22% of its income. Almost 60% of the total loans it has sold are from cross-selling, according to its latest quarter of earnings in September 2019.
Impact On The Physical Distribution
Fintechs, emboldened by tech-based lending, have also underestimated physical distribution. Bajaj, which isn’t online-only, doubled its presence to 100,000 touchpoints in two years. Combine this with its cost of borrowing. NBFCs’ cost of borrowing is about 10% while fintech NBFCs go as high as 22%, said the founder of a fintech lending company, who didn’t want to comment publicly. Because of this advantage, any operational efficiency tech can generate can’t compete with NBFCs’ cost structures.
That is why even in the toughest of environments for all lenders in 2019, the gross NPAs for Bajaj stood only at 1.54% in the year ended March 2019, with public sector banks at 9.3%. With such a business, Bajaj Finance is valued at $32.4 billion.
Fintech lenders are now playing catch up. LendingKart, for instance, relies on agents to source loans. Consumer finance companies like ZestMoney are going offline to lend. Fintech lenders are searching for niches missed by Bajaj Finance and banks. But the catch here is that once a niche is identified, and a segment has been verified as risk-fee, Bajaj Finance could swoop in to snatch the best borrowers.
It is a vicious cycle that can only be broken with a highly differentiated product. Some startups have their hopes pinned on tech.
Razor-sharp tech focus
Any feature that any tech company launches gets democratised in a matter of months. But payments aggregator Razorpay and discount broking startup Zerodha want to take those fleeting advantages.
Total digital payments volumes in 2019 grew to 31.3 billion transactions, 51% over last year. This momentum has been the wind beneath Razorpay’s wings. Razorpay helps businesses accept all modes of digital payments—from credit card to Unified Payments Interface (a real-time mobile-based payments system).
Up until 2014, two companies held the digital payments volume pie. Billdesk, which earns Rs 1,000 crore ($140 million) by processing utility payments, and Naspers-funded PayU, which accepts payments from the internet economy. In the five years that Razorpay has been around, it has made 8-year-old PayU uncomfortable.
It is on the back of this that Razorpay doubled revenues to Rs 193 crore ($27 million). A feat few Series C funded startups can claim in the year ended March 2019. Razorpay’s growth stands out because it comes at a time when there is large consolidation among online players, leaving few opportunities. That makes retention of those merchants that much harder.
To hold on to merchants, Razorpay is banking on new products—loans, current accounts, corporate credit cards, payment pages for offline stores accept payments, etc. According to Mathur, one of the most valuable metrics for the company is the number of products per customer. Mathur says this has grown from 1.5 last year to 1.8, with the ideal number being 2.5. At that level, Razorpay can better retain customers and close the gap with PayU.
It is this feature-focused approach that also led to one of the biggest fintech successes in 2019, where a startup grew bigger than the traditional incumbents.
The legend of Zerodha
If there is a fintech that is both profitable and fast-growing, it’s Zerodha. It took 10 years for Zerodha to become the largest discount broking company in 2019. A company, which, by charging only Rs 20 ($0.28) for trading, outgrew other broking behemoths like ICICI Direct and HDFC Securities in the last financial year. Zerodha, as of 2019, had 1.8 million active clients racing ahead of market leader ICICI Securities with 924,585 clients.
Indians make $60 billion worth payments in a year, half of which happen online. Razorpay claims it processed $10 billion worth of payments in 2019. A 500% growth over last year. This growth was driven in part by digital adopters spending more online. That alone made for 30% of the growth, said Harshil Mathur, co-founder and CEO of Razorpay.