The consumer lending industry is witnessing a significant power shift from those having access to capital to those having access to customers. New age consumer technology, e-commerce, and even traditional retail businesses could be the biggest beneficiaries of this trend, accelerated by the pandemic.
TERA, an AI-based risk-tech SaaS platform, is enabling businesses to create and deploy customized credit products to make consumer loans affordable for customers and profitable for new lenders. The Bengaluru-based company has raised USD 3.5 million to date from GAIN Credit, a US-based Fintech.
The risk technology firm offers a comprehensive lending infrastructure that includes digital on-boarding solutions, AI-enabled automated underwriting, loan management systems, and an API ecosystem integrated with India Stack and other external data sources. What makes TERA truly unique is given its deep experience in risk management, lending operations/governance, and capital access, it can offer a “one-stop-shop” partnership for businesses who have little to no digital lending DNA to confidently deploy and scale their online credit products with positive economics.
“Consumer lending has always been a lucrative business with large profit pools traditionally residing within financial institutions. TERA is now enabling businesses that have large customer bases to become profitable lenders themselves. This will not only help businesses further monetize their customer relationship but also deliver personalized credit products to customers and channel partners, indirectly enabling higher revenues and margins from their core business,” explained the Co-founder & CEO of TERA Finlabs, Pradeep Rathnam to reporters over the virtual launch event. An MIT Sloan alumnus, Rathnam is a financial services veteran who has worked with Citibank, Bajaj Finance, and AEGON Insurance.
According to data released by the Bank of International Settlements (BIS), India’s total credit to households as a % of GDP increased marginally from 9.4% in 2014 to 12.2% in 2019. During the same period, China’s rate surged from 35.7% to 55.2%. A large part of this growth is owed to alternate lenders and consumer technology companies like Alibaba, Tencent, and many others who have leveraged their customer base to provide lending products at scale. India will need many such institutions to step up and fill the credit gap.
While there is a visible growth in demand for small-ticket loans, primitive non-digital business models limit established players in tapping the opportunity. Experts believe that traditional lenders will soon be challenged by those with access to customers, offering simple products with superior experiences powered by API-led solutions that can be implemented with speed and scale. It also ties-in with the fact that the market is witnessing higher demand for digital-first “sachet loans” offered at the point-of-sale with smaller ticket sizes, shorter tenures, and higher frequencies. “Instead of being a simple lead provider, businesses lending to their customer base allows them to increase the lifetime value of this relationship and drive improved unit economics. This is also beneficial to customers who see higher approval rates and credit solutions directly integrated into the product or service offering vs. them having to secure financing on their own. We are already seeing large consumer tech and e-commerce companies offering their credit products. Soon relatively smaller companies will want to embed credit into their core product offering” said Mukund Venkatesh, MD India, GAIN Credit, when asked about the future of consumer credit in India.
Credit delivery is more efficient and cost-effective when it is fulfilled by the entity that knows the customer best. The cost of acquisition and loss rates, the two most critical components that impact the profitability of a credit business, are minimized when businesses offer credit to their captive customer base. “After COVID-19, industries will see a surge in digitization which in turn will make alternative data a key driver of risk management for consumer credit. The existing product or service relationship that a business enjoys with their customer can be leveraged to offer best in class embedded financing solutions” said Larry Rosenberger, former CEO of FICO and Chairman, GAIN Credit.
COVID-19 has severely stifled credit flow to consumers and small businesses. Uncertainties around business continuity and job security are further making borrower evaluation difficult for traditional lenders. The emergence of new captive consumer lending entities that are integrated with businesses that are close to their customers will only help channel more credit effectively and quickly.