Fintech is a rollercoaster baby!
Phew! It's been quite a year in the world of fintech.
From RBI finally coming out with the new Digital lending guidelines to the funding freeze in the startup world: all have had significant ramifications in the digital lending universe.
Let's go through this in detail.
Ever since 2020, the Fintech world has been crying out for clear regulations in the digital lending world. Most digital lenders, big or small have been pulled in by various authorities questioning their modus operandi and the legitimacy of their operations. This has been an extremely painful exercise for founders.
Most of them had no clue why they were being scrutinized. Given the amount of stress and pressure being applied many founders have ever since simply downed tools and stopped their digital lending operations completely. In the absence of clear regulations, it seemed everybody became the regulator of digital lending
Thankfully RBI took note and has started to publish regulations specific to the digital lending industry.
The gist of the regulations is as follows:
The regulated entities are responsible for the entire lifecycle of the loan and the actions of their LSP partners
Ensuring borrower protection against any undue harassment
Ensuring regulated entities are in control of the underwriting by limiting first loss guarantee (FLDG) from LSPs
Reporting of all loans to the credit bureaus and NPAs on the balance sheet of the regulated entities regardless of any commercial structures with their LSPs (FLDG)
These guidelines are great for the industry.
It finally announces to the world who the big daddy of digital lending is. Cometh the hour, cometh the man. RBI came in, stepped up, cleaned house, and brought everyone in line. It does not matter what your name is, RBI has ensured everybody knows their role in the ecosystem
It spells out the rules for all involved in the industry. We fully expect these rules to keep evolving as the industry and RBI's understanding of this industry matures
It puts the industry back in build mode. Given the chaotic nature of the industry in the last couple of years, the industry had gone into survival mode. Many prominent players like ZestMoney, Avail, and Fairmoney, unfortunately, were not able to make it out in one piece. While it will take a few months for the industry to hit growth mode, it's encouraging to see the folks who survived these traumatic times go back to building value for their shareholders rather than simply protecting it. At the same time, we are thrilled to see a wave of new startups enter the digital lending industry. We need them and many more if we are to collectively achieve financial inclusion in this country!
While the regulations were specific to the digital lending industry, over the last 12 months, funding for startups has become far more constricted.
This has been a result of a variety of factors but can largely be summarised below:
Low-interest rates and high technology dependence during the Covid years led to significant funding for startups at rich valuations. Covid times truly presented a mirage for tech investors who mistook growth during a black swan event to be a permanent reality
Now with the rise in interest rates, investors have access to safer assets giving better returns and therefore have become extremely picky when investing in startups which by their very nature are risky beasts
Startups too have struggled in transitioning between high growth mode (high cash burn) to revenue/unit economics first companies
The RBI guidelines coupled with a funding freeze have had an interesting impact on the digital lending world
Many software companies which had built significant distribution over the last few years are now moving fast to monetize their users by offering them loans. Revenue is priority 1
Lending companies have become a lot more risk-averse. The focus now is to only do loans that make money rather than past strategies which involved simply growing their loan book at the cost of portfolio quality
This coupled with the new digital lending guidelines where the regulated lenders (NBFC and banks) are regulatory required to show the NPA on their books regardless of any FLDG arrangements means there is a clear alignment between LSPs and their regulated lenders in creating a loan book which makes unit economic sense
In our opinion, this is a much-needed mentality shift within the industry. Losing money endlessly while lending money makes little sense and is simply a hangover from the e-commerce playbook of deep discounting. Companies that imbibe these values deep within their culture will be companies that will exist a decade from now. This, in financial services, is the most critical north star: Building a high-quality company that endures for decades. To unlock true unfair advantages in financial services your company needs to inspire trust. This can only happen if you build A+ loan books over a long period of time. Whether you are in the digital lending world or the traditional lending world, there is no substitute for this playbook.
Simply put: Vintage matters in financial services
At Apollo, we have become a lot more stringent in LSP partnerships. Our goal is to limit ourselves to only high-quality partnerships. We follow a thorough due diligence process that involves
Financials and burn rate checks
Equity investor reference calls
Lender reference calls
Founder reference checks
Past loan portfolio checks
Only once comfortable with each of these parameters, we progress towards issuing a term sheet to our partners describing the financial terms of our partnership. Every quarter this process is repeated to ensure our partners are moving in the right direction. Our goal is to do partnerships with fintechs where we believe there is long-term potential to create something of tremendous value together. For this, our values must align.
Over the last 5 years, we have worked with 50+ fintechs and done over 17 lakh loans. We use this rich experience in digital lending processes, underwriting, and technology to make the best decisions we can to build A+ partnerships with fintechs. We are extremely fortunate to be building a business that happened to be at the right place at the right time with the right team. Having built multiple companies before this one, I personally know how difficult it is to build a successful company. No matter how talented you or your team is, regardless of your track record, every single time you startup, it is very very hard to build something which actually works. Now that we have struck gold, we never take our success for granted, and nor do we give up in trying times. We will ride this baby to the very top!
We truly believe the digital lending world is now where e-commerce was in 2013: full of potential and ready for an explosion of growth.
I am confident, digital lending in 2033 will be like e-commerce today in 2023: The new normal