Fintech post-COVID 😷

• Many people have asked me about the impact on the Fintech universe due to COVID-19 and the moratorium offered by the RBI. Here is my take:

  • Lending Fintechs 🐰—> 🐢

    

    Lending Fintechs have been hit hard 

    The huge dip in repayments will create the following problems ⛈️

    • High loss rates will activate First loss guarantee's which Fintech’s have in place with their lenders

    • Depending on the scope of the First loss guarantee's, this will be a substantial hit to the equity coffers of fintechs

    • Fintech’s, depending on their funding status, may or may not have the capital to cover for these losses

    • This is likely to lead a scramble amongst their lender’s in trying to get their losses covered first before Fintech runs out of cash 

    • Investors of these fintechs will be wary to back companies in such dire conditions. They will write cheque’s only for the top 5%-10% of their portfolio, letting the market decide the fate for the rest

      • The fintechs getting funded to essentially get them out of these troubled waters will take significant valuation hits 

    • This episode is highly unfortunate and likely to result in a bunch of fintech’s shutting shop 

    • The ripple effect of this will create a substantial amount of friction for the near future 

      • VC’s will be wary of backing digital lender’s considering the blood bath they have seen in the current black swan event

      • NBFCs and Banks will further shy away from any meaningful lending partnerships with Fintech’s  

    • But here’s the bright side for digital lenders ☀️

      

      • I believe there is a monster opportunity if they survive the current madness

      • Demand is going to be huge given that the traditional lenders will be more cautious than ever in providing credit. 

        • This will leave a good bunch of creditworthy individuals and businesses on the table 

        • This is an opportunity for fintechs to engage with customers which they simply could not attract before

        • It’s all about acquiring, engaging, and retaining these customers by providing a bouquet of services. Fulfill a spectrum of your customer's needs. Not just lending 

      • There will be a lack of competition for the next few quarters. 

        • This is great 👍

        • This black swan event will shake out of the pretenders and keep only the serious players in the game 

        • Play your cards right and the next 1-1.5 years could be instrumental in establishing your company over the next 10 years 

      • Smart money will continue flowing in this space knowing this is a huge opportunity. It's important to 'go slow to go fast' in this sector. More on that in a future post 

      • 10 years from today 🔮, lending will look just like E-commerce is right now. It will be the default option for a certain audience segment. This is inevitable. Companies need to have a 2030 vision and build towards that steadily. Lending companies are always a marathon and not sprints

  Traditional lenders 🐢—> 👨‍🚀

  • Traditional lenders have been caught in this like a deer in front of headlights 

  • Not only has COVID-19 and the moratorium resulted in poor repayments but overnight as lockdown hit, their existing workflows were rendered completely useless 

  • These workflows relied heavily on physical interaction for everything right from servicing customer requests, processing and collections

  • Technology efforts have been largely outsourced. This comes from the DNA of the company. Check the top tier management of these companies v/s the top tier management at Amazon and it's easy to see why

  • Most of their software is on-premise and not cloud-based. It’s simply not built for remote work

  • Imagine being in a situation where your business is suffering as every day passes and simultaneously being paralyzed and unable to respond since your team can't function remotely due to lack of digitization. It’s completely alien territory 👽

    

  • Going digital has been a conversation forever in the banking world. It's been all fancy talk with little movement to show for it so far. Not any more. I am positive that there will be an urgency like never before to sort out this mess and double down on digitization efforts across the board  

  • 2 outcomes are likely

    • As I mentioned earlier, traditional lenders will not want to do lending with digital fintech lender’s given the mess their internal books and their current fintech partnerships are in

    • But they will have a strong interest in learning from them and adapting their workflows to become more efficient and digital in their workflow

    • They will have a strong interest in new-age fintech solutions for digitizing their existing workflows

  • Digitization efforts planned for the next 5 years will happen over the next 1 year if not sooner 

  • This is a large opportunity for fintechs to think about and collaborate with traditional lenders 

• Service providers of digital tools for lending 😓 —> 🤸‍♂️

  • Before COVID-19, while some fintechs did adopt them, others saw them as non-essential

  • Most traditional lenders did not take this segment seriously

    • Their business was going well without needing any such tools for digitization. It was nice to have and much lower in the order of priority 

  • This is not true anymore. This is their moment to shine 🚀

  • Every fintech and traditional lenders would be flocking to them to get their digital workflow act together

  • If these companies play their cards right, it could and should be their demonetization moment

    • Once the lending is back in full swing, they could see the fruits of their labor and see unprecedented growth trajectories 

      

  • They need to get their pricing right, keeping in mind high LTV, and build a trustworthy brand

  • This moment could establish them as critical cogs in the workflow of digital loans 

  • These companies should work hard to grab market share and make themselves the default company to go to in their respective spaces 

  • The stars are aligned here for them to have a low cost of customer acquisition and high customer lifetime value 

• Something new 🧙‍♂️

  

  • At its core, COVID-19 has broken the trust protocol which was implicit between 2 entities 

  • There are multiple examples of these instances 

    • Parents refusing to pay school fees

    • Tenants refusing to pay rent

    • Consumers who have taken cars/bikes/furniture on long term rentals and refusing to pay

  • At its core, is a lack of fear on the repercussions due to the long-drawn legal processes which plague India

  • So while some entities will no doubt take up matters legally, the rest will be left biting the dust. This annoyance and frustration is being channeled sharply by certain entities 

  • We are seeing a huge tidal wave of interest of companies in the rental, education and real estate segment to convert their existing structures into “loan agreements” because

    • They are tired of running after money owed to them and the lack of consequences for delayed or complete lack of payments

    • They want their customers to know the payments are being recorded on the bureau and delayed payments will adversely impact their “trust“ score

    • The legal protocols involving loans are much more efficient than standard agreements between 2 parties 

  • While this trend has been accelerated by COVID-19, there has always been a problem in India regarding getting invoices and bills paid on time

    • For example, large Indian companies are traditionally notorious for delaying payments for months to their suppliers or service providers 

  • There is a tremendous opportunity we see here for evolving the current trust score of every company and individual basis every transaction that they participate in. I am talking about the bureau score

  • While countries like the USA already incorporate rentals and bill payments within the credit score of entities, unfortunately, this is yet not part of the credit ratings in India

  

  • We are headed into a future 🔮 where the trust scores will be tied to every transaction and open to everyone to see 

  • Imagine a world where you don’t have to second guess before doing a deal with someone and you are confident that every party will act basis the legal agreements which have been signed else face long term consequences in the manner of dropping trust scores leading to fewer entities wanting to transact with them leading to reduced business 

  • Good actors will have high trust scores leading a larger number of entities wanting to transact with them leading to a flourishing business for the good actor 🤝

  • Ultimately a system like this, if built correctly, would improve the ease of doing business

  • Prosperity within a community is directly proportional to the median trust score within that community

Phew! That was long 😅

Thanks for staying till the bitter end. If you are a fintech or looking for an exciting role in the fintech ecosystem please reach out. We are hiring for roles in Business & Engineering. Details here: https://angel.co/company/apollo-finvest-1/jobs