Most banks do not lend to customers with a credit score below 750, which is considered mediocre. These customers make up about a third of the personal loan segment, according to a recent Bloomberg Quint report. Fintech companies hope to cater to these customers by filling the void. Also, millennials with low credit scores are turning to fintechs for loans, experts say. A recent report by CASEe, a fintech company, said that 64% of its loan demand in 2018 came from the 21-30 age group. Disha Sanghvi asks four experts if it is healthy for fintech companies to lend to such consumers?
Interest rates need to account for a higher default rate
—Navin Chandani, Business Development Manager, BankBazaar
Fintechs are trying to cater to a segment that banks are either unable to serve or have stayed away from. Different customer segments have different profiles. A consumer may be a millennial, under the age of 35, who may be new to credit. There may be a consumer who is 50 years old but may have a low credit score due to a bad credit history or a consumer who has an unpaid annual fee payment on a credit card they thought they had closed .
Depending on their profile and ability to take risks, fintech companies create propositions to attract customers and price the risks according to the interest rate. It is unhealthy for fintech if it does not analyze and have interest rates per segment. They need to be very clear with their data analysis and risk pricing. If they assess the risk well, the reward is good. If they get the risk pricing wrong, they will be in trouble. Therefore, interest rates must take into account a higher default rate. Those who pull off this mix would be the winners.
Managing risk and keeping costs low is key for fintechs
—Parijat Garg, Senior Vice President, CRIF High Mark
A credit score is an indicator of a customer’s creditworthiness or the likelihood of a customer defaulting on a loan. A customer with a low credit rating does not get a loan from traditional lenders because they find it too risky to lend to such a customer.
Fintech companies and a few other lenders view this segment as an untapped market opportunity. Fintechs are using alternative digital tools and data points in addition to credit scoring to keep their costs low and attract more convenience on the customer. They also compensate for the higher risk of not recovering a loan from a few of these customers by charging them a higher interest rate. For example, a customer with a credit score of 600 to 650 can get a to lend at 18-20% from a fintech company, while a client with a score above 750 can get 10-12%. Fintechs could also cap the loan amount for these customers to manage their exposure.
In a nutshell, it’s about finding a niche market while managing risk and keeping costs low.
Fintechs must be careful and not ignore due diligence
—Lovaii Navlakhi, Managing Director and CEO, International Money Matters
Fintech companies aim to scale their business in the area of short-term lending. Sometimes finding customers quickly is more important than finding the right ones. In an effort to lend more and get more customers, they start cutting corners. While the economy is booming, it works and justifies the lender’s decision to ramp up; it’s when the tide comes in that you find out who’s swimming naked.
For the client, she finds a super-smooth loan approval process with limited paperwork. She begins to use short-term lending for productive needs and is quickly lulled into the belief that speculating with borrowed funds increases the return on investment.
While we understand the shift to digitization, due diligence is grossly underestimated. The technology works when it has to sift through a large volume of data; Fintech companies not in the race to become the industry’s hot phoenix will be best served by remembering the adage: slow and steady wins the race.
Fintechs provide secured loans to those with low scores
—Satyam Kumar, Co-Founder and CEO, LoanTap
Basically, one should be able to tell the difference between no score and a low credit score. If there is no credit score, if there is no loan, and there are other credentials that make an applicant qualified for a loan, it is perfectly acceptable to grant them a loan. But if it is a low credit candidate, it means there are negative traits.
Some fintechs are consciously trying to walk with people with low credit and make them understand the importance of good credit and then move them from bad to good credit.
Most personal loans are unsecured in nature and no fintech gives unsecured loans to people with bad credit. Fintechs that provide loans to applicants with low credit ratings work on collateral-based systems.
Typically, all fintech companies give unsecured personal loans to applicants with good credit or those who meet the eligibility criteria despite not having a credit score.
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