Getting it Right: Product Market Grip
Credit needs are never the primary needs of the customer. Customers are driven by their need to buy a product like a car or a service. When we are building a Digital Lending business for a segment of our choice, we have to focus on the following elements:
Customer Segment and Needs
– Do we have specific insights on this customer segment, which others may not have?
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- This will help in identifying the right product for the segment instead of copy-pasting “EMI-based loans”, which work primarily for salaried customers.
Ideally, at least one of the Co-founders should have deep experience in this customer segment to get it right on Day 1. Building a deep understanding of the specific needs of the customer segment would also require extensive and personal market research. While many financial institutions outsource this research, we believe that the founders should personally meet the customers and understand the documented / non-documented needs of the customers.
This is easily the cheapest way to get the foundations of the digital lending business right including factors like
– Building the right product (tenor, rates, repayment schedule, repayment methods)
– Building the right journeys
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- Will the customer expect immediate credit or is he/she ok to wait for 24 hours
- Will customer buying journeys of his product/service be positively impacted by credit journey, Or Are you adding friction to customer journeys?
– Building linkages with usage
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- By entering the customer transaction flow, lenders would be able to ensure the right usage of credit
– Being part of the repayment process
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- Can we ensure that instead of depending on customers to pay through NACH, we get paid as part of the cash flow? This is specifically true for SME lending, where lenders can be embedded in the supply chain.
– Ability of impact/influence the customer in case of default
Channel for Customer Acquisition
– Do we have direct access to this segment, which is not available to others?
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- This will help in ensuring that “signals” of customer needs are available with us before the customer closes his buying process. This may mean knowing when a customer is buying a car and offering him/her a car loan.
While acquisition in mass-scale through digital campaigns may appear a good idea on paper, it will eventually make the “J curve” impossible. Acquisition costs for loans have spiraled and are hovering in the range of Rs 3000 plus for a sub 1 lakh loan.
We have to identify a direct source of customer acquisition through partners, where customers frequently transact. This may include colleges, eCommerce sites, supply chain platforms, etc. It would be difficult if not impossible to get the customers on a lending app without excessive cash burn.
This strategy would mean that digital lenders have to go with the API first approach instead of the Mobile App first approach.
Access to Cheaper Source of Funds
– Do you have access to multiple cheaper pools of funds?
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- Technology can help you in accessing the customer, creating engaging product and simplifying the journey. However, without access to a viable source of credit, we may end up like a TV Channels without Content. The last two years have specifically been challenging for Digital Lenders, with many going through “Start and Stop” due to lack of funds.
In the credit business, money is the only “ingredient”. We believe that expecting IRR of 30% plus may not be sustainable in the future due to linked risks. Digital lenders would have to either raise sufficient funds or would have to partner with banks to provide for sustainable low-risk growth.
Starting your digital lending business by stitching diverse sources of cheap funds will ensure that you can scale without pressure to build high-risk books.
In the next blog, we will share our insights on building tech platforms for scalable Digital lending businesses.
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