Gaurav Sharma Profile picture
Sep 17, 2018 24 tweets 6 min read Twitter logo Read on Twitter
1/n: LENDING (business) IS NOT A FEATURE.

And yes, distribution of lending/credit products is a ‘feature’ in some platforms/products.

Lending (CREDIT) is a business with many complex moving parts.

#long #fintech #thread #lending
2/n: In fact “Lending (Credit) is older than money and FinTech.” (…)

There’re lot of tweets (within the FinTech community in India) about Whether 'lending is a feature' or not? So, let’s unpack that a bit..
3/n: True definition of Lender = Lending Money from own balance-sheet (i.e. skin in the game). The primary revenue here is Interest Income (Net Revenue from Funds), and margins computed basis NIM (Net Interest Margin) and COF (Cost of Funds).
4/n: LeadGen/marketplace aggregation ≠ Lending.
The primary revenue model here is lead-gen fee or commission. In fact, Marketplace aggregators are at a severe disadvantage if they do not have scale or community. More on that here 👇🏼
5/n: Before the origin of the modern bank in early 1900’s – the oldest lending frameworks for centuries were 1-to-1. Something based on TRUST between an individual borrower and individual lender, with some additional guarantor/co-signor comfort, usually by a mutual acquaintance.
6/n: The local moneylenders/microfinance SHG’s in small rural villages still operate on these principles. The modern consumer banking evolved to institutionalize & scale lending business (i.e. take small deposits from many at lower rates, and lend money to many at higher rates).
7/n: So in some ways, modern consumer banks evolved out of the oldest P2P lending frameworks. This also resulted in the creation of Risk Models, Credit Bureaus, Balance-Sheet tools, Operations, Leverage, Treasury and other Institutional components.
8/n: On a separate note: Bitcoin /Blockchain/ Crypto experiments are trying to solve for this oldest problem: Trust, Distribution and Decentralized paradigm on a global scale. But I digress, more on that later...
9/n: Large B2C Platforms –whether commerce, content or payments have a primary relationship with the consumer; however their primary product/biz is not lending. Credit is a facilitator or adjacent proposition to deepen the value-stack. The core product value (CPV) is not CREDIT.
10/n: So yes, Amazon will offer working capital finance to suppliers and POS finance options to consumers, and large Payment/PSP’S co’s will offer Credit as a feature to its consumers/ merchants; However, their principal business is still commerce and/or payments.
11/n: The principal model will change when these commerce/payment companies start building their own balance-sheet (i.e. put together a fully regulation compliant lending OPCO's with Equity and Debt Capital, Risk models, fulfillment, Treasury and Operations etc.)
12/n: However, this will also lead to a new business (not feature) creation and a completely different play from their existing “core business”. A lot of big companies have quickly realized that...
13/n: For e.g. Amazon partnering with BOA (Lender) to restructure their credit risk exposure (…), and PayPal’s relationship with Synchrony Financials for consumer loans (…).
14/n: Similarly, Big banks relying on offline channels (DSA/FOS/Branch) will look for online “distribution partners"(e.g. GoogleTej tie-up with some Indian banks to distribute their credit product). However, the principal-relationship is still between the borrower and the lender.
15/n: People are very careful about who they borrow money from and on what terms and conditions (lest they end up in a ~Shylock: "A pound of flesh” situation). For “responsible borrowers”, the primary relationship with the lender is very important.
16/n: For microcredit short duration products this might not be a big deal as the relationship is transactional, but for longer term /big ticket loans (PL Mortgage, Business), especially in a low trust ecosystem, this is a very important factor: "From whom am I taking this debt"
17/n: The Lending business model redesign is much more complicated and requires massive re-stacking of the entire value proposition and business components- such as: capital, leverage, product, regulations, operations, income & risk models, distribution rails etc.
18/n: The “payments” industry is a prime e.g. of that: First Western Union(telegraph co.), then @Visa “everywhere you want to be” took it to a different level. And a few decades later @PayPal redefined the business model. Note, their core business (not feature) was/is payments.
19/n: Sometimes innovative ideas to improve underwriting, customer onboarding, and more are hamstrung by regulations. Some FinTechs in India have realized that now :-)
20/n: What we’re witnessing (across a majority of FinTechs) is only Product Innovation (i.e. relayering of tech and distribution pipes), not a core-business model innovation. I love FinTech, but a lot of FinTech companies have a business model problem.
21/n: Infact, all major P2P lenders( *ex-China) are in reality I2P’s, with capital predominantly from large FI’s.
The real breakout winners will combine a market opportunity that legacy FIs have missed with a business model innovation that is sustainable. And that takes time.
22/n : @Affirm (and ZestMoney in India) is a good example of a fin-tech company shifting an existing business model to unlock new value.

CREDIT is not a feature for them. CREDIT might be a feature for their merchant partners.
23/n: If FinTech Wave 1 (2008-17) was about UNBUNDLING, then FinTech Wave 2 (2018 onwards) is all about REBUNDLING. All that's happening is:

24/n: So yes, CREDIT is a feature for platforms whose core business is not CREDIT. Their business arc' will change the day these co's will build a 'lending business'. And they know that.

They know that CREDIT is a (serious) BUSINESS.


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