Gaurav Sharma Profile picture
Sep 17, 2018 24 tweets 6 min read Read on X
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.” (medium.com/@gaurav.sharma…)

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 (cnbc.com/2018/02/14/ama…), and PayPal’s relationship with Synchrony Financials for consumer loans (techcrunch.com/2017/11/16/pay…).
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:

The ‘CREDIT DISTRIBUTION GRID’ getting RE-DESIGNED, where *CREDIT IS THE NEW API*.
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.

<end>

• • •

Missing some Tweet in this thread? You can try to force a refresh
 

Keep Current with Gaurav Sharma

Gaurav Sharma Profile picture

Stay in touch and get notified when new unrolls are available from this author!

Read all threads

This Thread may be Removed Anytime!

PDF

Twitter may remove this content at anytime! Save it as PDF for later use!

Try unrolling a thread yourself!

how to unroll video
  1. Follow @ThreadReaderApp to mention us!

  2. From a Twitter thread mention us with a keyword "unroll"
@threadreaderapp unroll

Practice here first or read more on our help page!

Did Thread Reader help you today?

Support us! We are indie developers!


This site is made by just two indie developers on a laptop doing marketing, support and development! Read more about the story.

Become a Premium Member ($3/month or $30/year) and get exclusive features!

Become Premium

Don't want to be a Premium member but still want to support us?

Make a small donation by buying us coffee ($5) or help with server cost ($10)

Donate via Paypal

Or Donate anonymously using crypto!

Ethereum

0xfe58350B80634f60Fa6Dc149a72b4DFbc17D341E copy

Bitcoin

3ATGMxNzCUFzxpMCHL5sWSt4DVtS8UqXpi copy

Thank you for your support!

Follow Us!

:(