#5th FINTECH – Navigating the New Digital Lending Rules: Impact on BNPL by Nitin Gupta

Introduction

Session was structured as a freewheeling chat with Nitin Gupta that was moderated by Ravi Gautham. Nitin Gupta is the founder and CEO of Uni Cards. Uni Cards is a pioneer in the new-age credit card segment. The company has raised 94 Mn USD from marquee investors such as Accel, LightSpeed and General Catalyst Partners.  Nitin started his career with Lehman brothers where he worked on securitisation of asset backed securities. He came back to India and started his entrepreneurial journey in 2008. He started Khojguru in 2008 and PayU in 2011 and scaled it to the number 2 player in the payment gateway market. Post that he was the CEO of Ola Financial Services, where he scaled the company’s lending and micro-insurance business. Nitin is also an active angel investor and has invested in 70+ companies.

Agenda

Session started with a discussion on entrepreneurship in India, specially how Fintech entrepreneurs are building businesses. This was followed by a deeper discussion on digital lending business specially BNPL companies which have better unit economics than traditional lending product lines. Nitin also shared his philosophy behind building Uni Cards and some interesting insights on how the business has scaled in the last few years. It was concluded with a discussion on the regulatory environment and implications for digital lenders going forward.

Fintech Entrepreneurship in India

Tech entrepreneurs have an opportunity to use technology to scale fast to market leadership position in emerging areas in financial services. This is not possible in established verticals where incumbents are already dominant. The ultimate objective of the business is to make profits but sub-scale profitability is not useful, because the company can be disrupted by a competitor who can execute faster. In the current environment fintech entrepreneurs need to think very hard about the unit economics of the business model, just Product Market Fit is not sufficient. As they scale their business one eye needs to be on the robustness of the business model. The opportunity to scale Fintech products is immense. These products have a ubiquitous appeal and can scale very rapidly. However even for products that targets a smaller niche (40 Mn users say for credit card) this TAM is also rising with time as country becomes prosperous.

Innovation in Payment Led lending

Payment led credit is a strong product with two income streams: payment related income and NIM income. Banks make 7-8% RoA on credit card products. RBI has a view that Credit Card is a difficult product from a credit perspective and has thus restricted it to banks. This had restricted innovation and has kept credit cards out of reach for many consumers.

BNPL products can be of two kinds:

1. Lending based products: Products with a repayment period in 6 to 18 months. Here subvention from merchants accounts for a significant share of unit economics. BNPL globally earns 70-80% of their income from the merchant subvention income.
2. Convenience based products: Payment product which doesn’t require two factor authentication. Customers that use convenience product (with 15-20 day) payment period doesn’t understand the credit aspect and get surprised by negative credit report or late fee if they forget to pay on time.

Uni Cards core thesis emanated from the fact that many creditworthy consumers often face a short-term liquidity mismatch. Uni Cards onboards customers with an average CIBIL score of 770 (vs 740 of for most Banks). Uni doesn’t onboard new to credit customers. Uni’s 90 DPD is 60% lower than industry. Most customers are acquired through digital marketing vs feet on street for banks.

Regulatory environment for digital lenders

Customers are demanding credit via BNPL type products but customer level leverage needs to be monitored. As a responsible regulator RBI has applied brakes so that the system doesn’t get heated up. This slows the sector down but doesn’t shut it down. Underwriting standards for the industry will go up.

Fintech players acquire the customer and are willing to underwrite the credit cost of the customer. The lender to Fintech wants FLDG arrangement to cap the credit cost for them. The provider of FLDG, the Fintech needs to provide credible guarantees, so that regulated entities do not suffer large credit losses.

Conclusion

The opportunity for digital payment based lending products is immense. Fintech players have an opportunity to build new products to expand the market. However they need to be mindful of their business model and their underwriting practises. The current regulatory environment gives an opportunity for players to re-design their products and business models in-order to become resilient.