Digital lenders: Strong growth prospects driven by improving financial inclusion

  • Lending is the second-largest segment within the EM fintech universe, but still has a strong growth potential
  • Targeting new customer segments, geographical expansion and tech investment are the biggest strategic priorities
  • Key innovations: Digital banking, AI, chatbots. Market dynamics, funding access are the main growth constraints
Digital lenders: Strong growth prospects driven by improving financial inclusion

This report, part of our series on the risks and opportunities in the emerging markets fintech space, focuses on lending fintechs. Our work draws on the results of our detailed proprietary surveys of 31 digital lending firms, 22 incumbent banks and 700 consumers in seven emerging markets (Brazil, China, Indonesia, India, Kenya, Mexico, South Africa), allied to desk research of around 450 lending fintechs.

Our key findings

  • Lending is the second-largest segment within the EM fintech universe (after payments), accounting for 27% of all firms (ranging from 35% of the fintech universe in Indonesia to just 13% in China).

  • The top values that lending fintechs deliver to their customers are product quality, customer responsiveness and transaction speed.

  • The most important factors driving these firms’ success to date are product quality, servicing the unbanked population and funding access.

  • Lending fintechs currently have around 7ppts lower market share than fintechs in other product areas.

  • Over the next 3 years, lending fintechs are likely to gain 7ppts market share (in line with the 7ppts gain expected in other fintech products), mainly by serving the currently financially-excluded customers.

  • Top strategies for lending fintechs include expanding their reach to new customer segments and new countries, along with technology investment.

  • Heavily targeted innovations include digital banking, artificial intelligence and chatbots/virtual assistants.

  • Market dynamics and funding access are the major constraints to growth faced by lending fintechs. Major regulatory issues are capital requirements, deposit insurance and data protection rules.

  • Banking incumbents are responding to the competition from lending fintechs by investing in technology, followed by better analysis of data and lowering product prices.

  • Innovative lending firms identified in our study include EarlySalary (India — approves loan within 10 minutes using AI and ML technology to assess creditworthiness of applicants) and Koinworks (Indonesia — assesses creditworthiness of SMEs via automated analysis of their financial statements).

The digital lending ecosystem in selected emerging markets

Source: Tellimer Research

Overview

We examine the lending fintech landscape in seven large emerging markets, including the drivers of firms' success to date, their future strategies, targeted innovations, key growth constraints, and the impact that lending fintechs have on their customers. Our work is complemented by the results of our consumer survey in these same seven countries; we ascertain their current service provider preferences, assess their future expectations and determine the implications for lending fintechs. Lastly, we highlight some interesting innovations from selected lending firms.

Lending is the second largest segment within the EM fintech mix after payments, accounting for about 27% of the total fintech firm universe. By country, Indonesia has the highest weighting of lending firms (35%), while China ranks last (13%). According to lending fintechs, the top values they deliver to their customers are product quality, customer responsiveness and transaction speed. The most important factors driving these firms' success to date include product quality, targeting the unbanked and funding access.

Fintechs currently have a market share of 17% in lending, while the segment is still dominated by formal financial institutions. Based on our consumer survey results, this fintech segment is likely to experience market share gains in the range of 7ppts in line with other products, mainly by targeting the underserved population.

Key strategies that lending fintechs are adopting over the next three years include expanding their reach to new customer segments and new countries along with technology investment. Their most heavily targeted innovations are digital banking, artificial intelligence and chatbots/virtual assistants. Selected innovative lending firms we are highlighting include EarlySalary (India, approves loan within 10 minutes using AI and ML technology to assess creditworthiness of applicants) and Koinworks (Indonesia, using technology to assess creditworthiness of SMEs by analysing their financial statements).

The most relevant constraining factors for lending fintechs are overall market dynamics, plus funding access. The main regulatory issues are capital requirement, deposit insurance and data protection rules.

Banking incumbents are responding to the lending fintechs by investing in technology, followed by better analysis of data and lowering product prices.

Indonesia has the highest weighting of lending fintechs

Lending is the second largest segment within the EM fintech mix, accounting for 27% of all firms. By country, Indonesia has the highest weight of lending fintechs at 35%, while China has the lowest (13%). China has a vast and diversified fintech ecosystem, with strong contribution from segments like blockchain, SaaS, financial management etc — this could explain the relatively lower weighting of lending firms despite presence of some lending platforms like Lufax, and Ant Group’s Huabei and Jiebei.

Weighting of lending fintechs by country

The customer value-proposition: Quality, responsiveness and speed

According to lending fintechs, the top values they deliver to their customers are product quality, customer responsiveness and transaction speed. Relative to other fintechs, lending firms place more importance on customer responsiveness and less on delivering convenience.

Product quality is a broad term that includes factors like ease-of-use, product innovation, seamless execution and speed of service. This may explain why it is mentioned as one of the top values by both fintechs and consumers, not only in the lending space but in other segments as well. Some digital lenders highlighting this as their key value proposition include ZestMoney (India) and Konfio (Mexico).

Responsiveness to customer needs: This was the second most important value mentioned by fintechs in lending sector. We think many incumbent firms are failing to address customers’ specific needs (due to difficulties in tailoring products/services), which is opening-up opportunities for fintechs such as Finserve (Kenya) and SanKash (India).

Faster approvals: Lending fintechs have made the loan approval processes smoother, usually without human interaction. They use artificial intelligence and machine learning technologies to build customer credit ratings, which saves time during the approval process. We think fintechs will need to keep progressing forward in this area as incumbents are also working to up their game. Wejinsuo (China) and Karbon Card (India) are among the lending fintechs that mention fast approvals as a key value they provide to their customers.

Lending fintechs' value proposition

Key success factors: Product quality, targeting the unbanked and funding access

The top three success factors cited by lending fintechs are product quality, targeting the unbanked and funding access. Compared to other fintech sub-sectors, lending firms seem to benefit more from product quality, but less from management expertise.

Product quality: As discussed earlier, this is a broad term including a variety of factors. Since incumbents are also actively innovating, fintechs need to deliver quality services to be able to compete effectively. Some lending firms that think the quality of their product has been a key driver of their success to date include Financepeer (India) and Klar (Mexico).

Targeting unbanked customers: A key area of opportunity for lending fintechs has been financially underserved populations. These customers in the past have been forced to rely on informal channels for their borrowing needs, which are often exploitative in pricing. Some lending fintechs that think serving the unbanked customer has been a key success driver include Tala (Kenya) and Duanrong (China).

Funding access. To effectively compete with big industry players and achieve scale, start-ups may need significant funding for marketing, infrastructure and network-building. Funding has played a key role in the success to date of lending firms like Indifi (India) and Akulaku (Indonesia).

Key success factors

Lending firms' strategic plans: New customer segments, countries and technology investment

The top 3 strategies that lending fintechs are deploying over the next three years are expanding their reach to new customer segments and new countries along with technology investment. Compared to the other fintech segments, lending fintechs are less keen on entering strategic partnerships and more focused on entering new customer segments.

Entering new customer segments helps fintechs to diversify their revenues and capture more business from existing customers. Entering new segments can help build scale and generate a faster path to profitability. Lending fintechs citing this strategy include Mifos (Kenya) and Koinworks (Indonesia).

Expanding into new countries: Lending fintechs that have succeeded domestically and see strong opportunities in other markets are actively considering expanding their geographic footprints. Some digital lenders citing this strategy include Tunaikita (Indonesia) and Kueski (Mexico).

Technology investment: Technology like machine learning and artificial intelligence can improve the speed and quality with which services are delivered to consumers and also reduce the risk of non-performing loans for lending fintechs. Pravaler (Brazil) and JUMO (South Africa) are among the lending companies planning more technology investment.

Strategic priorities

Lending fintechs' innovations: Digital banking, artificial intelligence and chatbots

Considering their innovation plans over the next three years, lending fintechs are most focused on digital banking, artificial intelligence and chatbots/virtual assistants. Compared to fintechs in other sectors, lending companies are more focused on artificial intelligence and less on blockchain.

Digital banking encompasses the full suite of products offered by traditional banks, but via digital channels. By adopting this approach, lending fintechs will aim to develop an integrated suite of products like savings, payments and insurance. Lending fintechs with digital banking in their innovation plans include Weel (Brazil) and Tala (Kenya).

Artificial intelligence can help lending fintechs develop credit rating algorithms, which are key to enabling lending to customers with little or no credit history. Investing in artificial intelligence can help improve firms' credit risk models and reduce the volume of delinquencies. Lending fintechs that are planning greater use of artificial intelligence include BLU365 (Brazil) and Umba (Kenya).

Chatbots and virtual assistants help improve the client experience by automating customer service/education and at the same time allowing fintechs to reduce their operating costs by limiting the staffing needed to handle customer queries. Fintechs with plans in this area include Zainfu (Kenya) and Geru (Brazil).

Targeted innovations

Lending firms will grow by serving more unbanked clients

We asked consumers which kinds of providers were meeting their current financial services needs for borrowing, and which ones they expected to use in three years. We use this data to estimate current and likely shifts in share of wallet for different types of firms.

Currently, fintechs have a 17% share of the lending sector, which is below the 24% average share fintechs have in other products. Looking ahead, lending fintechs are likely to gain 7ppts market share over the next three years, in line with average gain expected in other products — this gain would largely come from serving more financially-excluded customers.

To avoid our questions being too intrusive, note that our consumer survey did not ask for quantitative information (such as the size of any outstanding loans); we think formal financial institutions would have a much higher share if our survey results were volume-weighted.

Lenders' market shares

Key constraints to growth: Market dynamics and funding

Overall market size/growth and funding are the biggest growth constraints faced by lending fintechs. Compared to fintechs in other sectors, Covid-19 is a bigger challenge for lending companies, while competition from informal channels is less of an issue.

Size and growth of the market: It can be difficult for industry leaders to outgrow the overall market, particularly as the number of competing fintechs rises. We think market size is impacted by customer awareness, which is still limited in some emerging markets. Koinworks (Indonesia) and Financepeer (India) are among the lending fintechs that cite market dynamics as a concern.

Funding/capital: Depending on the business model they employ, funding is essentially the lifeblood of lending fintechs. There are often high capital requirements for lenders to grow their loan book and protect them in case of adverse impacts. Lending fintechs citing this constraint include Finaccel (Indonesia) and SanKash (India).

Key constraints to growth

Lending regulatory hurdles: Capital requirements, deposit insurance and data protection

According to our survey, capital requirements, deposit insurance and data protection data are the key regulatory hurdles that lending fintechs face. The regulatory hurdles for lending firms are broadly in line with fintechs in other sectors.

Capital requirements: In general, fintechs tend to favour capital-lite business models; any regulations that challenge this approach can have a serious impact. This has been brought vividly to light by the last-minute suspension of the Ant Group IPO. Fintechs citing this regulatory hurdle include Geru (Brazil) and Klar (Mexico).

Deposit insurance: Lending firms often operate mobile wallets, or raise funding from other banks, which are subject to deposit insurance regulation to protect consumers from any adverse event. Lending firms that are affected by deposit insurance regulations include Duanrong (China), and ZestMoney (India).

Data protection requirements: One way that lending fintechs generate a competitive advantage is through the collection and utilisation of customer data to develop sophisticated credit rating and distribution models. Data protection regulations play a key role in determining the extent to which these companies can obtain and use such information, and the processes they must follow to protect it. Lending fintechs citing data protection regulations as a hurdle to their growth include Konfio (Mexico) and Tunaikita (Indonesia).

Key regulatory hurdles

How incumbent banks are fighting the fintech threat: Technology, data analysis and competitive pricing

Technology investment is at the forefront of financial industry incumbents to fight the fintech threat especially from lending fintechs, followed by better analysis of data and lowering product prices. Compared to other incumbents sectors like tech and teleco, cost-cutting is a less-targeted strategy for banks, while the focus on cultural change is much greater.

Investment in technology/automation: To boost process efficiency, financial institutions are adopting SaaS applications in areas such as accounting, human resources and KYC verification. They are also using cloud technology for data storage and security. Co-operative Bank (Kenya) and Axis Bank (India) are among the incumbent banks boosting technology investment.

Better analysis of existing datasets. In theory, banks have a big advantage over new entrants as they have large customer bases with long and relevant transaction histories. But often the data is not in one place, and/or is difficult to work with. With the help of AI and ML, incumbent firms are now working more closely with this in-house data to offer more personalised and targeted services to their customers, and to make better-informed strategic decisions. Companies using this strategy include Banco Inter (Brazil) and Kotak Mahindra Bank (India).

Lowering product prices: Our consumer survey indicates product pricing is more important for consumers than financial services providers think. Lending incumbents focusing on lowering product prices include Firstrand (South Africa) and Santander Mexico.

Incumbent banks' steps to counter the fintech threat

Lending fintechs' innovative practices

In the table below we highlight some innovative practices by lending fintechs based on our desk research:

Lending fintechs' innovative practices

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