Why are E-commerce category leaders venturing into lending?


In 2017 Google’s payment app Tez was rebranded as Google Pay. Tez was Google’s UPI platform for money transfer and from its launch in September 2016, in a single year there have been 55 million downloads on playstore, with 22 million active users and 750 million transactions with annual run rate of with $30 billion.

With such an astounding success rate for a payment app, one will wonder if there was a real need for rebranding unless there was something new to offer. The answer to that is loans. Google had partnered with banks to disburse pre-approved loans on the Google Pay platform. While the current partners are private sector banks such as HDFC, Kotak Mahindra, ICICI, and Federal Bank, it is unknown whether Google will extend this partnership to NBFCs as well.

Not too far behind is Amazon with its newly launched seller lending network. After a pilot last year, their intention is to offer loans to sellers by partnering with multiple third-party lenders. Thus, in a bid to provide financial assistance to sellers on their lending platform to promote their businesses, Amazon has partnered with Bank of Baroda, the second largest public sector bank in India, to offer loans to MSME entrepreneurs.

If that’s not all, Flipkart has plans to apply for an NBFC licence to provide financial services, ranging from credit to insurance for its consumers and sellers alike, thus targeting consumer and vendor lending. Mi Credit was Xiaomi’s venture into lending  in India, where users could avail quick personal loans from Rs 1,000 to Rs 1 lakh from the only loan provider listed on Mi Credit.

All these instances present a single theme of tech and e-commerce giants exploring lending options and intending to add revenue to their existing portfolios.

But what makes lending so lucrative to these companies?

The answer lies in data and credit.

Ever since these companies have had a foothold in the Indian territory, the amount of data generated on their respective platforms has helped them develop in-depth insights  about the Indian customer. This includes spending patterns, buying patterns, types of expenses, preferred forms of payment, money flow, behavioural patterns, demographic needs, and so on. There is so much information to extrapolate and intercept that these tech giants have comfortably established themselves in the minds of the Indian consumer.

Credit has always been a touchy topic for financial institutions in India. With NPAs mounting for banks, coupled with loans going bad and increasing number of defaulters, there is a pressing need to improve the records on their loan books and implement new-methods of lending to sustain.

Tech companies like Amazon, Google and Flipkart have the technological prowess that can improve lending operations in several ways. The narrative these giants are playing on is the lack of access to credit. Traditional lending has often left out small business lenders for several reasons. Lack of documentation, negligible credit history, small loan ticket sizes, steep interest rates, and longer processing times have all contributed to the small entrepreneur losing out on his access to finance and investment.

These tech firms are offering loans precisely by addressing these pain points for both the lenders and the borrowers. Their proposition is simple – Faster loans at low interests with little documentation.

The major advantage to these firms is their customer base. E-commerce Giants like Flipkart and Amazon already have an expansive network of sellers on their platform. Moreover, since Flipkart is aspiring to be an NBFC, they intend to offer loans to their customers as well. Thus, sourcing leads isn’t a major sales exercise as in the case of financial institutions, and customer base is well-established and networked in this case. For instance, Google claims that 1.2 million small and medium business lenders used Google Pay as their preferred platform for payments.

Inability to prove themselves as creditworthy has been a major roadblock to small businesses. Either their loan applications get rejected or they cannot apply owing to documentation issues. For example, Flipkart estimates that approximately 60% of its 100 million customer base lacks access to credit.

Plus, owing to smaller ticket sizes and longer approval times, customer drop-offs are high in small business lending. This is a sweet spot for tech giants to score the most. For a ticket size of 1 lakh to 25 lakh INR, Amazon claims to disburse loans in a span of 3 to 5 days for eligible sellers at annual interest rates of 10.45% – 11.5% with little documentation as opposed to banks who approve loans in a span of 30 days after due diligence with high annual interest rates between 18% – 30%. Google has partnered with four banks to disburse pre-approved loans directly to the customer’s bank  account on their platform while offering them customised loan products as well as easy repayment options through Google Pay.

Technological innovations change at a rapid pace, and banks find it hard to keep up with trends while maintaining risk and meeting customer expectations. If banks partner with these tech giants, they can easily be inline with changing market demands while leveraging state-of-the art technology offered by these companies. For tech companies, banks are a reliable source of finance as well a lending authority, thus helping them comply with lending policy, processes and operations governed by financial regulatory bodies, such as the RBI. They also enjoy a upperhand in establishing themselves in developing economies like India, where the consumer is more digitally rich before being economically rich, thereby easily adopting and receiving technological innovations, making it a win-win situation for everyone – the borrower, the lender, and the tech provider.

An interesting element in this premise are Fintechs. For payment fintechs such as PayTM, UPI will be their primary challenger, and Google Pay is already presenting a promising picture with an active base of over 22 million. Not just that Google Pay is also extending its services to utility bill payments. For lending fintechs such as LendingKart, there is stiff competition from Amazon which has both banks and lending fintechs such as Capital Float as partners, hampering their prospects. Flipkart has plans to apply for an NBFC licence, thus attempting to bring the best of two worlds on a single platter. Moreover, Flipkart believes that its innovative products like “buy now, pay later” and “cardless credit” will drive at least 15%-20% of its growth for 3 years at the least.

In all these dynamic scenarios of cut-throat competition and enriched, customer-centric services, the borrower stands to benefit the most. Consumers will be spoilt for choice to opt for a loan of their needs with every player vying to offer them their topmost services, and it will be tricky for them to differentiate their positioning. It will be interesting to see whether the Indian consumer actually adopts to this new-age lending practices, and how these tech companies will deal with defaulters, changing governance, and the ever-demanding customer.