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Srinath Sridharan talks about the impact of Covid-19 on the Indian Financial Markets and Digital Finance. And cautions why fintech players should not chase the same narrow set of credit-worthy customers. 

Srinath Sridharan has donned the role of Transformation enabler / Corporate Leader / Board member / CXO coach in a career that spans over two decades with leading corporates across diverse sectors including automobile, e-commerce, advertising and financial services.

His talk on the Indian Financial Markets (in context to Covid-19) was extremely well nuanced and was reflective of his keen eye for market dynamics and spotting consumer trends (across industries). Key learnings from his conversation with our portfolio founders are documented below. 

Innovations and Opportunities 

For an industry that hires the best talent from premier B-schools and is seen as a good pay master, the sheer innovation quotient is very low in the Financial Services industry.

FinTech has ushered in a new paradigm of innovation, by presenting a massive opportunity to innovate / disrupt the sector through consumer-led tech.

Presently, there is massive under-penetration in financial services. For example: 70% of all two wheelers are uninsured.

While there is enough opportunity for all players, one should be careful of herding towards the same narrow set of credit-worthy customers. 

Distribution in the financial services industry is important (but overrated). Key is the cost of acquiring AND retaining a customer. In India, as a market where the availability of product / service choices is just about expanding, the customers are not loyal to just specific brands. They will experiment with a variety of options before choosing to stay with one. Hence, the cost of acquisition is very high. 

Also, while a lot has happened on the capital markets side (trends there have been fairly robust and competitive), the debt markets in India are not competitive at all. So in a post-Covid world, one can also expect rating agencies to be active and downgrades could start happening.

Till December of 2019, the flavor of the season was retail lending, which was largely driven by India’s consumption story. Now, with Covid, retail lending has slowed down dramatically, along with MSME lending (since businesses have slowed down and the future is uncertain). 

What should fintech companies focus on?

It is going to be hard for fintech companies to raise money right now. Regulatory provisioning norms could increase and  will likely stifle the lending industry furthermore (along with non availability of debt lines for lenders). That said, fintech companies are here to stay and the sector needs them (especially, in a post-Covid world). 

1) Debt availability is going to be slow

The focus for fintech companies should therefore be to survive the next 3-4 quarters. While debt availability is going to be slow (and socialist type policies will gain currency to benefit poorest consumers), it is very important to focus on cash conservation.

2) Ruthlessly cut costs

We are already seeing mass retrenchment across all sectors. There is however an opportunity to network across industries to attract talent at affordable costs. Engage with people across sectors since your ability to acquire talent now is going to be the highest. Now is also a great time to refine / redefine your communication with consumers. 

Some cuts may be very hard to make, especially on the people-side of things – think of how you can soften the blow (pay kid’s school fees when you let them go) – but make these cuts if required.

3) Over communicate

Create virtual interactions and make clear what ‘strategy’ is on a day-to-day basis to all stakeholders involved. 

4) Focus on legal / compliance issues

Now is also a good time for legal / compliance folks in each company to look at and evaluate each contract. 

5) Spend time with family

The founder’s family bears the biggest brunt during a crisis like this. Communicate with them about the status of your venture – spend some time with them. 

What does this crisis mean for digital finance? 

Financial Services has always tried to induce in people the desire to purchase things they do not need (every consumer app wants to add lending as a feature, EMI feature, etc.). The challenge with EMI is obviously collections – key is to look at whether the consumer actually needs the product. Focus on collections. Hire a good Chief Risk Officer. We are a few years’ away from having a good credit score mechanism – it takes 2.5 years from having a trust score to see credit patterns emerge, etc.

Also, always ensure your collection folks stay. Figure out how to incentivize them to stay. If you do not want to let people go, can you defer salaries? Might be a good option to consider this, but only you (the founder) will be able to decide this. 

Finance industries do not generally lend to certain category of professionals as they are very hard to collect from. However, some affinity groups’ repayment behaviour could surprise you positively. 

We think people buy things only during festivals etc. But this is a wrong assumption that brands and advertisers make, since people consume all year around.

Flaws in consumer financing

Among other things, many consumers still do not think about tech when they think of finance. Fintech founders need to do more to educate the average Indian consumer, as well as understand the consumer behaviour to develop product choices.

1) Everyone chasing the same customers

The urban consumer gets multiple offers for the same product / service offering – at a geographic distance of 50 kms away (as we move away from the urban sprawl), a consumer of similar demographic finds it very hard to reach out to brands. Good consumerism is giving product / service choices to the customers.

2) Lack of personalisation

Today, there is no way to personalize EMI structure itself as a choice / flexible financing options. 

3) Dissonance between tech and finance

Many consumers still do not think about tech when they think of finance. Fintech founders need to do more to educate the average Indian consumer, as well as understand the consumer behaviour to develop product choices.

4) Lack of digitisation

Today, most banks have digitised. Many are not yet digital-first, and are still employing manual processes. The end mile consumer connect suffers.

5) Muscle power of traditional banks

Banks are able to generate premiums due to distribution-might. However, fintechs are very well placed to understand consumer behavior which will be a massive advantage. Almost everything can be disrupted digitally.

6) Pre-empting behaviour is hard

Understanding consumer behavior (wrt the fintech industry) is very hard – because this behavior may not be consistent between lending, savings, investments – and this also changes dramatically during crisis, good times, etc.

Mistakes made by new-age fintechs 

New-age fintechs that didn’t take-off either raised massive capital, or their cost structures were completely flawed, or they had inflated designations, or no one focused on customers’ needs & consequently the ROI. 

Debt markets in India are very shallow. Raise borrowings when liquidity is available and not just when you need it. 

Growth vs Risk Management: Three years ago, once could have chosen ‘growth’ over everything else, because capital was easily available. However, today, founders should focus on risk management, because one cannot afford to lose any (more) money in today’s environment. Focus should be on unit economics, how can you improve profitability. One should not worry about balance sheet growth. Especially if you cross a certain balance sheet size, and if you are a non bank lending institution, think if you can evolve into a bank.

Best practices to adhere to (esp, in the wake of Covid)

1) Consider reducing credit limits for certain high-risk consumers

If your customers are not used to fluctuating credit limits, this may not be a bad time to inform customers that this will be happening on a quarterly basis . This may also be a good way to let consumers know that credit limits could go up if they demonstrate good behavior – this leads to higher engagement. Pay-as-you-go options are also not a bad idea to try out. 

2) Collections holiday vs write-offs

If you believe that defaults are definitely going to increase, make the write-offs today. You can write it back, if you are able to collect it eventually. 

3) Leverage is good

Leverage should not be looked at negatively. Asset / Liability mismatch is a structural issue in the Indian financial services industries. Irrespective of the cost of leverage, pick up debt when it is available (not when you want it). Focus on having liquidity, and generate your ability to repay 6-18 months obligations. 

This is also a great time to raise a Working Capital line if you have good fundamentals in your business.

4) Navigate governance issues well

Make sure everything is well documented / presented to the board & key investors periodically. It is better to over-communicate. Engage with your regulators regularly.

5) Optimize collections

Look at concepts like VLE and leverage their extensive network for collections. Consumer Behavior is very different for lending vs savings. 

6) Deep understanding of customers

NPAs are going to spike for all sectors – banks have advantage because they have access to savings accounts, they give credit cards and have ability to better understand consumer spending patterns. Fintechs are also dependent on regulation to some extent (because they use smartphone data, etc.). Fintechs should therefore do everything they can to have a very deep understanding of their consumers. 

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