Otherwise considered a risky asset class, peer-to-peer (P2P) lending is finally getting a revamp as larger fintech companies including the likes of BharatPe and Cred launch offerings in the segment.
Merchant fintech and freshly heralded unicorn BharatPe earlier this month launched a new P2P offering called ‘12% Club’, to let consumer lenders earn 12% interest on their investments. Members of the product can also borrow at 12% interest, as BharatPe launches a separate app for the P2P offering.
“Earlier (institutional) investors were wary of the P2P businesses, owing to the high customer acquisition cost (CAC) required to build both supply and demand for loans on the platform. But now with businesses like Cred and BharatPe having access to cash-rich individuals and merchants, the P2P lending segment is set to become mainstream,” co-founder and MD of BharatPe, Ashneer Grover, said. The fintech's P2P offering is close to a monthly investment run rate of $5 million by individual investors, and loan disbursals worth $1 million, he added.
Last week, credit card bill-based rewards marketplace Cred launched its P2P offering--Cred Mint. It allows for its community of 7.5 million users with 750 or above credit scores, to lend at 9% interest and borrow at 12%-15%. The idea was to build an inflation-beating product for customers with surplus savings, and to counter annual (borrowing) interest percentage rate of credit card revolving, which stands at 36% to 45% in the industry, said Cred founder Kunal Shah.
Smaller incumbents in this space such as Faircent, LenDenClub, and LiquiLoans are also happy since the big fintechs are partnering with them to get access to a larger consumer base. Delhi-based BharatPe, for instance, has partnered with P2P NBFC LenDenClub and LiquiLoans to create its offering in the space. Consumer borrowing by individuals on its new product will be powered by NBFC Hindon Mercantile, among others. Cred has signed up with Kunal Shah-backed LiquiLoans for its P2P lending product.
“As soon as a player like Cred enters the P2P domain, it brings a lot of more credibility to the sector. It will have a network in terms of reaching out to the customer,” said Bhavin Patel, founder and chief executive officer (CEO), LenDenClub. He added that eventually when the sector matures, each player will try and cater to specific targets of a customer base, rather than directly compete against each other within segments.
“It’s actually good for us […] They'll (Cred) expand the market and educate. Our challenge is awareness both on the lending side and the borrowing side. They have deep pockets and will propagate the category. When a big player comes with lots of money, they typically educate the customer... It is not a one-player market anyway, since the focus is on acquiring credit worthy borrowers,” said Rajat Gandhi, founder and CEO, Faircent on the entry of large fintechs in the space.
Besides, big fintechs are looking at P2P lending as a feature to engage a captive audience, instead of building business models around the space. On the other hand, companies such as Faircent, LenDenClub, and LiquiLoans rely on two distribution channels – direct B2C leads, and leads generated through partnerships.
To be sure, the P2P lending sector has its fair set of challenges. For one, the industry that is regulated by the Reserve Bank of India (RBI) is plagued by lack of consumer trust, poor product-market fits and me-too product innovations, causing many upstarts in the space to shut shop, according to many executives in this sector.
Gandhi of Faircent points out that platforms such as Cred could run into the challenge of not having a strong base of borrowers. “The problem is that users who have credit scores of 750 or higher don’t need personal loans,” he said.
“Customer quality filter is a very important thing (in P2P lending). By design of the customer segment we target, we will get a higher demand for lending than borrowing,” agrees Cred’s Shah.
Meanwhile, players like LenDenClub and Faircent are knocking on RBI’s door to allow for secured loans in the P2P lending segment. Patel said he expects RBI to take action on the allowance over the next six to 12 months. “As I see in the next one or two years, I think P2P lending will start doing secured lending also. It's a natural process where the platforms will move it,” Gandhi added.