Fintech Lending 101 Lesson 2 – Client Origination in the Age of Digital Lending by Greg Krasnov

“Shallow men believe in luck. Strong men believe in cause and effect.”  

(Ralph Waldo Emerson)

Loan origination is the process by which a borrower applies for a new loan, and a lender processes that application. To understand origination, we need to introduce two additional concepts: “Channel” and “Front End.”

“Channel” is a method used by a company to market its product to consumers.  Historically, lenders have used the following channels to sell loans:

  • Branch.  The predominant traditional bank format – high street branches.  Typically, 100+ sq.m., including full functionality of loans, deposits, and cash transactions.
  • Branch Light.  A “kiosk” version of mini-branch presence, typically without cash teller functionality.  Could be a booth in a retail mall or a smaller high-street storefront, ca. 50 sq.m.
  • Retailer POS.  The so-called “sales finance loans” (loans for the purchase of consumer goods) are normally originated through lender presence at a retail store, typically home electronics or furniture stores.  The in-store lender booth can be manned by the lender employees or by the retailer employees working under a white label arrangement with the lender.
  • Agents.  Includes any organized networks of third-party individuals selling bank’s loan products, such as mortgage brokers, or other “credit broker” networks.
  • Direct Channel.  Includes outbound and inbound telemarketing and direct mail.  This tends to be the predominant channel for cross-selling and up-sell of additional products to existing clients.  
  • Advertising.  Most popular modes of loan advertising include TV, radio, billboards, and outdoor campaigns (flyers/promoters, etc.)  Advertising is used to increase foot traffic to the Branch, Branch Light, and Inbound Contact Center channels, as well as to the partner retailers.

The digital age has introduced a new type of channel to this mix:  Digital Marketing and E-Commerce.  A loan customer now increasingly starts his journey by searching online.  In the mature markets, digital marketing now accounts for ca. 70-80% of total advertising spend for retail financial services, and emerging markets are rapidly evolving in the same direction.  The key channels of customer acquisition in the digital domain include the following:

  • Google & Facebook.  Ca. 60% of the digital marketing spend goes towards ads on Google (44%) and Facebook (18%) (Source: Statista).  A lender can buy ads on these platforms, and have its offer flashed at the client at appropriate points of interest.
  • Financial Comparison / Lead Generators.  Also known as “financial marketplace” sites, these are the websites/apps that enable the customer to compare many lenders offers across various product categories.  Some of the leading ones in the region include GoBear, CompareAsia, Cekaja in Southeast Asia, and BankBazaar in India.  A lender would typically pay on a per-lead basis to these sites.  Some of the sites are now developing a more ecosystem-based approach to their lender offer to increase their value for lenders.  For example, GoBear has recently entered into a partnership with CredoLab, the SEA market leader in alternative scoring, to provide lenders with pre-scored leads, which will lead to a significant increase in conversion rates by introducing a “pre-approved” offer for the client.
  • E-Commerce Sites.  By partnering with the rapidly growing e-commerce sites, lenders can take their Sales Finance offer into the digital retail domain.  Some of the better-known players in this space in Southeast Asia include Kredivo and Akulaku.  The structure of lender cooperation with the e-commerce sites on the Sales Finance product would not be dissimilar to that previously done offline in the Retailer POS channel.
  • Marketplaces.  Integration with various B2C marketplace sites can place the loan offer at a point of highest relevance for the consumer.  For example, our portfolio company Homsters builds performance-based marketplaces for new real estate developments, monetizing through lead generation for both real estate developers and mortgage banks.  Other examples of marketplace integrations include partnerships with new or used cars or motorbike sites.

“Front end” is a term used to refer to the electronic form of submission of the customer application to the lender.  In the “paper” days of 20th-century consumer lending, the client would submit his application on paper in person through one of the channels, or by fax.  Subsequently, lenders introduced electronic application forms, that the bank’s representative would fill in on behalf of the client and submit directly to the bank system through the network connection.  These electronic application forms ultimately took the shape of a browser-accessed form or a smartphone/pad app.  

Today, the lenders are increasingly taking the intermediary person out of the process of filling out the “front end” application form.  The client can fill out the form himself in the bank app, the financial comparison app, or can be led to a landing site with the application form from the e-commerce site.  The front-end interaction then typically takes place on a device owned by the potential customer.  This enables the banks to use the data contained on the customer’s device for credit risk assessment.  This is, for example, the approach being taken by our portfolio company CredoLab, which uses customer device data for credit assessment.  In an environment with scarce credit bureau data, this approach has proven to be the winning one for financial inclusion, establishing CredoLab in the last two years as the undisputed market leader in Southeast Asian alternative scoring/risk assessment space for consumer lending.

While digital technology is altering the Origination landscape for digital finance, it has to be remembered that the consumer lending business is highly cyclical.  And the business models based on pure-play Origination are at the highest risk during a macro downturn, as banks tend to switch off their new loan origination to deal with growing credit risks in the portfolio.  Any player, digital or offline, relying on origination-based revenue stream is thus at substantial risk in an unfavorable macro scenario.  Personally, as an angel investor, I lost a substantial amount of money on two pure-play Agent model originators in Europe, that went bust in the liquidity squeeze of 2008-09.  Today’s investors getting excited about such pure-plays in the digital domain would be well served to heed the lessons of the past, as the global economy now nears the global peak.

Greg will be the trainer and panelist for the AngelCentral Deep Dive Series Webinar – Early Stage FinTech Investing in the Era of COVID-19: What’s Hot and What’s Not! Join us for the session here

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