Wish lists have replaced bucket lists. This is a fairly familiar tale for anyone who shops online.
You go to buy something you need, but another thing catches your eye – except that it is too expensive to buy right away. So, you put that thing on your wish list – a bottomless pit of desires – till you save enough, or get a credit card.
However, less than 2% of the Indian population owns a credit card. And as anyone who has tried applying for one without a formal source of income will tell you, the process is neither quick nor straightforward. So university students who have no regular income, save for their pocket money, have no chance of getting one – those fancy gadgets will have to wait.
In the cash-strapped student who owns no real assets, a handful of Indian startups have identified their next big opportunity. The idea is simple: let people borrow on their savings account for online purchases and charge a higher interest rate for the service.
Can I buy a plane on installments?
No. That’s a bit much to ask, but many of these startups allow you to buy pretty much everything else. You can take credit to pay for movie tickets, phone bills, mobile phones, laptops and even gold jewellery – as long as the bill is less than Rs 1 lakh.
Take for instance, RedCarpet, an app that focuses solely on students and helps them finance everything from smartphones to fancy dinners and even rail tickets through its platform.
Kartik Venkataraman, one of the co-founders RedCarpet, got the idea for the app from his own experiences while trying to secure a loan for his earlier startup.
“I wanted to buy some equipment and I couldn’t afford it all at once, so I kept looking for someone to finance these things,” he said. “And the credit card companies kept declining my application despite a good credit rating, because the address on my identity proof was of a village, which is a red flag for them.”
Venkatraman launched RedCarpet in January and said the company has managed to finance a range of things. The company said there are 30,000 students on the app already and much more are likely to join as the categories of products expand.
“The usual demand is for clothes and gadgets, but people come to us with unusual requests very regularly,” Venkatraman said. “There was someone who wanted to throw his girlfriend a birthday party so he needed credit for that and then some people came to us because they wanted to buy servers for their startups in instalments.”
Who decides if someone gets a loan?
Since students do not have many assets to show as collateral, they will not be considered for credit by traditional sources such as banks. So for startups trying to bridge this gap, making sure that the people they're lending to will be good on their word is a challenge. Companies are putting safeguards and systems in place to navigate this.
Finomena, another startup launched in January, lends only electronic gadgets and also takes a down payment. Even though it requires people to submit their bank passbook copies as well as other financial documents, the company said it does extensive research online to evaluate a person and their ability or willingness to pay.
“We collect multiple data points on each customer before processing their application,” Mohit Sorout, in charge of growth at the company, told Scroll.in. “We look at people’s digital footprint, which extends from Facebook profiles to their recent purchases on online shopping sites, to determine whether they are likely to pay back the credit.”
Sorout said that though there is a huge demand for such a service in the market – the app has recorded 50,000 downloads in the last three months – it is important to let data, rather than sentiment, make the decision.
“We have about 20 people mining and analysing data about a person,” he said. “The idea is to make sure that algorithms are making the final decision and with machines, this can be done in a matter of minutes.”
Venkataraman said that RedCarpet also looks at similar indicators but for them, willingness to pay is more important than the ability to pay – and the process to determine that is different from just looking at Facebook or Twitter.
His company uses long questionnaires, among other psychological assessment tools embedded in their app, to determine a person’s “character”.
“It’s a bit like assessing someone’s character,” Venkataraman said. “If you are going to commit a fraud, you will default on payments regardless, whether the amount Rs 500 or Rs 5 crore.”
Whose money is it, anyway?
These start-ups are not to be mistaken for credit-providing companies. They actually act as an interface between banks and Non Banking Financial Companies and customers. It is a bit like how Uber connects drivers to riders – these startups connect lenders to buyers.
Venkataraman said it is not financially viable for a bank to lend less than Rs 1 lakh. These apps, on the other hand, are willing to lend anything from Rs 500 to Rs 1 lakh.
“The bank has to do lots of paperwork, follow the customer and maintain several records before deciding to lend and then repayment is also a hassle,” he said. “The bank will usually end up spending much more than it will earn from a small loan.”
This is where micro-lending, as facilitated by these startups, steps in. The process is almost entirely paperless, requires almost no personal visits or negotiations and happens in a matter of days.
ZestMoney, which operates in the same space, operates with a limited number of e-commerce websites that allow customers to pay them directly through Equated Monthly Installments – as opposed to those like RedCarpet and Finomena, which allow you to buy across e-commerce sites in India.
Guessing game
Lizzie Chapman, co-founder of ZestMoney, told Scroll.in that their data-mining team is trying to obtain a person’s creditworthiness “without using credit scores”.
“A lot of people around the world are turning away from credit cards because your limit is too high and you could go out of control and spend exuberantly,” Chapman said. “We are trying to guess our customers' affordability of credit by looking at their transactions and online behaviour.”
But how can one guess if someone will pay back a loan depending on their Facebook profile pictures?
“We definitely use social media as one of the indicators, but we cannot depend too much on it since these things can be deceiving,” she said, adding that the company asks for financial proofs as well as bank statements as part of its process.
“It’s a bit like going on a date with someone," she said. "You try to know as much as you can without seeming intrusive and then hope for the best."