The underbanked is a characteristic of people or organizations who don’t have sufficient access to mainstream financial services offered by retail banks and consequently often deprived of banking services such as credit cards or loans. The concept of money lending to unbanked has emerged in recent years, where government, NGOs and private sectors invest capital and efforts in highlighting the idea and making it a part of the formal financial system.
It is believed that these financial inclusions will reduce corruption and fraud by enabling governments to remit funds to citizens in a much safer way. The growth of the digital payment system in the last decade has been phenomenal with innovations like mobile money, UPIs, and projects like Aadhar and digital India, which are still ongoing.
The Reserve bank of India introduced the concept of payment bank. The idea behind the concept is that payment banks can access saving & current accounts, issue debit & ATM cards, and can have net-banking & mobile banking, but will only accept restricted deposit and can’t issue loans or credit cards.
Challenges Faced in Lending to Underbanks
The process of loan to underbanked is a challenge in itself. In the traditional lending process, the physical visits and manual work of filling applications take several days. The underbanked lack three critical assets;
- They have no credit history since they have never opted for credit before.
- They don’t own any assets that can be used as collateral.
- They lack a steady income since they work in the informal economy.
Another challenge faced here is the fact that banks and financial institutes do not find it profitable to loan a small amount of money. Unfortunately, that is what the under banked require; small amounts that are payable.
Challenge with the digital lending processes, even with quick decisions is that they look for credit history or some customer records with a centralized credit bureau or financial institute. Digital lending is known to streamline the lending process and is more feasible and efficient, but still falls short to meet the requirements.
Collaborative Lending: The Answer to lending underbanked
The progress in terms of credit and loans resulted in Collaborative Lending — a process where an existing partner collaborates with a non-existing partner. The person lending money uses the underwriting know-how and regulatory framework along with the lending license. Collaborative lending enables an efficient and economical process as the partner supplies credit lend, thereby yielding a meager cost of customer acquisition for the lender.
The lender accepts validated customer data from the partner, which reduces the operational cost with margins. The lender distributes the funds instantly and directly through the partner, which reduces the risk of fraud.
Why Collaborative Lending?
Collaborative Lending can be appropriate for all unsecured loans.
- When an unbanked person uses a mobile money application and does not have sufficient balance to pay.
- When an individual purchases a home appliance and the merchant offers that purchaser a bank loan to finance the purchase.
- When a small business or MSE wants to buy from their current supplier.
- Collaborative Lending is time-saving. A person gets credit whenever needed at the lowest possible prices.
- The partners reduce customer churn and increase their customer value through additional income related to credit.
- Lenders have access to a new target market of potential borrowers which can be very efficient and deliver a higher return on equity(ROE) than existing digital or traditional lending.
Collaborative lending seems to be an apt solution for paying the underbanked, which also works in favor of all parties involved. The borrower can meet the lender and agree on the terms of personal loan, which bank has denied them. The personalized loan through this concept has proven to be successful in countries like Japan, China, Netherlands, Italy, etc.