It is the last week of the month, and you need money. This is your first job and so can’t rely on savings yet. In such a situation, you’d probably ask friends or family for help till the next salary arrive. But, it is a different story these days.
Easy credit is the way to go for the young as fintech companies line up products especially crafted to meet their day-to-day expenses. While this credit facility can be used without cost if one is diligent about repayments, failure to do so can lead to penalties, EMIs at high interest rates and a poor credit score at a very young age.
At a glance, these are short-term and low-ticket credit products with repayment cycles of a month or less. They can be accessed via a mobile device, but some companies are also offering physical cards to be used at merchants that do not yet accept digital payments.
The population in the range of 18-29 years is usually the target. They get initiated into the credit culture with a digital Know Your Customer (KYC) process and pre-approved limit, which is then raised depending upon their spending habits.
"The segment is potentially of a 60 million customer base. I'm talking about targeting startup employees, graduate students, freelancers and small business owners," said Rajan Bajaj, the founder and chief executive officer of SlicePay. The platform has an active customer base of 180,000 whereas about 260,000 are in the waitlist for its card. The company is adding customers at the rate of 25 percent each month and is looking to touch 2 million customers over the next three years.
The ease of payments and readily-available credit is what drives this growth. Most of these customers may not be eligible to get a credit card or simply do not go for it due to the stigma associated with it. But by bringing merchants and customers together on a platform, fintechs have found a way for the tech savvy to plug the gap between their income and expenses.
"Customers have a digital footprint which is useful in deciding whether the customer is credit worthy or not," said Akshat Saxena, co-founder, ePayLater. The app provides 14-day credit for each transaction, instead of bunching them up at the end of a cycle. ePayLater also offers a digital credit card.
The transaction patterns observed by these platforms shows that youngsters use the apps to pay for food, entertainment, travel and utility payments. Customers prefer to club payments across categories and pay up at the end of the credit cycle in one go. LazyPay, a product by PayU Finance recently announced tie ups with digital streaming platforms too.
"Today, the way this generation consumes things is very different from earlier. They are comfortable with digital and expect convenience. For instance, we see customers who have a credit card but still use LazyPay to complete their transactions," said Pallav Jain, the country head at PayU Finance.
LazyPay runs on a 15-day repayment cycle and the initial limit is set as low as Rs 1,000 for new customers. This limit can be raised to Rs 15,000 per cycle. The platform has 1.5-2 million customers, mostly aged between 20-35 years. LazyPay is targeting to acquire 10 million customers in 12-18 months.
LazyPay has also started providing personal loans of up to Rs 1 lakh via PayU Finance, which is a registered non-bank finance company (NBFC). "We are looking to raise this limit. We are in talks to tie up with more partners as well," he said, adding that the app is getting 8,000-10,000 personal loan applications a day.
Brands have also tapped into these apps to expand their reach. Next time you buy a movie ticket or order food, check the offers' tab before paying the money and you will see a list of discounts and cashbacks that can be availed depending upon your choice of payment.
"That's a key proposition actually, for customers as well as brands. Most of our customers are coming in and using the app for the sake of offers and rewards," said Bajaj of SlicePay.
But, what happens when customers do not repay? Constant reminders via calls, messages, emails and a late fee of Rs 10-30 per day are the tools that are put to use by these apps. Some may even report the behavior to credit bureaus impacting the individual's credit score.
As of now, these apps are pretty satisfied with the repayment rate. "Normally, it is assumed that in a product like this you must be incurring a very high loss but the delinquency rate is well below 2 percent and continues to improve every month," said Jain.
"We are fairly conservative in our disbursals and the non-repayments are below 1 percent," said Saxena.Like credit cards, some apps offer an option to convert the amount due into EMIs at an interest rate as high as 30 percent annually. In such a scenario, the objective of using short-term credit to manage personal finance clearly backfires. Young individuals could end up with EMIs not meant for building assets like home or vehicle purchases but incurred for menial expenses that could have easily been avoided.