What is the idea?This week's 1001 startup idea is about establishing a company to provide small, short-term loans via a mobile and web-based application. The startup will be a finance company which shall provide loans to the short term small loan borrowers. It will cater to the market of Individuals who do not have a credit history or have a bad credit history and are employed with a consistent salary record.
The startup will work with employers of the borrowers in this regard. The employer will register with the startup and provide access to employee's salary records to the startup upon request from the employee. The employee will also upload the bank account statement to show a track record of funds utilisation by the employee. Once the loan is approved, the employee will authorise the employer to deduct the loan instalment from the salary and pay the startup.
Market DefinitionThe startup will be on par with a payday startup and provide small, short-term loans to individuals to meet their one-time or regular expenses. Payday lending across the globe is a huge industry.
According to Community Financial Services Association of America, Industry analysts estimate 20,600 payday advance locations across the United States extend about $38.5 billion in short-term credit to millions of working Americans in 19 million households who experience cash flow shortfalls. It also states that in addition to being a valuable source of credit for many consumers, the payday loan industry makes a significant contribution to the U.S. and state economies employing more than 50,000 Americans who earn $2 billion in wages generating more than $2.6 billion in federal, state, and local taxes.
A report titled "The State of Online Short-Term Lending" by G. Michael Flores, Bretton-Woods, Inc. which analysed 15.3 million records from three credit bureaus from 2012-2014 and 3.7 million single payment and instalment loan records from seven lenders from 2012-2014 stated the following facts:
For Single Payment Loans:Average median loan amount is $428.Average median loan cost is $113.Average median loan term is 20 days.Average median annual days indebted are 73 days.
For Instalment loans:Average median loan amount is $667.Average median loan cost is $690.Average median term is 148 days.Average median annual days indebted are 135 daysThe report also quotes Jeffries report, which stated that demand for the small dollar, short-term credit remains significant in the last few years with a modest reduction of 8 percent from $49 billion in 2012 to $45 billion in 2014.
Competitor AnalysisThere are a lot of payday lenders who have been providing short-term small loans. There has been a huge dissatisfaction amongst their customers, and various regulators across the globe have come down heavily on these lenders for using unfair practices. In fact, Google in 2016 banned Payday lender advertisements. There is a vast space to help the lower income category with the use of technology. A company called Squirrel for example, which calls itself a ‘financial wellbeing platform' also partners with UK employers to help employees budget, save and pay bills directly from their payroll. However, it does not offer the loan product. The unfair practices used by Payday lenders and the crackdown of regulatory authorities on them have led to the rise of various fintech startups which are trying to revolutionise and disrupt this broken industry. Companies like Lenny and Uberima have been trying to solve this problem by providing attractive rates and fair schemes to borrowers.
Pain Point & Target AudienceThe target customer market for this business is the "short term small loan borrowers (up to USD 1500) with a bad or no credit history falling in the lower income group". The customers have been reaching out to various payday lenders to meet their short-term money needs. These payday lenders have been taking advantage of financial condition and offering loans at very high interest rates which sometimes goes up to 400%.
Value PropositionThe startup not only provides borrowers access to short-term funds but will also provide other benefits like customised repayment instalment plan and much lower interest rates as compared to payday lenders. And these loans will be offered without any security. In addition to this, by syncing with employers, it can ensure hassle free repayments via instalments by deduction from the salary.
Business ModelThe startup will offer loans to lower income group customers and make money by way of interest earnings. This is a direct business to consumer model where there is a huge risk of non-repayment of loans. Therefore, the tie-ups with employers are necessary to mitigate the possibility of default.
Way to marketThe great thing about this business is that the marketing can happen by tying up with corporates, as one tie-up will bring access to all its lower income group employees as potential customers. Therefore, in the first instance, the startup will have to focus its energies on tying up with corporates. It should target a financial hub as its starting point or an industrial area where factories are located and tie up with some of the companies in the area.
MilestonesThe startup should target disbursing loans to at least 5000 customers in first one year deploying all the initial capital and should ensure a steady circulation of funds. Once the startup can successfully penetrate in one market, it can target the other markets by raising funds.
Investment Needed For PrototypeFor testing & building the prototype, pitch for raising 200K USD from angel investors or incubators. There is a big attention towards fintech startups, and that has lead to a lot of fintech incubators and accelerators being set up across the globe. The startup could reach out to one of these incubators like FinTech Innovation Lab, Barclays Accelerator, Fintech Sandbox, Y Combinator, etc. The majority of this money needs to be used for lending to the borrower, and rest should be used for building the platform.
Team CapabilityYou would need to have a micro-finance expert, an economist and a tech expert in the team. In addition to this one needs to build an in-house credit rating algorithm to ensure risk assessment of each borrower, for this you would need a data sciences expert.
Investors / Expert TakeThere is huge investor interest in Fintech arena. Forbes in September 2016 reported that over 1,000 Fintech companies (startups and historical incumbents) that raised over $105 billion in total funding were worth nearly $870 billion in current value. Forbes also stated that "The Fintech scene in Asia is also growing rapidly, led by India (49) and China (31) due to their population size (2.7 billion people) and a fast-growing middle class. Australia is also a fertile ground for the development of
Fintech companies (24) with its friendly regulatory environment". In case you are interested in launching a business on these lines, please drop us a note to Yostartups.com and we will be more than happy to help.This is a niche product which has the potential of disrupting the forever prevalent payday lender industry. However, the startup would need to ensure that it successfully implements the model at a small scale, so that the investors see the potential for scaling up.
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