Why is every app trying to become a microfinance app?
In today's Finshots, we explore the rise of microfinance in India and why it's becoming a popular feature in consumer apps.
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The Story
Amazon recently launched a feature allowing users to invest in fixed deposits and mutual funds through Amazon Pay. A decade ago, this would have been unthinkable. eCommerce apps were expected to sell products, deliver food, or book rides, not manage savings or lend money. Yet, here we are.
Microfinance has become a common feature in consumer apps. To understand why, let's look back at how apps initially monetized their users.
A decade ago, consumer apps in India focused on distribution. The key to success was acquiring users quickly, cheaply, and in large numbers. Discounts, cashbacks, free deliveries, and aggressive marketing were justified by the belief that scale would lead to profits.
However, this belief was soon shattered. Having users alone didn't guarantee conversion, and competition and capital scarcity slowed growth. Companies realized that relying solely on selling goods or services was a weak business model.
This led to a shift towards microfinance. Unlike commerce, financial products create recurring interactions and predictable revenue streams. Savings and investment products anchor users over long periods, making it harder to switch apps unless something dramatic happens.
Companies like Amazon, Airtel, WhatsApp, and Ola are now offering financial services through partnerships with regulated institutions. They operate between users and financial institutions, filling a gap in India's financial system.
India's Financial System Gap
India's financial system has a well-documented gap between formal banking and large sections of the population. Traditional lending relies on income proofs, collateral, and credit histories, which many people lack. Banks are constrained by regulations and cost structures, making it challenging to serve these segments profitably at scale.
Non-Banking Financial Companies (NBFCs) don't face the same constraints, but they lack a good distribution system. Apps like Amazon, Ola, and Airtel have exactly that, continuously observing user behavior and data.
This data allows platforms to underwrite small-ticket credit quickly by partnering with NBFCs or banks, without the need for branches or loan officers. Apps now do what physical microfinance institutions once did through software and data.
Buy-Now-Pay-Later (BNPL) Products
As a result, BNPL products have become popular. They reduce friction at the point of purchase and encourage users to stay within a platform's ecosystem. From the app's perspective, credit becomes a tool to accelerate commerce while building a financial relationship that can be monetized repeatedly.
Co-Branded Credit Cards
Co-branded credit cards have also proliferated, extending the platform's influence beyond its app and into a user's broader spending behavior. Each transaction reinforces brand presence, generates interchange income, and deepens the financial link between the user and the platform.
The Risks of Embedded Finance
While embedded finance offers benefits, it also comes with risks. The ease of credit availability changes how borrowing feels, making it less friction-filled. Traditional loans involve evaluating debt, but embedded credit removes this friction, breaking repayments into small installments, and deferring charges. This can make borrowing feel like convenience rather than obligation.
However, overuse of BNPL products can lead to difficulty tracking multiple loans across different apps. Pricing opacity is another issue, as effective annualized costs can rise sharply once fees, penalties, and delayed payments are included.
Systemic Risk
Most consumer apps operate lending through partnerships, creating misaligned incentives. Platforms are rewarded for growth and engagement, while credit risk is managed by others. When economic conditions worsen, defaults rise, and lenders pull back, reducing access to credit and locking users out.
The Positive Impact
Despite the risks, app-based credit can serve as an entry point into the formal financial system for many first-time borrowers. Responsible usage and timely repayment help build credit histories, leading to cheaper loans, mainstream banking access, and better financial products.
The Future of Finance
The future of finance is likely to be deeply embedded and largely frictionless. Whether this improves financial well-being or undermines it depends on how transparently these products are designed, how carefully they are regulated, and how consciously users engage with credit that no longer feels like borrowing.
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