Fintech has become an integral part of India's e-commerce landscape over the years, providing digital payment solutions for online shops. A NASSCOM report suggests that the Indian fintech market is expected to reach $31 billion by 2025, with e-commerce being one of its key drivers.

Platforms like Amazon and Shopify developed their payment systems, with Amazon Pay reportedly having over 5 million daily transactions in India. While others partner with fintech companies to establish payment wallets, secure online payment gateways, or enable UPI transfers (NPCI reporting more than 3 billion UPI transactions in a single month).

Despite their different approaches, recent developments in consumer lending in e-commerce suggest a shift in the system.

New Age Lending in India

For the past three years, credit card spending in India has remained stagnant at INR 140,000 per year, limiting access to medium and large-ticket goods. To avoid high-interest rates and fees associated with credit cards, customers are turning to simple and affordable financial services, including new-age loan methods with little to no interest.

The growth of e-commerce is driving the emergence of these lending arrangements, with Deloitte projecting an 11.4% share of the Indian retail sector by 2026. No-cost EMIs and Buy Now Pay Later options are transforming shopping habits, allowing customers to make immediate purchases and delay future payments for products like furniture and appliances, providing financial flexibility without hardship.

The Emergence of E-commerce Lending

Consumer fintech has witnessed significant growth in digital lending, and now prominent players in the e-commerce and consumer services sectors are joining the trend. Recent announcements from Flipkart and Swiggy highlight their foray into the lending domain, signaling an expansion of the digital lending opportunity beyond traditional fintech. Swiggy has set its sights on the co-branded credit card segment. Flipkart is venturing into the personal loan business, rivaling its sister company PhonePe in this major push into lending. These developments showcase the evolving digital lending landscape and the widening scope of players entering this space.

Origin of the Concept: Who Set the Precedent?

The concept of e-commerce companies and retailers venturing into banking services is not entirely new, as UK supermarkets have set a precedent. Tesco, a prominent grocery giant, has been operating Tesco Bank since 1997, offering various financial services such as deposits, credit cards, loans, mortgages, and insurance. While Tesco Bank has gained over 6 million customers, US retailers have slowly implemented such a comprehensive financial services system.  

However, retail credit cards have served as a significant revenue stream for some retailers like Macy's and JCPenney. Other UK retailers, including Asda and Sainsbury's, attempted to establish their own financial services divisions but faced challenges due to the strong incumbency of central retail banks and the capital requirements of running a bank. In regions with limited credit access, fintech holds promise for e-commerce companies.

Case In Point: Flipkart Jumps Into the Digital Lending Landscape

Flipkart, owned by Walmart, has recently announced its collaboration with Axis Bank to offer personal loans on its e-commerce platform. With a customer base of 450 million, Flipkart will distribute loans up to Rs 5 lakh, repayable over three years. The move aims to enhance customer lifestyles and empower them with increased purchasing power. The platform already provides financing options such as Buy Now Pay Later (BNPL), Equated Monthly Installments (EMI), and co-branded credit cards. Axis Bank sees the partnership as an opportunity to expand its lending services to a wider range of customers.

Leveraging the combined user base of Flipkart and Myntra, shopping data and behavior will serve as key differentiators for Flipkart. In the personal loans space, Flipkart faces competition from players like Navi, CRED, Paytm, and others.

Why are E-commerce Companies Foraying into Lending?

E-commerce companies partner with fintech and provide consumer lending for several reasons, the most notable ones being:

• Recognizing and addressing customer frugality and credit aversion in Indian customers
• Reducing the immediate financial burden by spreading out payments over time, ultimately increasing transaction volumes
• Enabling credit and enhancing purchasing power by granting customers liquidity when needed
• Building a loyal customer base through added convenience and benefits
• Targeting credit-worthy and tech-savvy consumers who become the core user base for financial services
• Selective co-branding strategies to drive customer acquisition, loyalty, revenue growth, and a competitive edge in the market
• Boosting spending and revenue growth for e-commerce companies by driving higher transaction values
• Reshaping the online shopping landscape for diverse customers by offering financial services alongside core products

Case In Point: Swiggy to Enter the Arena with Co-branded Credit Cards

Swiggy plans to launch a co-branded credit card in collaboration with HDFC Bank. The brand will offer flat discounts, special offers on its hyper-local delivery services, and additional discounts on Dineout and Swiggy's restaurant bill payment service. The credit card initiative aims to increase customer retention, generate revenue, and support Swiggy's expansion into a larger e-commerce platform while providing banks access to a large customer base and younger demographics. Swiggy has been actively diversifying its business, piloting services like 'Maxx' and 'Minis' for home goods and direct-to-customer brands. Swiggy aims to grow its gross merchandise value (GMV) and compete effectively in the market by focusing on profitability. The co-branded credit card is expected to be powered by Mastercard. Swiggy's rival, Zomato, had previously launched co-branded credit cards but discontinued the service in April.

The Role of Balance Sheets in Profitability

Balance sheets, often seen as a necessary evil, play a vital role in the partnership between fintech and e-commerce companies venturing into lending. While rising interest rates pose challenges, banks have an advantage with their balance sheet provisions and deals with legacy lenders. Fintechs should embrace balance sheets to control their fate and enjoy improved unit economics. Obtaining a banking license enables them to increase net interest margins and retain the spread, leading to greater profitability. It's a strategic move that empowers fintech and fuels their journey toward success in the lending landscape.

Case In Point: Arzooo Launches Lending Service for Offline Retailers

Arzooo, a growing B2B Retail Tech platform in India, has also introduced Arzooo Pro Finance, a fintech service aimed at elevating the businesses of Consumer Durable retailers. The new offering addresses offline retailers' common pain points, such as boosting in-store sales conversion and upselling higher-value products. Arzooo is adopting a digital-first approach to remove barriers hindering the growth of offline retailers by providing innovative checkout solutions that integrate payments, consumer finance, and bank-led offers. Arzooo's Pro Finance aims to empower retailers to expand their businesses and offers financial inclusion for new-to-credit shoppers. The service offers diverse payment options, instant consumer finance, and exclusive bank offers through partnerships with leading banks.

Closing Thoughts

The lending facility provided by e-commerce companies and retailers signifies a significant development for both fintech and e-commerce. It introduces new avenues for financial inclusion and convenience, allowing customers to borrow funds for their purchases. This offering enhances the future of fintech by expanding its scope beyond traditional banking institutions and bringing financial services directly to the e-commerce landscape.

However, the regulatory landscape surrounding payment services is an important aspect to consider. To operate a wallet and offer UPI services as a Third Party Payments Provider (TPAP), a company must hold a PPI (Prepaid Payment Instrument) license and a PSP (Payment Service Provider) license, respectively. As the fintech and e-commerce sectors and their partnerships evolve and grow, regulatory frameworks will likely become more stringent.

E-commerce companies must also exercise caution about asset quality and Non-Performing Assets (NPA). To mitigate risks and maintain financial stability, they should carefully assess borrowers' creditworthiness, monitor loan repayments diligently, and implement robust risk management frameworks.

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