Thailand’s digital lending platforms are still in its infancy but this could take off if the right moves are undertaken such as the use of data mining in order to increase the customer base.
Digital lending has recently become the latest financial trend and many new start-up companies are entering the market. Even so, digital lending still accounts for a mere 0.2 per cent of the total retail lending sector in the Thai banking system, although there is a potential for further growth
According to our research, the digital lending sector in Thailand is expected to be around 12-12.5 billion baht by the end of 2020. There are many positives to take from the fact that the sector is still in its infancy as non-performing loans in the digital lending market remain small.
But for the growth to happen there are many basic things that need to be undertaken and among them is the fact that fintech start-ups would need to figure out ways to be able to tap the database of the established financial institutions which have started to enter this segment as well.
The lack of sufficient customer data for risk profile assessment, in part, because non-bank service providers – including fintech companies – are legally barred from using credit-data sharing facilities, has hampered the growth of stand-alone fintech firms.
As a result, these digital lenders are unable to gain full access to customers’ credit data, which presents an obstacle to risk assessment of new customers, particularly freelancers and self-employed individuals, employees and retail operators, who have never drawn on funding sources from mainstream financial institutions due to their inconsistent income.
It is for this reason that most digital lenders still choose to offer their loans to existing borrowers who have a good credit history or new clients who are fixed-income earners with verified bank statements.
This could be one of the reasons why current digital credit providers in the market tend to initially grant short-term loans (1-3 months on average), with a small credit line and at relatively high-interest rates, albeit being below the Bank of Thailand’s controlled ceiling.
Hence, these loans are suitable for general customers seeking emergency cash for spending, or micro-enterprises who need emergency funding as working capital for their businesses.
Advantage – Financial Institution
The current set of rules gives an advantage to the established financial institutions who have all the access to data of the would-be customer and therefore are able to better access their credit history.
At present, large commercial banks continue to be major players in the digital lending market in Thailand as they have a large customer database. Loan approvals are still primarily based on conventional data – or in other words, income data or bank statements which reflect customers’ debt-servicing ability.
This has given the commercial banks an edge in terms of having sufficient data for customers’ risk profile assessment. Given that most Thai people have confidence in the loan services given by commercial banks, along with their ever-increasing familiarity with internet banking and mobile banking, commercial banks can focus on providing digital lending services via internet banking or mobile banking channels to appropriate target groups.
To make matters worse for start-ups major commercial banks have partnered with their business allies and other service providers on prominent online platforms like e-marketplace and large online food delivery platforms with a vast network of stores and restaurants.
Although on the surface it does not look like a big deal, this partnership allows the banks to gain access to alternative data from new target groups of potential customers for more efficient income analysis, for instance, sales turnover, purchase orders, and product refund, along with product and service reviews.
In essence, commercial banks have the opportunity to provide digital lending services to existing clients and expand their reach to potential new customers. At present, commercial banks’ focus is on customers who have good debt-servicing ability and credit records, especially middle-income earners, as well as SME operators.
Data Reliance and Digital tech investment to drive growth
The challenges that will shape the future of the digital lending landscape is its expansion into the untapped customer base and those with restricted access to digital loan products and much will depend on the following two major factors.
- Use of alternative data for credit approval:
Rather than using data related to income or sales turnover, focus should be on alternative data such as utility bill payment, mobile phone usage records or online shopping behavior on virtual platforms. If such alternative data can be utilized in the future, digital lenders will be able to access new target customers on a larger scale.
2. Investment in digital technology:
Digital lenders should prioritize their investment in digital technology such as AI, Big Data analytics and online platforms like mobile applications and websites in order to reduce operating costs while also streamlining the credit approval process. Since target customers in this loan segment are generally those in need of emergency cash, fast loan approval has much to do with their decision to borrow.
At the same time, cutting operating costs will likely induce digital lenders to charge lower interest rates. New target customers will thus gain better access to digital lending services. Additionally, the development of user-friendly mobile banking applications or websites with easy-to-use functions and efficient personal data protection systems will be pivotal in securing borrowers’ confidence and a positive user experience that will eventually lead to familiarity in and continuous use of digital lending services.
While these two factors could prove beneficial to the expansion of the digital lending business, much still depends upon economic circumstances that will directly or indirectly impact customers’ debt servicing ability and credit scoring.
To us, although Thailand’s digital lending remains in an initial phase of development, its growth opportunities remain large, especially when the country begins to emerge from the present COVID-19 crisis.
Also, once digital-lending service providers gain sufficient data and build up enough digital-technology capabilities, market competition will help drive these players to more aggressive and thus lending a hand to those underserved in the market.
