FINANCIAL MARKET AND INSTITUTION

ASSIGNMENT

PRESENTED BY
MOHD ALTAF BAGWAN

707

PAWAN KUMAR THAKUR

703

THIRD SEMESTER

SECTION- GH

MBA GENERAL
CONSUMER FINANCE

AN INTRODUCTION

The buy-now-pay-later culture is still fairly nascent in India. Even today, there

exists a generation and segments of consumer who might prefer to accumulate funds

rather than take it on DEBT. But then again, the choice is a recent one. Earlier, in our

capital scarce economy, there was not enough credit available for industry, let alone

for the household sector. Today the corporate sector is flush with funds and banks as

well as CFCs seem to have a surfeit of funds to lend. Demand for industrial leasing

has slumped, since industry has relatively larger and easier access to funds for

purchase of capital equipment. As a result, increasingly numbers of leasing companies

are diversifying into CF in a bid to attract borrowers.

On the other hand, a manifestation of the Government’s ongoing liberalisation

coupled with general economic growth has attempted to upgrade the status of

consumer claiming that consumers have been made a hub around which corporate

growth is being planned. It needs security to access its effectiveness and to measure a

gap between theoretical philosophy and practical considerations with regard to CF

activities in India. It is true that today, the consumers have relatively a wider range of

alternative products to choose from compared to the past. Across the board in

practically number of sectors like cars, electronic items and white goods, there has

been a tremendous surge in production. Cars, colour televisions, cellular phones,

audio equipment, as electronic gadgets are some of the products, which are, made

available to consumers. Besides, better utilisation of industrial capacities, new ones

are also being created at a rapid pace never seen before, all vying for the consumer’s

attention. Consumer Financial Services (CCFS) in form of a 50:50 joint venture with an
expected target of business of more than Rs. 250 crore in first two years i.e. till 1996.

C ‘Buy now pay later’ culture is evolving slowly in India. It is being perceived

that the families belonging to middle income groups in India have been traditionally

debt aversive and consider debt as stigma? The indebtedness was looked upon as a

negative development in India for a very long period of time. The social taboos

attached to borrowing have also affected consumer-financing activities in an adverse

way. The important feature observed among consumers/ families in India is that they

save and thereafter plan to purchase a consumer durable productiBut now, the trend

has started to change slowly. In India, we come across consumers who are losing their fear of
borrowing and riding the waves of consumerism on surfboards of CR)

One of the important and noteworthy point worth mentioning here is that

younger families especially opt for savings to go into high-return investments like ’u-— / stock
market and opts for buying of consumer durable products mainly through CF.

Along with buying of a home, they prefer CF also for buying of home appliances like

a television set, a washing machine, a fridge, and a music system. These are the

members of a growing breed of normally conservative middle-class Indians who are

shedding their inhibitions about opting for CF loans for not only cars but also even for

household consumer durables^, It is something that their parents would have probably

never dreamt of doing. According to them, despite the high interest cost of the loans,

it makes better sense to pay a fixed monthly amount and at the same time, put their

other savings to better use to fetch better returns on investments in primary market

issues and mutual fund units.XApart from consumer financing institutions, now banks

have also entered in the f:ra^ The banks are already lending to their customers against

collateral like fixed deposit certificates, jewellery and real estate. These banks are

now allowed to enter hire purchase and leasing activities of their own and also
through only their subsidiaries A To illustrate, Citibank has entered in consumer

financing activities in 1980s

CONCEPT OF CONSUMER FINANCE: X ^The consumer finance is a win-win system in

which every one wins.

For the consumers it is an opportunity to upgrade standard of living in the here

and now instead of waiting for years of savings to accumulate.

For manufacturer, consumer finance stimulates demand and brings down

inventories.

For dealers it is one type of sales booting. For finance company it is profit

generation. /

We find use of CF going back from prehistoric times. We could found evidences that ancient
societies have used consumer finance (CF). It has grown at an

astounding pace since World War II. In USA it is widely used concept. In India it is at

fairly nascent stage.

TYPES OF CONSUMER FINANCE:

The types of consumer finance are categorised as following: -

(A) Based on Schedule for Repayment:

It has been further divided into two types of consumer finance.

A (i) Instalment Payment:

This CF usually arises from the purchase of high priced items viz., TV,

washing machine, and freeze, etc. The buyer does not have to pay the entire amount at

once. Repayment is then made in instalments over several months until the debt is

retired. The number of months may be 6, 12, 18, 24, and 36 as case may be.

A (ii) Single or Non-Instalment Payment:

According to this scheme customers are required to repay entire debt in

single or one payment.

(B) Based on Approval for Money Transaction:

This type of CF is further divided into two types of consumer finance:

B (i) An Open Ended Consumer Finance:

It is available up to some pre-set amount without approval for each

transaction. The borrowers may apply for initial approval from a lender agreeing to

the terms of the CF and repayment.

Generally after approval customer receives an identifying number that can be

used whenever customer needs credit. We can consider credit cards as an example in

this category of consumer finance.

B (ii) Closed Ended Consumer Finance:

It requires approval for each transaction. That amount can be added to the

previous credit financing without a new agreement between customer and lender.

(C) Based on Mode of Payment:

This type CF has been also further classified into two sub-types

C (i) Direct Money Consumer Finance:

This CF is extended to consumer by lending agencies of finance institutions.

The consumers can use the borrowed money to purchase the desired items.

The various plans available to consumers in this category of CF are as

follows:

(a) Check Credit Plan:

It is a form of open-ended consumer finance, in which lending institutions

especially a bank approves a predetermined credit. When customer overdraws

account, it automatically triggers to loan. So long as the payment schedule is met and
authorised limit of CF is not crossed customer can continue to increase the loan.

(b) Instalment Loan:

It is often used to meet needs over a longer period than the single payment

loans for several years like 1,2 or 3 years. Periodic payment tries to match customer's

ability to repay with size of the loan to be satisfied. Finance charges for these loans

depend on the source, amount and timings of loans as well as value of collateral

offered.

C (ii) Retailer Consumer Finance:

The retailer CF is directly related to sale of product. Seller of goods and

services offers it. The retailer CF has been further classified into three categories as

follows:

(a) 30 Days Consumer Finance:

The amount owed must be paid within a set time, usually thirty days. The

charge for credit is included in price of product for service. Most of Indian families

use this type of retail credit CF for purchase of milk, newspapers, food grains,

monthly rent payment to servant, washerman, etc.

(b) Revolving Consumer Finance:

It helps customer to continue purchases and pay whole or a part of the balance

owed each month. It has certain advantages and disadvantages. First, it enables

purchase of a large rupee volume due to extended repayment period. Second, this

account is easy to use. Once the account has been opened, the customer is free to buy

without having credit rechecked with each purchase.

The disadvantage of this type of CF is that because of the ease and

convenience of purchase, customer may over purchase and thus he remains

continually in debt to the retailer. Second, the rate of interest ranges from 1.5 per cent

to 2 per cent per month.

(c) Bank Credit Cards:

The first bank credit card of the current type was issued in 1951 by Franklin

National Bank of USA. The bank credit cards are convenient because of their wide

acceptability and their centralised billing system regardless of where purchase is

made. There is only one monthly bill. Master card, BOB card, StanChart, Citibank

Card, are examples of bank credit cards.

SOURCES OF CONSUMER FINANCE:

The major sources of consumer finance are as follows: -

(i) Commercial Banks:

The commercial bank offers loans to qualified individuals on secured and

unsecured basis. Secured loans are based on security of collateral like cash surrender,

gold, jewellery, real estates etc.

The unsecured and single payment loans require, only a customer’s signature

on a loan paper. The loan papers have contents like repayment schedule, amount, due

dates, etc. It includes various types of loans like the regular loans, credit cards and

check credit.

The important advantages are as follows:

Mostly the rates of interest charged are usually lower compared to other CF

schemes.

It increases credit rating with a bank in case of favourable repayment without

default.
The important disadvantages are as follows:

It has rigid requirements to qualify for availing of consumer loans.

It often avoids small-unsecured loans, as they are not perceived to be profitable to

handle by the commercial banks.

(ii) Consumer Finance Companies:

These companies have specialised in offering of small loans to consumers.

They are commonly known as ‘small loans’ companies or personal Finance

companies. It includes leading companies like Countrywide, Whirlpool, Apple, MAS

finance, and Kotak Mahindra.

The important advantages of this source are as follows: -

■ One can obtain small loans from CFCs.

■ It is easier to qualify for availing consumer loans for individuals.

The important disadvantages of this source are as follows':

The rates of interest charged are higher and they charge flat interest rates (16 to 20

per cent)

■ The consumers are required to pay high processing fees.

(iii) Credit Unions:

It is a group of people. They have a common interest of activity so they join

together to form a co-operative for giving loans for purchases to their members. A

borrower must be a member of credit union. The credit unions are set up on the basis

of caste, employee, religion, nature of work etc., in India. The co-operative credit

unions are very popular in India.

The important merits of credit unions area as follows:

-> The rate of interest is usually lower than other sources of consumer finance.
-> They offer small loans based on a signature only. They do not need any collateral,

and guarantors.

The key demerits of this source of consumer finance are as follows:

-+ Many customers may not like to reveal their financial needs to other colleagues.

-> If customer is not or can not become a member of credit union he/ she can not get

loan from it.

(iv) Savings and Loan Association:

They mainly focus on home mortgage loan. It could offer loans only to those

people who have saving account with the association. The consumer loan is provided

against the account. It is also known as an account secured loan. The rate of interest

charged is usually lower compared to CFCs but it is higher in relation to those

charged by other sources of consumer finance.

■ Life Insurance Corporation:

Life insurance policyholders can avail a loan in the amount of cash surrender

value plus any accumulated dividend or interest from the insurance company. Such

loans are called policy loans because the life insurance policy serves as collateral.

The important advantages are as follows:

■ It is simple and easier to obtain loan from Life Insurance Corporation.

-> Their interest charge is based on outstanding loan balance.

■ It offers flexible repayment schedule.

The important disadvantages are as follows:

An amount outstanding is deducted from benefits paid to the policyholder in the

event of death of insured.

-► A customer must be a Life Insurance Policyholder for getting loan.

(v) Pawn Broker:

It is a last resort in a money crisis or when customer’s credit does not permit

borrowings from any other sources. Customer gets loan by taking personal property to

the Pawn Brokers to serve as collateral. Loans usually amount to less than 50 per cent

of appreciated market value of collateral. This type of CF has more disadvantages

than advantages. Such consumer loans are very expensive because it carries interest

rates from 24 per cent to 100 per cent per annum. The loans also lack adequate

protection to consumer. The chief advantage is that it is quick..

What Is Financial Technology – Fintech?

Financial technology (Fintech) is used to describe new tech that seeks to improve and automate
the delivery and use of financial services. At its core, fintech is utilized to help companies,
business owners and consumers better manage their financial operations, processes, and lives
by utilizing specialized software and algorithms that are used on computers and, increasingly,
smartphones. Fintech, the word, is a combination of "financial technology".

When fintech emerged in the 21st Century, the term was initially applied to the technology
employed at the back-end systems of established financial institutions. Since then, however,
there has been a shift to more consumer-oriented services and therefore a more consumer-
oriented definition. Fintech now includes different sectors and industries such as education,
retail banking, fundraising and nonprofit, and investment management to name a few.
Fintech also includes the development and use of crypto-currencies such as bitcoin. That
segment of fintech may see the most headlines, the big money still lies in the traditional
global banking industry and its multi-trillion-dollar market capitalization.

• Fintech funding is on the rise but regulatory problems abound.

Fintech in Practice
The most talked-about (and most funded) fintech startups share the same characteristic: they
are designed to be a threat to, challenge, and eventually usurp entrenched traditional financial
services providers by being more nimble, serving an underserved segment or providing faster
and/or better service.

For example, Affirm seeks to cut credit card companies out of the online shopping process by
offering a way for consumers to secure immediate, short-term loans for purchases. While rates
can be high, Affirm claims to offer a way for consumers with poor or no credit a way to both
secure credits and also build their credit histories. Similarly, Better Mortgage seeks to
streamline the home mortgage process (and obviate traditional mortgage brokers) with a
digital-only offering that can reward users with a verified pre-approval letter within 24 hours
or applying. GreenSky seeks to link home improvement borrowers with banks by helping
consumers avoid entrenched lenders and save on interest by offering zero-interest promotional
periods.

For consumers with no or poor credit, Tala offers consumers in the developing world
microloans by doing a deep data dig on their smartphones for their transaction history and
seemingly unrelated things, such as what mobile games they play. Tala seeks to give such
consumers better options than local banks, unregulated lenders and other
microfinance institutions.

In short, if you have ever wondered why some aspect of your financial life was so unpleasant
(such as applying for a mortgage with a traditional lender) or felt like it wasn't quite the right
fit, fintech probably has (or seeks to have) a solution for you. For example, fintech seeks to
answer questions like, "Why is what makes up my FICO score so mysterious and how it is used
to judge my creditworthiness?"

As such, loan originator Upstart wants to make FICO (as well as other lenders both traditional
and fintech) obsolete by using different data sets to determine creditworthiness. They include
employment history, education, and whether a would-be borrower knows their credit score to
decide on whether to underwrite and how to price loans. Similar treatment is given to financial
services that range from bridge loans for house flippers (LendingHome), to a digital investment
platform that addresses the fact that women live longer and have unique savings requirements,
tend to earn less than men and have different salary curves that can leave less time for savings
to grow (Ellevest).

Fintech's Expanding Horizons

Up until now, financial services institutions offered a variety of services under a single
umbrella. The scope of these services encompassed a broad range from traditional banking
activities to mortgage and trading services. In its most basic form, Fintech unbundles these
services into individual offerings. The combination of streamlined offerings with technology
enables fintech companies to be more efficient and cut down on costs associated with each
transaction.

Fintech and New Tech

New technologies, like machine learning/artificial intelligence, predictive behavioral analytics,
and data-driven marketing, will take the guesswork and habit out of financial decisions.
"Learning" apps will not only learn the habits of users, often hidden to themselves, but will
engage users in learning games to make their automatic, unconscious spending and saving
decisions better. Fintech is also a keen adaptor of automated customer service technology,
utilizing chatbots to and AI interfaces to assist customers with basic task and also keep down
staffing costs. Fintech is also being leveraged to fight fraud by leveraging information about
payment history to flag transactions that are outside the norm.

Fintech Landscape
Fintech startups received $17.4 billion in funding in 2016 and were on pace to surpass that sum
as of late 2017, according to CB Insights, which counted 26 fintech unicorns globally valued
at $83.8 billion. The same firm reported that there were 39 VC-backed fintech unicorns worth
$147.37 billion by the end of 2018.

Fintech Users
There are four broad categories of users for fintech: 1) B2B for banks and 2) their business
clients, and 3) B2C for small businesses and 4) consumers. Trends toward mobile banking,
increased information, data, and more accurate analytics and decentralization of access will
create opportunities for all four groups to interact in heretofore unprecedented ways.

As for consumers, as with most technology, the younger you are the more likely it will be that
you are aware of and can accurately describe what fintech is. The fact is that consumer-oriented
fintech is mostly targeted toward millennials given the huge size and rising earning (and
inheritance) potential of that much-talked-about segment. Some fintech watchers believe that
this focus on millennials has more to do with the size of that marketplace than the ability and
interest of Gen Xers and Baby Boomers in using fintech. Rather, fintech tends to offer little to
older consumers because it fails to address their problems.

When it comes to businesses, before the advent and adoption of fintech, a business owner or
startup would have gone to a bank to secure financing or startup capital. If they intended to
accept credit card payments they would have to establish a relationship with a credit provider
and even install infrastructure, such as a landline-connected card reader. Now, with mobile
technology, those hurdles are a thing of the past.

Regulation and Fintech

Financial services are among the most heavily regulated sectors in the world. Not surprisingly,
regulation has emerged as the number one concern among governments as fintech companies
take off.

As technology is integrated into financial services processes, regulatory problems for such
companies have multiplied. In some instances, the problems are a function of technology. In
others, they are a reflection of the tech industry's impatience to disrupt finance.

For example, automation of processes and digitization of data makes fintech systems
vulnerable to attacks from hackers. Recent instances of hacks at credit card companies and
banks are illustrations of the ease with which bad actors can gain access to systems and cause
irreparable damage. The most important questions for consumers in such cases will pertain to
the responsibility for such attacks as well as misuse of personal information and important
financial data.
 There have also been instances where the collision of a technology culture that believes in a
"Move fast and break things" philosophy with the conservative and risk-averse world of finance
has produced undesirable results. San Francisco-based insurtech startup Zenefits, which was
valued at over a billion dollars in private markets, broke California's insurance laws by allowing
unlicensed brokers to sell its products and underwrite insurance policies. The SEC fined the
firm $980,000 and they had to pay $7 million to California's Department of Insurance.

How does fintech work?

Fintech is not a new industry, it’s just one that has evolved very quickly. Technology has, to
some degree, always been part of the financial world, whether it's the introduction of credit
cards in the 1950s or ATMs, electronic trading floors, personal finance apps and high-
frequency trading in the decades that followed.

The guts behind financial technology varies from project to project, application to application.
Some of the newest advances, however, are utilizing machine learning algorithms, blockchain
and data science to do everything from process credit risks to run hedge funds. In fact, there's
now an entire subset of regulatory technology dubbed "regtech" designed to navigate the
complex world of compliance and regulatory issues of industries like, you guessed it, fintech.

Top Companies in the Nation's Hottest Fintech Hubs

• NYC Fintech Companies
• Chicago Fintech Companies
• Boston Fintech Companies
• Seattle Cloud Companies

Most Prominent Fintech Startups In India

India’s fintech segment has expanded by leaps and bounds, and the data around this industry
points to a strong growth potential going forward. The country’s adoption rate for fintech
products stands at 59%, the second-highest pace worldwide, and significantly higher than the
global average of 33%, as per analysis by DataLabs by Inc42.
Fintech startups have transformed commerce and payments in many ways in the India market.

Here are the top fintech startups in the country:

1. Paytm
2. Paytm Money
3. PhonePe
4. MobiKwik
5. PayU
6. ETMoney
7. PolicyBazaar
8. LendingKart
9. Freecharge
10. Mswipe
11. ezetap
12. LoanTap
13. Billdesk
14. FINO PayTech
15. Capital Float
16. Pine Labs