Nudging credit choices with Fintech
Updated: Jul 8, 2018
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It’s a well known fact that Asian households (all countries east of Pakistan, to be clear about scope) used to have much lower leverage (and hence hold more cash like instruments) than their counterparts in Europe and Asia. This article from FT, discusses how leverage ratios have been on a dash since then, driven largely by propensity of central banks to hold rates low. Corporate behavior is discussed here (Economist) and here (IMF). I am not going to discuss the merit / demerit of these empirical facts; I am just thinking out loud whether financial institutions and startups in Asia think about fintech innovation differently relative to their counterparts in the US.
Technology and Information Asymmetry in Credit Markets
While attending Echelon Asia 2016 conference in Singapore, I had the good fortune of speaking with some founders and listening to VCs debate about the velocity of innovation in fintech (and other verticals like O2O as well). Fintech innovation should ideally be driven by end user preferences, it is interesting to note the mushrooming of P2P lending startups focusing on vehicle and personal loans in countries like Indonesia and Vietnam. While new channels of information help reduce the adverse selection of bad credit, the financial system in these countries do not allow for better monitoring of moral hazard. In banking, much of moral hazard is really driven by unsophisticated decision making and uninformed decision makers (eg., holding balances in a higher rate credit card while paying down a lower rate loan or signing up for ARMs while not having income to cover the leverage commitments). Net outcome of this innovation is that more people get loans, but more unsophisticated borrowers are left with sub-optimal portfolio of credit instruments.
How technology can "nudge" consumers towards better decisions?
While it is great to have analytics and tools to enable credit growth, I have not really seen any tools that would "nudge" (see Richard Thaler's book, Nudge for a lay man introduction to behavioral economics) people to a more efficient frontier in decision making. Economies, while in transition, often create displacements for new entrants to create value where entrenched players are unable to. For countries like Indonesia, Vietnam, India etc, where new opportunities abound in the credit markets, new technological opportunities should focus (hopefully) on providing consumers better information, not necessarily more choices. More choices are great for informed / sophisticated households, more nudging is needed for unsophisticated creditors.