The three characteristic problems of a lender
Lending is about finding a way to believe in repayments from the promises of ambitious borrowers. The way through is identifying the external, internal, and philosophical problems that a lending business is trying to solve.
In this blog, we will discuss how successful lending businesses determine the characteristics of a problem and how it delivers the ultimate promise to the ecosystem. The ultimate promise forms the basis for building an everlasting business of lending.
In the previous blog, we discussed what micro-lenders want. But it doesn't solve the entire piece of the problem because obsessing about the solution is not enough until we get into the depth of the core problem.
Successful products defeat the problem by identifying its characteristics.
So how do we discover those characteristics? By breaking a complex problem into more straightforward issues until it becomes too apparent. These problems define the characteristics of the problem, which in turn decides the hierarchy of development of features.
It's impossible to design empathy without understanding every characteristic of the problem. Empathy is the path to happiness and success. Users lose interest in the product when the product shifts away from this hook.
Let me explain it to you with an example.
Now that we know lenders are aiming for 100% repayment but predicting it is a complex problem. Existing products take data points from various sources (mobile, web, social media, etc.) and predict financial behaviour.
Considering the NPAs today, clearly, spying and predicting good behaviour with data alone is not working. Wilful defaulters are coming in all shapes and sizes. We must ensure that wilful defaulters do not influence new-to-credit (NTC) borrowers.
If borrowers are moving away from good behaviour, then it's a case of product shifting away from the hook of the problem. Instead, it's a combination of issues overlooked.
A problem is in its simplest form when it questions the emotional needs of the user. Before arriving at the emotional needs of the user, breaking down the problem goes through a journey of three types of problems:
- Internal, and
I. External Problem: Evident to all
Everyone agrees that the business of lending is solving the problem of identifying creditworthy entities (both individuals and organisations).
The external problem of every lender is looking for the promise while underwriting that the loan applicant will repay the principal and interest in time.
Let me make it more evident by citing examples from products known to most of us. During the 90s, Dell, Microsoft, Apple, and HP solved the same external problem of making computers more acceptable in people's daily lives. Starbucks, Costa and CCDs sell (freshly) brewed coffee from crushed beans.
The market is flooded with data analytics & underwriting products, but not many promises to improve NPAs or repayments. Because determining repaying capacity is not an external problem. It's an internal problem.
Companies tend to sell solutions to external problems but users buy solutions to internal problems.
II. Internal Problem: inner frustrations of the underwriters
Users begin to engage with a product when it resonates with their external problem. External problem is the frustration of the market, while internal ones are frustrations specific to the user. At times, internal problems question the ability of the user. In its journey of accomplishing a task, a user often tries to answer - Do I have what it takes? Users buy products to solve their inner frustrations.
Dell and Apple succeeded in selling personal computers because they both addressed the internal needs of their customers. While Apple was addressing the needs of users frustrated with the quality of Windows and software supported on it, Dell addressed the price sensitivity of users who were more interested in buying a better configuration of hardware at a lower price.
Here's a very compelling explanation of the internal problem by Late Dr Clayton Chritensen, professor at HBS, where he explains with an example using milkshakes sold at McDonald's.
Despite developing an understanding of what users wanted, the underwriters were still sceptical of adopting Inkredo. We realised that their ultimate ambition is not limited to precision in data intelligence but also in keeping their jobs safe and making significant progress at work.
A well-designed product identifies the inner frustration and offers a plan to resolve it along with the external problem. It increases the perceived value of the product. Users bond with the product because it has positioned deeply into their narrative. Users feel understood.
So finding & designing a solution for the inner frustrations of the user is empathy. That's why products that convincingly determine repaying capacity are winning users' trust. Developing empathy is love for the user.
III. Philosophical Problem: Why does the industry exist?
After solving the external (finding creditworthy entities) and internal problems (predicting repaying capacity to ensure 100% collections on time), it appears that we have safely covered all our bases. However, we have a more profound question to answer - why lend? Why does the business exist?
I have often noticed that borrowing comes with a bad connotation, so why is lending such a lucrative business? Why do lenders make an insane amount of business from it? It is the money compounding, but there's more to it.
If you are still with me, thank you. We have arrived at the most exciting part of this blog.
Credit is a belief in the future. No credit, no future.
Imagine current times when those with the means hold on to their spare cash and do NOTHING with it - they do not invest in any instrument in the market. The value of their money will diminish to almost nothing.
However, when those with the means successfully contribute to promising & ambitious entities' future, creditors are rewarded with a higher return. The encashed interest increases the value of the otherwise idle cash.
Credit is about creating wealth by leveraging the ambitious ones. It's the ambitious ones who work hard to create wealth for both. The creditor gets rewarded for carrying the goodwill. So that the flywheel of friendship continues to work for the ambitious ones, must keep the harmful elements away.
Hence, the objective of lending is two-fold:
- The borrower shouldn't hurt the goodwill of the lender, AND
- The pool of good borrowers ought to be increasing with time
It's increasingly becoming difficult to keep away the bad ones. The most common method of pooling and rewarding the good ones is extending the ease of future credit. But digitisation has eroded the difference in ease of borrowing. There's neither any lowering of interest rates nor any incentive for good repaying behaviour. The stakes are higher than ever before.
The philosophical need is keeping the industry together; increasing the pool of good borrowers and keeping the good ones in the same bucket.
Philosophical problems matter to humanity. It's a mindset.
Addressing the philosophical problem also ticks both internal and external problems in a single shot; users experience a sense of delight which often leads to mad love for the product. Apple products are not merely beautiful by design, but consumers pay a premium for peace of mind. Nike sells because its narrative is bringing out the athlete in every human being.
Conclusion: The ultimate promise
Lack of credit can be discouraging to work on anything ambitious. Opportunities will become a possession of the rich. We need a standard playing ground with rich well-wishers in a free and open market to make opportunities more equitable and rewarding with time.
People love to associate with larger than life purposes. It offers the perfect brand promise. Successful lenders understand this larger than life purpose that drives an everlasting lending business.
Businesses that elevate users towards greatness create a higher value for their products. That's the ultimate promise to the user. Credit exists because it advances possibilities like never before.