Emerging Tech-Based Financing Models in Affordable Housing
828 million people around the world live in slums, and this number does not include people from rural areas who live in substandard houses. Lack of access to housing finance contributes greatly to this housing gap. Low-income families whose livelihoods come from the informal economy often lack the income proof and credit history required to be eligible for a mortgage loan. As a result, they are denied the improved health, education and sense of security, including the ability to practice social distancing, that come from adequate housing.
The gap between demand and supply of affordable housing finance products is huge, estimated at $16 trillion by McKinsey & Company. This presents a sizeable business and social impact opportunity for financial service providers (FSPs) to develop new products and services that enable housing finance for low-income families. Though in the past many traditional FSPs have lacked the tools to adequately identify, assess and monitor borrowers in the informal sector, this is beginning to change.
A fast-evolving financial ecosystem offers potential for affordable housing finance
The financial ecosystem is evolving rapidly with the advent of tech-enabled and branchless banking models. Digital platforms and digital banks are getting active in the housing finance space. MFIs and housing finance companies are increasingly using digital field applications and credit scoring platforms to improve customer experience, reach out to new customer segments, enhance operational efficiency and offer additional products. Banks are getting into the agency model by appointing organizations such as MFIs, NGOs and cooperatives as distribution points for offering a suite of their products.
In this blog post, we look at four different emerging models along with examples for each one.
Model #1: Digital platforms facilitating housing finance
There are a number of different types of digital platforms which facilitate housing finance, including:
- Fintech companies that provide financial services to the retail segment, such as peer-to-peer lending platforms, fintechs focusing on consumer finance and others.
- Digital marketplace platforms that allow a retail customer to choose a product from various FSPs.
- Payment-based platforms that would like to diversify their offerings through tie-ups with relevant entities.
- Tech-enabled platforms (such as e-commerce firms) that would like to get into the financial services space.
One example of this business model is Gradana, a fintech peer-to-peer lending platform in Indonesia that focuses on property-related financing. The startup targets first-time home buyers who have difficulty saving up for a down payment. It supports them by aggregating developers, agents, investors and banks to make property investments more accessible and affordable.
Square Yard, India’s largest integrated platform for real estate and mortgages, is another example. Square Yard’s platform offers an integrated consumer experience and covers the full real-estate journey from search and discovery to transactions, home loans, rentals, property management and post-sales service.
Model #2: Fully digital retail banks
Another emerging housing finance model takes the traditional banking business model and improves it with the latest digital technologies to offer a better banking experience for lower cost. For example, digibank is a completely digital bank launched by the DBS group which offers full suite banking solutions (including home loans) directly on smartphones. It is currently available in India and Indonesia.
Model #3: Partnerships between digital platforms and commercial banks or lending companies
Emerging partnerships between traditional lenders and platforms or marketplaces aim to leverage each other’s strengths. For example, Bank BTN, one of the largest commercial banks in Indonesia, partnered with Gojek, a multi-service app which includes ride-sharing and delivery services, to offer home loans to its drivers. The bank uses drivers’ transaction history on Gojek’s payment platform to determine creditworthiness and approve loans.
Model #4: Housing finance companies embedding technology into core operations
Last but not least, we have housing finance companies and microfinance institutions which are leveraging technology to improve the customer experience and streamline their operational models.
Aviom India Housing Finance is an affordable housing finance company in India that has embedded technology in various aspects of its business model to help it provide mortgage solutions to low-income women from informal segments, strengthen credit underwriting through proprietary credit scoring platform, improve the turnaround time of applications, and improve overall risk management throughout the product life cycle.
How do the models compare in terms of value for the customer and the FSP?
The qualitative analysis in the table below captures the degree of value propositions that tech-enabled business models offer to customers and financial intermediaries. While the degree may vary, all of the value propositions are applicable to each model. And, importantly, all of the models enable a deep understanding of customer usage and behavior through advanced data collection, which could be further leveraged to develop customized products for target segments. These value propositions should eventually lead to efficiency gains for both providers and end-users.
Apart from financing, low-income households struggle to secure other housing inputs, such as materials, labor, home design, budgeting and reliable estimation. Non-financial services for homeowners can also benefit from the adoption of technology-enabled models, helping to empower homeowners to make essential decisions in their home improvement journey. For example, the iBuild app serves as a marketplace, connecting the customer, contractor, worker and supplier on a single platform to help families manage their construction projects.
Continued study is needed to know which innovations will lead to more inclusive housing finance
The hope is that these digital innovations and platforms will either create increased access to affordable housing finance on their own or enable more traditional financial service providers such as banks and MFIs to begin offering housing-related loans at greater scale and affordability. But it remains to be seen whether efficiency gains brought on by digitization are passed on to customers in the form of reduced pricing or more inclusive lending criteria. Only time and further research will reveal which factors and models are effective in sustainably financing housing for low-income people.