Newley Purnell and Justin Scheck report in the Wall Street Journal:
Silicon Valley venture capital is funding a wave of fintech startups that use data from borrowers’ cellphones to collect on debts in ways that are illegal. It is the latest example of Silicon Valley pushing legal and ethical boundaries in a global race for customers and profit. Lured by the promise of massive populations of people who are just beginning to transact online, tech companies are moving into banking in emerging markets, where cultural norms are complex, regulations are often weak, and many consumers lack credit histories or even official identification.
Silicon Valley venture capital is funding a wave of fintech startups in India that use data from borrowers’ cellphones to collect on debts in ways that are illegal in both India and the U.S.
The startups are providing much-needed credit in India, where consumer lending has been limited by a lack of credit scores and by banks that are reluctant to make personal loans. While the newcomers’ tactics are illegal, they are ignored by Indian regulators who want to encourage lending, according to analysts and company insiders. The startups also use personal data to make lending decisions.
It is the latest example of Silicon Valley pushing legal and ethical boundaries in a global race for customers and profit. Lured by the promise of massive populations of people who are just beginning to transact online, tech companies are moving into banking in emerging markets, where cultural norms are complex, regulations are often weak, and many consumers lack credit histories or even official identification.
Last year, investors globally poured a record $9.6 billion into lending startups, with 83% of the money going outside the U.S., according to a Wall Street Journal analysis of Dow Jones VentureSource data.
A record $909 million of that went to India-based lending startups, making the country the third-biggest market behind China and the U.S. Last year, U.S. investors backed nearly 40% of the 65 India-based loan companies that completed a funding round.
Investors see India, home to 1.3 billion people, as the world’s largest untapped digital economy. A boom in cheap smartphones and mobile data has allowed lenders to access a person’s income and spending patterns as well as location and gender. With that personal information, the lenders can determine creditworthiness on the fly. Lending apps also suck up contact information to help chase borrowers down if loans go sour.
When Sachin Kumar Soni, 24 years old, needed cash to pay for exam preparation classes last year, the recent college graduate in New Delhi turned to a popular Mumbai-based lending startup known as PaySense, which is backed by Los Altos, Calif.-based Rocketship.vc as well as Nexus Venture Partners, which has offices in Menlo Park, Calif., and India.
PaySense, founded in 2015, has raised $25.6 million, which the company‘s website says will help solve “the fundamental problem of not having simple, convenient and transparent access to credit in today’s India.”
Mr. Soni got a 16,000 rupee ($225) loan and began making nine fixed, monthly 1,979 rupee payments, with an effective 2.25% monthly interest rate. He said he didn’t tell his parents because he didn’t want them to worry about his financial standing.
After missing two payments because of what he called an administrative mix-up at PaySense, loan collection agents began calling his mother and father and threatening to visit their homes if their son didn’t pay up, Mr. Soni said.
“My father was totally worried about me,” said Mr. Soni. “Their workers were not professional. It was disgusting.”
After Mr. Soni posted a public complaint on PaySense’s LinkedIn page, the company’s founder, Prashanth Ranganathan, apologized and said he would look into the matter. Then he added, “I think u should delete your post, does not look good for you or for me :).”
Dozens of PaySense customers have posted complaints online about aggressive collection tactics going back to 2017. Mr. Ranganathan said PaySense explicitly receives permission from users to access their smartphone contacts but uses them only rarely, when the borrower can’t be reached.
He said that outside debt collectors must sign a code of conduct for collections but that PaySense is taking steps to better monitor their activities. “This issue is not unique to us,” he said, adding that PaySense complies with all local laws and regulations.
Sailesh Ramakrishnan, a partner at Rocketship.vc, said that he was unaware of the public complaints and that his firm doesn’t support aggressive collection tactics. A Nexus spokeswoman declined to comment.
Countries including India are attractive to these lenders because the market in the U.S. is far more crowded and lenders can’t use such smartphone data as location, photographs and social networks to make lending decisions. These can be proxies for age, gender, ethnicity or place of residence, which can’t be used for lending decisions.
Consumers in Indonesia, another market primed for fintech growth, last year complained about the aggressive collection tactics employed by a lending startup then called Rupiah Plus, backed by the prominent Silicon Valley venture-capital firm Sequoia Capital.
Yige Wang, the founder of the startup, said it removed collection agents who had violated the company’s internal guidelines. A Sequoia Capital spokeswoman said the firm encourages all the companies in which it invests to adhere to local laws and ethical business practices.
In the Philippines, the National Privacy Commission is investigating hundreds of complaints from consumers about lending apps siphoning data and harassing users in that promising fintech market.
Another PaySense user, Akshay Yedke, who lives in Pune, India, said he took out a 121,000 rupee loan in 2017 to pay for his wedding. He said that he was a few days late on his 7,700 rupee monthly loan payment and that PaySense’s agents targeted Mr. Yedke’s closest contacts.
“They started calling my mom, my dad, they even called my grandmother,” demanding payment, he said. “They disclosed my loan details to all of them.”
In one audio recording reviewed by The Wall Street Journal, Mr. Yedke asks a collection agent who called him how she obtained his number. “You don’t have a right to ask any questions,” the woman said. “First pay your loan.”
Before the rise of fintech lenders, consumers in India turned to high-interest local lenders for cash. Collection agents harassed borrowers and threatened them with physical harm.
But lenders’ newfound ability to leverage personal data from smartphones, which is often collected without users fully understanding how it will be used, gives startups powerful new tools to pursue them.
Aggressive collection tactics are illegal in India, according to Reserve Bank of India rules. But regulators, eager to bring more people into the financial system, haven’t enforced the rules.
“There’s no consumer watchdog with teeth,” said a person familiar with the fintech industry. A Reserve Bank of India spokesman declined to comment.
In the U.S., debt collectors can’t harass customers or speak with anyone other than their spouses or attorneys.
Consumers in India have also complained about aggressive collection tactics employed by such startups as Lendingkart, whose investors include Menlo Park, Calif.-based Mayfield, and Early Salary, which is backed by Eight Roads Ventures.
A Lendingkart spokeswoman said the company has a code of conduct in line with regulations ensuring that “all personnel authorized to engage with customers are extensively trained to follow these guidelines.” A spokeswoman at Mayfield didn’t respond to a request for comment.
An Early Salary spokeswoman didn’t respond to a request for comment. A spokeswoman for Eight Roads Ventures declined to comment.
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