Why is every app trying to become a microfinance app?

In today's episode on 8th Jan 2025, we understand why every app is trying to become a microfinance app. Book a FREE call with Ditto to secure your term plan today https://ditto.sh/vx51ji

• 0:00Speaker 00

  Hello folks, you're tuned into Finshots Daily. In today's episode, we try to understand why every app is trying to become a microfinance app.

• 0:10Speaker 00

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• 0:52Speaker 00

  A few days ago, Amazon launched a feature that lets users invest in fixed deposits and mutual funds through Amazon Pay. A decade ago, that would have sounded absurd. E-commerce apps were supposed to sell products, deliver food or help you book rides, not manage your savings or lend your money. Yet, here we are. Microfinance has seeped into almost every consumer app these days. But to understand why, let's rewind a few years and look at what apps did initially to monetize their users. You see, a decade ago, consumer apps in India competed on one thing alone. Distribution. Whoever could acquire users faster, cheaper and at scale, usually won. Discounts, cashbacks, free deliveries and aggressive marketing were all justified by the same belief that once scale was achieved, profits would eventually follow.

• 1:38Speaker 00

  Now, as a result, companies invested heavily in marketing and built large customer bases. But that belief was eventually shattered because having users alone did not guarantee conversion. On top of that, growth eventually slowed as competition increased across sectors and capital also became scarce. In this environment, companies were discovering a hard truth. Selling goods or services alone is a weak business model. Margins became thin, customer loyalty became fragile and price competition never really ended. Which is why so many platforms have gravitated towards microfinance. But why finance? Unlike food delivery, e-commerce or ride-hailing where transactions end at checkout, financial products create recurring interactions and predictable revenue streams.

• 2:19Speaker 00

  Finance monetizes scale and retention far more effectively than e-commerce ever can. And savings and investment products anchor users over long-time horizons. Because, let's face it, once we start using an app for investing, we're far less likely to actually shift to a different one unless something dramatic happens. And that's exactly what companies want to bet on. This is why Amazon Now lets you invest via Amazon Pay. Airtel runs a payment bank inside their app. WhatsApp has UPI embedded right beside your chats. And even Ola lets you get a personal loan on their ride-hailing app. They operate through partnerships positioning themselves between users and regulated institutions. You see, India's financial system has a well-documented gap between formal banking and large sections of population.

• 3:03Speaker 00

  Millions of individuals and small merchants remain underserved because traditional lending relies on income-proof collateral and credit histories that many people simply don't have. Banks are constrained by regulations and cost structures and struggle to serve these segments profitably at scale. NBFCs, on the other hand, do not face the same constraints. But NBFCs do not have a good distribution system to get users. Apps like Amazon, Ola and Airtel have exactly that. They already observe user behavior continuously. They see transaction histories, spending patterns, repayment consistency, geographic stability and cash flow signals in real time. This data allows platforms to underwrite small-ticket credit quickly by partnering with NBFCs or banks without building branches or employing loan officers.

• 3:48Speaker 00

  What physical microfinance institutions once did through fee lagence and paperwork, apps now do through software and data. As a result, buy-now-pay-later products became a direct outcome of the shift. They reduce friction at the point of purchase and encourage users to stay with a platform's ecosystem. From the app's perspective, credit becomes a tool to accelerate commerce while simultaneously building a financial relationship that can be monetized repeatedly. The same logic explains why co-branded credit cards have proliferated. These cards extend the platform's influence beyond its own App and into a user's broader spending behavior. Each transaction reinforces brand presence, generates interchange income, and deepens the financial link between the user and the platform.

• 4:30Speaker 00

  Compared to one-off commerce transactions, this is a far more durable way to monetize attention. However, the strengths of embedded finance are also where the risks begin. The ease with which credit is offered changes how borrowing feels. Traditional loans involve friction which forces borrowers to evaluate their debt. Embedded credit removes much of that and repayments are broken into small installments. Charges can be deferred and borrowing is framed as convenience rather than obligation. Individually, these loans may appear manageable, but if overused, they can become difficult to track, especially when you stack multiple BNPL products across different apps. This problem is compounded by pricing opacity. While headline interest rates may look low or even zero,

• 5:14Speaker 00

  effective annualized costs often rise sharply once fees, penalties and delayed payments are included. The user experiences the benefit immediately but absorbs the cost gradually, which weakens financial discipline rather than strengthening it. There is also a systemic risk element that is easy to overlook. Most consumer apps operate lending through partnerships sitting between the customer and the institution that actually owns the loan. Now, this is generally good for both parties as it allows rapid scaling, but it also creates misaligned incentives. Platforms are rewarded for growth and engagement while credit risk sits elsewhere. So, when economic conditions worsen as they did after Covid, defaults rise and lenders pull back. This reduces access to credit that was once easily available

• 5:57Speaker 00

  and users who grew accustomed to frictionless borrowing suddenly find themselves locked out or even worse, it shows up on their SIBIL score. Yet, it would be misleading to frame this entire shift as exploitative. For many first-time borrowers, app-based credit serves as an entry point in the formal financial system. Responsible usage and timely repayment help build credit histories, which can later unlock cheaper loans, mainstream banking access and better financial products. And in that sense, embedded microfinance is far better than informed money lenders as they expand inclusion at a scale traditional banking has struggled to achieve. This is probably why every app wants to move in this direction. Finance offers higher margins, recurring revenue and stronger user lock-in than commerce.

• 6:41Speaker 00

  All while credit accelerates spending and savings products deepen the relationship. From a platform's perspective, this evolution is rational, even inevitable. For users, however, the burden of responsibility increases. When borrowing becomes invisible and effortless, financial discipline matters more and not less. Embedded finance delivers real value when it substitutes expensive informal credit and expands access responsibly. But it becomes harmful when it normalizes constant fragmented debt without clear signals of cost or risk. The future of finance is likely to be deeply embedded and largely frictionless. Whether that future improves financial well-being or undermines it will depend on how transparently these products are designed,

• 7:24Speaker 00

  how carefully they are regulated and how consciously users engage with credit that no longer feels like borrowing at all. So, there you have it, folks. You either die unprofitably or live long enough to become a microfinance app.

• 7:38Speaker 00

  Thank you for listening to today's episode. And if you want to share your feedback or suggestions, do drop us an email to [email protected]. Until next time.