Last December, 28-year-old Roshan Zameer was gripped with panic. His phone had suddenly stopped working. As an electrical repairman in the outskirts of Bangalore, Zameer needed to make a call to check if the main electricity line was turned off before he started work at a building: information crucial to his safety. A message appeared on his screen: “Pls pay the amt via online through our website to unlock your device.” His Samsung Galaxy A71 phone was then blocked by a pre-installed app, restricting access to all of his phone’s functions, including the ability to make phone calls.
Zameer had bought the cellphone secondhand online in August. The original owner, it turns out, purchased it with the promise of paying off the device through equated monthly installments (EMI), a fixed payment schedule. Zameer didn’t know the phone was on a payment plan until the day after he bought it. 15 days after he purchased it, the device automatically locked and alerted him that he was roughly $40 behind. He’s been stuck paying monthly installments ever since.
Despite widespread access to low-cost smartphones (the cheapest costing $78), the average Indian still needs to work 63 days to afford one. It is why financing phones has become an important driver of sales. An estimated 40%–60% of all high-end smartphones — in the $100–$400 range — are sold on installment-based plans, according to the market intelligence company International Data Corporation.
But in the last year, the easiest way for retailers and online stores to get high-end devices into working-class people’s pockets has been through a new method of lending: collateralizing smartphones. Vendors are selling smartphones to first-time borrowers on high-interest payment plans financed by loan companies, but only after users install an undeletable app at the point of sale. The apps can then monitor repayment behavior throughout the duration of the loan. One late payment leads to instant blocking of the phone, rendering it useless. For loan providers and smartphone sellers, this form of lending opens their products to a new class of consumers. But users purchasing phones on loan are bearing the brunt of the coercive repayment tactics built into their devices.
Neel Juriasingani is a telecom industry veteran and chief executive of Datacultr, an Indian startup that uses the borrowers’ own information to nudge for repayment. Once installed, Datacultr’s app has access to huge amounts of data: everything from texts, images, and user location. “We did some research and figured out, You know what? People really still want to buy a phone,” Juriasingani told Rest of World, explaining the genesis of his company. “They just can’t afford it.” Juriasangi thought, How can we cater to this segment?
For lower- and middle-class customers in India, lack of formal credit scores or collateral makes it difficult to assess loan-worthiness. Juriasangi’s solution: a sophisticated software that escalates “nudges”— a series of irritations on a device — to repay loans. “Within three to four months, [the app will] have gathered enough information about these people to figure out what’s the risk profile,” said Juriasingani. He also said that, on any given day, his application is added to some 1,800 phones on loan across India, Malaysia, Bangladesh, and Ivory Coast — developing markets where smartphone and internet usage has outpaced formal credit institutions.
Datacultr uses a laundry list of techniques to force borrowers into paying. The app starts by sending audiovisual prompts in regional languages as reminders. If the user misses their first repayment, it forcefully changes the wallpaper on their cellphones. If Datacultr’s data scrape reveals a user to be a prolific selfie-taker, for instance, the app will send notifications every time the camera function is opened. If the user continues to default on the loan, frequently used messaging and social apps like Facebook or Instagram are progressively blocked, severely restricting the use of the device and ultimately shutting down all of the phone’s functionalities.
Juriasingani said that, of all of Datacultr’s nudges, forced wallpaper changes are the most likely to result in a payment. Replacing wallpaper images of family or friends with messages like, “Your EMI is due” makes the reminder difficult to ignore. “We see almost 50% of these people pay within three days of just putting up the wallpaper,” he explained, “and almost 70% in seven days.” Juriasingani said this technique worked “beautifully” and that seeing the message on your phone background “100 times a day” increases the odds of payment.
In the past year, two of the largest consumer durable lenders in India, Bajaj Finserv and TVS Credit, have incorporated Datacultr’s technology for debt recovery into many of the smartphones they finance. Although these companies have not confirmed their use of Datacultr’s software directly, a since-removed public document reviewed by Rest of World on the early stage investment website Startup Network connected Bajaj Finserv and TVS Credit to Datacultr. The document was originally posted on the site by Datacultr itself.
In an emailed statement to Rest of World, a TVS Credit spokesperson neither confirmed nor denied their company’s usage of Datacultr’s products. Instead, the spokesperson said the company endeavors to fulfill the “smallest dreams” of their customers, whether that be owning a smartphone or a vehicle. “To achieve this, we are continuously driving to create value for our customers by offering them affordable finance, given many of our customers are new to credit without an established credit behavior.” The spokesperson added that “all customers are informed regarding the loan process” and that each seller “requests for consent as a part of the loan agreement procedure.”
India is just the latest market for this type of financing. Silicon Valley–based PayJoy has been offering mobile locking tech to finance $300 smartphones in Mexico since 2015. It’s one of the oldest and best-funded companies offering these services — PayJoy’s proprietary locking software is present in over a million phones. The company has licensed its lock to lenders in over 20 countries, including Colombia, Guatemala, and Indonesia. Alongside India, the African market is its latest foray via a partnership with the continent’s top mobile supplier, Transsion.
Major multinational tech companies have also begun offering their own device-locking applications. In July 2020, Google released a device-locking app in partnership with Kenya’s largest telecom operator, Safaricom, for users in the country to buy 4G phones on installments. The app allows Safaricom to remotely restrict access to devices after four days of nonpayment. Samsung also restricts device functionality for nonpayment in India for phones purchased through the Samsung Finance+ program.
“Loans for phones” aren’t new to the Indian market, and, in years past, the financing was limited to customers with bank accounts and a credit history. What’s new is collateralized phone financing, which is reaching third-tier Indian consumers, unbanked and often new to the internet. For them, a $300–$400 smartphone is not only a luxury but one that they would struggle to finance without formal credit.
Critics of lockout technology say that, while the pay-as-you-go model has potential to benefit users, the lack of consumer protection might result in coercive practices entering the mainstream through legacy lenders. It is a trend that has become all the more concerning to low-income consumers, as demand for “buy now, pay later” schemes are poised to surge among India’s next batch of internet users.
These lending practices are built on the idea that loans can be exchanged for consumer privacy. Tarunima Prabhakar, a researcher with Carnegie India who co-authored a report on alternative lending in India, noted that coercive lending techniques, like locked phones, are often tolerated by regulators under the guise of financial inclusion for the lower and middle classes. “I think the [privacy] trade would be justified if it was truly allowing people to move up to better credit products,” said Prabhakar. But “given a choice between a credit card and a lending app that tracks my location and contacts offering the same credit limit and interest rate, [users] are going to choose the former.”
Akshay Mehrotra, a founding member of Fintech Association for Consumer Empowerment (FACE), a regulatory body of digital lenders, says the industry needs to strike “a fine balance” between the lack of consumer protection guidelines and benefits to the lenders, but he sees phones on loan as a savvy way of increasing credit penetration. “Once the product gets more stable, I think the guidelines will come out on the correct way of running it,” said Mehrotra.
In India, phones on loan with locking software have spurred the emergence of an illegal reselling economy. Faced with mounting payments, some borrowers go on to sell locked smartphones for a discount on secondhand marketplaces like OLX, where people like Zameer unwittingly fall prey to a seemingly functional phone. The debt burden de facto rolls over to the new owner; it can be paid by any consumer through the loan financier.
Zameer said his secondhand Samsung phone was getting locked on a monthly basis, until last month, when he paid the full amount owed. He’s been fighting with the original owner to reimburse him for the last payment; ultimately, he blocked Zameer. Now, there’s a $6 processing fee left for Zameer to pay. He’s hoping that TVS Credit, the phone lender, won’t block his phone over such a small default.
Zameer said he isn’t paying the $6 fee, on principle. Since the loan is in the original lender’s name, if Zameer pays it, it’s the original phone owner who stands to benefit — a cleared loan means he can apply for future loans more easily, a form of credit history for a customer with no credit card. If the phone does get locked, Zameer says he’ll pay what little is owed and sell the Samsung phone online. He says he’ll make sure the phone is unlocked before selling it; cheating a new owner the way he was cheated, he says, is not in his nature.
For now, the phone remains unlocked. Zameer says he doesn’t mind the surveillance app as long as he can keep using his phone. Anyway, he has his eyes on a new 5G phone.