India remains one of the largest markets where the structural enablers to incubate and exponentially leverage fintechs have come together strongly. As the broader economy shifts from respond to recover, new opportunities for fintechs are likely to be created in the lending space.
Challenger financial innovators are leading the way in pioneering disruptive digital lending innovations. Globally, lending fintechs have leveraged a common approach and theme: being customer centric with a comprehensive end-to-end digital experience and a simplified process to create a “Wow” moment for the customer. This segment has also garnered significant attention in recent times due to the convergence of digital innovation with regulatory rigor, as most fintechs in this segment are eventually being brought into the regulatory ambit.
The current opportunity
The current financial sector environment is putting significant pressure on the lending market. Open banking provides banks and NBFCs with an opportunity to leverage fintechs and serve their customers better. This partnership enriches the entire digital lending process – better sourcing by leveraging a fintech’s digital and ecosystem access; insightful credit evaluation by leveraging financial as well as alternate/non-financial data points, which a fintech is best positioned to aggregate; and also better monitoring and compliance based on the fintech’s access to real time information.
Fintech companies are more successful at creating a more robust economic profile of their customers. This leads to better efficiency in the system – customers are be able to demonstrate their credit worthiness better and banks are able to evaluate their risks better. The ability of fintechs to create economic profiles out of traditionally ‘credit-invisibles’ and ‘thin filers’ is expected to create access to a segment that has been clearly underbanked over the years.
Fintech players are addressing structural issues of lower credit penetration, information asymmetry and reducing TAT for underwriting loans to customers and businesses. Rapid advancements in technology and IT infrastructure, increasing digital penetration, favourable regulatory regime, significant funding, and lastly – the emergence of open APIs offer tremendous potential to provide a 360 degree view of the customer and offer need-based, personalised products and services, while driving operational cost efficiencies and giving rise to truly disruptive business models.
Emerging business partnership models
As the opportunities and innovative disruptions continue to proliferate, diverse collaborative models have emerged between fintechs, and traditional banks and NBFCs, ranging from mutually beneficial partnership models to hybrid models. The key difference in the models lies in the moment of truth – who owns the customer?
Under the White Label Model, banks/NBFCs leverage the technical functionalities of fintechs across the lending value chain – underwriting, application processing, early warning system, collections, etc., while they remain the customer facing entity at all times. This partnership operates as a pay-per use or subscription model that helps boost fintech revenues.
The Point of Sale (PoS) financing model leverages data from PoS machines/gateways to offer instant unsecured loans. Peer-to-peer (P2P) lending is also an innovative model for transferring credit risk from banks and financial institutions, by dispersing it amongst individual lenders.
Marketplace lending (MPL) typically tends to connect individual borrowers with institutionalised lenders, including banks and NBFCs, where most of these fintechs play the role of originators with an agency relationship with the banks and NBFCs. MPL models can have two variations; MPL platform as an originator (acts as an aggregator to route leads to banks/NBFCs), and MPL platform as a matchmaker (connects lenders to borrowers with no/limited role in loan servicing). The MPL model can be leveraged for the MSME sector in ways we haven’t seen before and can truly bring value to these set of customers and eventually for the larger MSME ecosystem. Hybrid models (partnerships as well as individual financing) have emerged where fintechs serving niche market segments such as travel, healthcare, F&B, etc. partner with banks to provide their customers/merchants financing based on their specific needs.
Bank-led digital lending models are also emerging where banks are launching their own independent digital lending platforms to tap in the digital lending market by leveraging existing capabilities in traditional lending. The key to success of this business model will be in providing seamless customer experience, and the latest micro service architecture, in short: creating a “fintech-like” nimble business proposition. Most of these models also look to leverage point solutions by fintech partners.
The way forward
The robustness of partnership models, including where the financial services player is leveraging the credit algorithms of fintech players, are yet to be tested as the industry is yet to complete a full credit cycle. Fintechs need to be on the path of continued acceleration of partnerships with financial institutions, which can offer the benefits of capital, distribution access, and compliance infrastructure, and provide them with highly innovative and intuitive digital solutions. There is huge potential in holistic financial services that integrate consumers’ financial needs and behaviours, in areas such as health tech, tailfin (retail), as well as the wealth management space. The real benefit to the economy would be when besides digitising the current lending landscape, which just moves the channel from paper based to digital, fintechs create newer segments that convert credit invisibles into mainstream borrowers. That would mean a larger pie for fintechs, financial services players, customers as well as economy at large.
DISCLAIMER : Views expressed above are the author’s own.