Riding on the back of hitherto unavailable data, deeper penetration into the hinterlands and strategic collaborations with legacy players, there is no stopping the fintech startups and companies in India.
As fintech continues to innovate and evolve at a rapid pace, fintech startups and companies have broadened their horizons to cater to a diverse range of segments in the financial sector. Having disrupted the payments and remittances space with new and efficient technologies, both existing as well as new fintech firms have expanded their footprint across areas such as personal banking, personal financial management, consumer and business loans, investments, financial advisory, etc.
These fintech startups owe their exponential growth and success to the major paradigm shift in consumer behaviour over the last few years, as the increasing use of smartphones and easy access to affordable internet has driven the demand for digitally accessible products and services across the banking and financial services spectrum. As a result, various players from across the financial services industry have capitalised this massive opportunity by augmenting the level of technology integration in their processes to create new services driven by digitisation and personalisation – for consumers and businesses alike.
Further, technology integration has transformed the business model of lending in the following ways:
Smartphones and internet have widened the spectrum of eligible borrowers, making financial inclusion a reality.
The most important game changer in the fintech model is increased data availability. As a result, financial services have benefited in the following two ways:
- Companies have used technology to ensure easy availability of existing data points. One such example is the ability to read bank statements of a customer with his consent through an app without the customers having to upload or share bank statements.
- Availability of new sources of data such as digital footprint in social media for retail customers or daily sales volumes through aggregators in case of MSMEs.
Advanced credit underwriting:
Availability of data points enable the companies to have a holistic credit view of the customer. The traditional assessment system has been replaced with scorecards, which draw inputs from multiple data sources. Companies have clustered discrete data points of a customer ranging from lifestyle, peer circle, credit history and desperation for funds to predict expected customer behaviour. For business loans, technology has shifted underwriting from balance sheet-driven assessments to cash flow-driven assessment as the latter is a better representation of a company’s ability to repay. Also, cash flow from alternative channels reduces the possibilities of fraud.
Customised product solutions:
Technology-enabled underwriting capabilities help fintech companies take a lifecycle view of a customer. Fintech companies are able to customise products based on client requirements rather than using a one-size-fits-all approach. Larger finance companies have used technology and data science to reach customers with financial solutions ahead of requirement. Take EMI cards, for example, which ensured customer retention.
Ability to monitor real-time:
Fintech companies have used technology to identify early warning signals for credit deterioration or intentional default. Decreasing sales in aggregator platform or retail borrowers reaching out for additional loans can be addressed on a real-time basis. Lending platforms provide dynamic credit underwriting of corporate clients every quarter to all stakeholders.
All of the above have resulted in superior customer satisfaction. However, with any major technological transformation in any industry, fintech also has certain challenges to overcome, both in the present as well as those likely to arise in the foreseeable future. On the other hand, the opportunities for fintech will be potentially massive once the sector finds effective solutions to these challenges.
Present challenges and opportunities in the future for fintech
The total asset base of lending fintech startups would be in the range of Rs 3,000 to Rs 4,000 crore. Fintech companies have to demonstrate their superior credit underwriting capabilities over a longer time period and business cycles for equity and debt participants to draw comfort.
The cost of leads through online platforms, data and technology are also quite significant for fintech companies, and so must continuously add value to retain and turn profitable at a customer level. In case of lending to businesses through fintech platforms, the value proposition to the customer is still evolving. Fintech companies lending to businesses are also partnering with direct sales agents for leads because of a lack of clarity in their value proposition for the customer. The fact that SME borrowers value physical touch points indicates an opportunity for omnichannel credit marketplaces. Such a model could be comparatively more sustainable in the long term for fintech firms, given that is a large portion of potential SME borrowers are not digital and transact through offline means.
Furthermore, financial services have traditionally relied on the ability to touch base with a customer to select, underwrite and to collect. In the fintech model, these touch points have become non-existent. Having a robust collection infrastructure that can reach out to a deteriorating or delinquent customer at the earliest is a primary requirement for the model to sustain. And breaking geographical barriers for client acquisition has increased challenges from a collection and customer service perspective. Virtual communication channels, however, offer a more convenient way of reaching out to customers.
Opportunities and the way forward
According to a World Bank report, the number of adults with bank accounts in India rose to 80 percent of the total population during FY2018. For one, the growing penetration of mobile phones in the country has contributed immensely to more people in rural and semi-rural regions opening savings accounts and being able to access basic banking services. There are currently 92 mobile connections for every 100 individuals in the country – a total of 1.183 billion connections, according to data released by the Telecom Regulatory Authority of India (TRAI).
With all of these factors at play, fintech startups are presented with a massive opportunity to expand their base. However, most of them have a considerably smaller distribution network that is mostly limited to metros and Tier-I cities. Hence, fintech firms need to look beyond the metros and Tier-I cities to capitalise on the opportunities in Tier-III and IV towns, as well as rural and semi-urban regions in general.
Traditional banking and financial services companies, on the other hand, have a considerably wider distribution network and much deeper pockets as compared to growing fintech startups. Some of the larger traditional players have evolved as fintech players because of their ability to mine data to come up with intelligent product solutions. Financial institutions that are unwilling to recognise these changes will not be able to compete with the level of speed and efficiency of fintech-powered financial products and services. Therefore, combined with evolving consumer demands and a potentially huge, untapped market of unbanked and unserved customers segments, the dynamics between legacy players and fintech firms are changing, with a competition giving way to a trend of collaborative innovation between the two sectors.
This is currently one of the biggest opportunities in front of the fintech sector.
Successful collaboration will require an effective synergy of the strengths of both traditional business models and fintech-driven models to deliver high-quality products and services as well as a level of customer experience which would not be possible for these players as individual units. This is because what sets most fintech firms and startups apart from the legacy financial sector is their focus on innovation and agility, and a clear consumer-centric approach to building a digital infrastructure.
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