Leveraging technology and new ideas, the financial services sector is set to change right before our very eyes.
While banks are the bonafide traditional lending institutions that people can bank upon as being very stable, but at times, due to their set customer base and standard ways of credit underwriting, takes away from them the ability to innovate and the nimbleness to adapt.
In this front, some things are changing and although banks continue to process the credit requirements of most corporate and consumers, the trust and power which the banks have enjoyed over centuries is diminishing.
The parameters in play that are creating a perspective around the growth of fintech companies in the credit lending space are:
Firstly, the global financial crisis had an extremely negative impact on the trust element that the banks carried, even in the current context in India we are seeing credibility of state run banks being questioned for the kind of loans given out and the losses it’s causing. It is ultimately the tax payers money that gets put back in the system to recapitalise these behemoths and consumers have started asking why my money?
Secondly, the ubiquity of mobile devices and consumer Internet has begun to undercut the advantages of physical distribution that banks previously enjoyed, suddenly having thousands of branches spread across the country is no longer being seen as a huge differentiator, and going to physical branches for products is being seen as a chore.
Thirdly, there has been a massive increase in the availability of widely accessible globally transparent data supplemented by the enormous digital footprints that we as consumers are leaving on the Internet, this is especially significant if you couple it with a substantial decrease in the cost of computing power.
Fourthly, and specially in context of India, the change in the demographics of the country, the consumers are younger, living in a “Uberised” world of instant gratification, and wanting to discover products and services sitting in the comfort of their homes and no longer wanting to wait for weeks for lending solutions which they see less as a favour from banks and more as a right.
Thus, finding a gap in the banking credit service, financial tech is mushrooming to play the role as an enabler and a disruptor, taking over these individual roles in different facets and products of the industry.
Riding on three key differentiators, technology, data and product expertise, fintech journey proposes to be an exciting one in the credit lending history of India. Where one is talking about existing products being delivered to the existing customer set, Financial Technology can play a very efficient role of an enabler to ensure quicker, more transparent and less documentation intensive delivery of these products.
However, if one is trying to reach out to a new customer set altogether or create a new product suite, then technology could create disruption and lead to extremely fast and scalable growth.
Finance Buddha, a fintech start-up in retail lending business is working to create better modules and communication systems. Parth Pande who co-founded Finance Buddha in early 2012 after spending 8 years at Citibank says, “We are in the process of creating credit models using machine learning, predictive modelling techniques etc to create a credit inclusion strategy which will help us in broadening the universe of population for financial services products, hence giving us the capability of working seamlessly with both traditional as well as alternate lenders.”
Impact on the common consumer
The future is certainly going to be different than what it is at present - where consumer inertia in financial services is high and consumers have generally been slow to change financial services providers. “The key differentiators could make the financial journey and processes even simpler and streamlined for the customer. Through proprietary algorithms fintech could give customers a more incisive suggestion on the best product/bank to choose from,” holds Parth.
Technology would give power in the hands of the consumer by giving customers transparent information. What Fintech promises is to give instant solutions to the problem of credit, cut down on mundane paperwork, be transparent in their offerings and willing to give consumers a superlative customer experience, a significant upgrade from what is available from banks.
Why alternate lending is important and here to stay
Globally over $40 billion has been deployed in this sector over the last 5 years, and over 3,000 companies across the world are part of this fintech space. Is this an indication that we are heading somewhere significant?
These alternative lending organisations are also attracting significant venture capital to potentially give them the muscle to take on some of the behemoths in this space.
Fintech companies with the abilities to deploy better technology for faster processing and innovative means like peer to peer etc can solve supply problems. Using alternate sources of data like social media parameters, psychometric tests, etc along with traditional sources can reach out to a larger customer base, Parth states.
Besides, Alternative lending can try to solve two major challenges with financial services - democratisation and inclusion. Democratisation is a critical point to end information asymmetry that results in uninformed financial decisions and getting products pushed down to the consumers.
Inclusion is the other challenge in the financial services space where a large chunk of the population does not get access to financial products, technology advancements and use of services like biometrics, Aadhar integrations, Jan Dhan Yojana etc of the government. Technology can help in delivery of these products to people who currently do not have access to them and create a scenario where more people get included in the credit mainstream of the country.
Challenges around the fintech space
Fintech start-ups are focussing only on solving the credit underwriting problem whereas there is so much more to lending play like distribution, great products, strong brands, excellent sales and service staff, and benchmarks around customer service and in collections, point out experts in the financial services field.
Also, leading alternate lenders globally are coming under scrutiny as companies become bigger and more active. Are fintech companies ready to work in a box of regulations?
Lastly, can fintech change the landscape of financial services in India? This has become a matter of debate.
Conceptually, banks and fintech companies look at different customers and also look at them differently. Banks are critical to the economy; for fintech to survive, they will need to stand out on their natural advantages combined with the goodness of the traditional banking system to come out with an enhanced product service to provide value to customers.
Updated Date: May 30, 2016 12:37 PM