Vinay Kalantri
Alternative lending is an idea whose time has finally come. The idea is primed by a growing crowd of pure-play technology driven firms, better known as financial technology firms (fintechs in short) which thrive on a conducive start-up business eco-system and funded by early stage investors with veterans pitching in as mentors with their decade old domain knowledge to handhold the start-ups in their early stages of evolution.
I can convincingly argue that, with some changes in the regulatory framework, financial technology firms will do what the Amazons and Flipkarts have done to e-commerce to the alternative lending space.
Arguably, the ruling regulatory framework restricts the fintech firms’ bandwidth in this experiential phase. But these firewalls are expected to go as we move towards a fully digitalized economy in the year ahead.
It goes without saying that what tilted the scale in favour of fintech firms is the government’s firm resolve to usher in a cashless economy which has led to a tectonic shift in consumers’ behaviour. A credible initiative to create a robust digital payment infrastructure is paying rich dividends with a large section of the consumers shifting towards digital payment modes like e-wallets and cutting back the use of paper money to bare minimum in their everyday lives.
The fast adaption of e-wallets and the ushering of the digital economy is spurred by technology savvy young consumers. I am convinced that the digital payments industry in India is expected to witness exponential growth with the rise in internet and mobile penetration, incentivizing of cashless transactions and a fast evolving consumer mindset and verified by Aadhar or the universal identification card.
As people rapidly jump on to the digital payment bandwagon and the use of online payment tools like e-wallets becomes an essential part of their daily lives, the alternative lending sector in India is bound to get the much needed high speed connectivity with customers. If one were to make a sector-wise demand analysis, the MSME segment in India is poised to grow in leaps and bounds contributing significantly to the economic output of the country. The segment is fast emerging as a key market for fintechs in alternative lending space.
Also, for the borrower who has a limited or no credit profile, alternative lending provides for easy access to credit. It facilitates transparency in the lending procedure as compared to availing of credit lines from other sources of financing. Customers can also gain the advantage of lower turnaround time for availing loans.
Substantial benefits are also available to the lenders who can check the credit-score of their customers and open the credit line to the under-banked. Fintech firms can also provide niche financial products to the SMEs. Using data analytics processes, lending agencies can create a potential customer database to understand their financial requirements and figure out their refinancing needs which helps improving customer relations and customer retention.
Considerable scope also exists for NBFCs and other fintech firms to log on to new-age technologies like cloud-based computing, data migration and digitizing the lending process from the loan application to the final approval and disbursal stage, thus shrinking the lead time drastically. This also helps leave a digital audit trail of the customer similar to blockchains.
However, fintechs need to invest in innovative technology solutions to provide their customers with simplified end-to-end experience. Lending agencies will need to build an easy digital infrastructure to provide user-friendly interfaces and ease the process of applying for loans via apps and other online platforms. Designing and deploying a suitable and accessible technological framework will remain a key challenge.
With the increase in the digital trails of customers, data security has emerged as a major concern for alternative lending firms. It becomes imperative for lending agencies to upgrade their security architecture to ensure that there is no malware attack and data breach. Deployment of filters to protect hacking of apps is also essential to provide customers a seamless and secure transaction experience.
With conventional banks reeling under stressed assets issue, their headroom to finance customers is fast shrinking. Fintechs and e-wallets can play a decisive role by stepping into this void left by banks. However, as I mentioned in the beginning, fintech firms currently operate within a limited bandwidth. But since they have proved their metal, they should be allowed to operate in a broader spectrum to help them grow in size and scope.
One such area that needs express attention is insurance technology space. Fintech companies can develop more customized offerings for customers and cut the cost of intermediation. Present complex regulations governing the insurance industry serves as an entry barrier for innovators. Due to the high cost of compliance and risk, asset light players should not be able to cover the risks. This works as an entry barrier for start-ups whose resources are limited.
Another window that is waiting to open for fintech firms is invoice trading. Fintech companies can develop solutions that will provide a lending platform to MSMEs to sell their invoices or other receivables at a discount for working capital. Many a time cash flow of MSME is chocked due to delayed payments. Letting the fintech players into this space will make life easier for MSMEs.
Fintech providers should also need to change their business model by closing ranks with conventional lenders. Fintech solutions are fast gaining currency because of more targeted offerings in areas of payments, loans and personal finance. This puts Fintechs squarely against the conventional lenders. But this does not close the window of opportunity for Fintech firms to join hands with banks. Fintech companies can develop ready-to-go market solutions. And with such collaborations, both can live happily ever after.
Finally, Payments Bank’ licenses are set to converge towards a hybrid model where mobile services blend together with banking services. Many Fintech’s are eyeing for Payment Bank licenses to provide new-banking solutions. With this, payments banks will be in a position to reach out to the under-banked and unbanked customers as well. That presents a best case scenario for lenders, fintech firms and customers.
Author is Founder and Managing Director of tmw (The Mobile Wallet)
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