Month: September 2022

The concept of credit cards emerged in the 1950s and thus began the phenomenon of competitive financial services and innovative banking. Thereafter, with the initiation of internet banking in the 1990s and digitized payment technology recently, the financial ecosystem has undergone an absolute change. Until recently, traditional banks ruled the financial ecosystem but with the introduction and fast adaptation of Fintechs, the financial arena is undergoing a disruption; a disruption for superior services and better CX. How is the disruption taking place? Regulatory and policy shifts in the financial ecosystem have paved the way for transparency and scope for collaboration between age-old banks and upstarts. It has offered an opportunity for players with innovative technology to join forces and introduce customer-centric services and solidify their legitimacy. The said collaboration and therefore change in policies have forced traditional banks to share customer data that authorize it with third parties. This has given rise to open banking systems and the use of open APIs thereby allowing third-party developers to build applications and services that are institution-centric. These changes have given rise to the concept of Banking as a Service; a concept widely being adopted by organizations. Banking as a Service A plug-and-play, on-demand financial service; Banking as a Service allows traditional businesses to offer payment gateways on their platform without building entire applications in-house. Just like the concept of Dropbox that enables individuals to purchase space and store data on the cloud instead of investing in hardware, banking as a Service, a seemingly simple model has revolutionized how banking is performed today. Banking as a service has proven to be a cost-saving and an increased source of revenue for banks who prefer to work through a model that allows them to charge a fee per API transaction, i.e., 43% of the banks. However, banking as a service comes with its own set of challenges which include modernizing traditional banks and reconstructing a well-defined API strategy where operational processes and business capabilities need to be exposed optimally. Banking as a service case study RBL recognized that cash flow is an important consideration for customers interested in purchasing a vehicle and hence, in collaboration with Bajaj Finance, RBL is leveraging Bajaj Finance’s pan-India reach and offering vehicle loans to its customers. RBL’s secure and compliant digital infrastructure provides existing customers a sense of reliability while increasing its reach in the market for newer customers. As the above example demonstrates, the financial capabilities of banking-as-a-service go far beyond those associated with traditional financial services products. They can create new revenue streams, lower cart abandonment rates and improve customer retention levels. Conclusion Banking as a service has given rise to an entire ecosystem of regulated applications that provide tailored customer services and experiences. Traditional banks should take note and keep up with the rising demand for intuitive and personalized financial services as they risk being left behind their innovative brethren if they fail to comply with increasing customer demands.

India is a land of extensive opportunities and a home to 6.3 crore MSMEs; a significant chunk of the population and needless to say, an essential part of the economy. These MSMEs indulge in several kinds of businesses and yet they all face a similar challenge- access to capital. Formerly, banks were a traditional source of availing credit which was not only time-consuming but also involved long processes that did not necessarily provide the outcome businesses desired. However, a new dawn of innovation in the financial sector has transformed how MSMEs are served; promising a more inclusive tomorrow. Customer-centric credit modules have lessened the friction that has plagued MSMEs for a long time now. Using technology, upstarts have made it easier for small businesses to choose their creditor, avail credit, improve cash flow, make informed investment decisions, etc. As per the data revealed by the economic survey, a majority of these MSMEs are sole proprietorships, hence, they are limited in their managerial, marketing and operational skills. Apart from the rules and regulations of the banking industry, which require certain hygiene parameters to be met in determining creditworthiness and the costs incurred in servicing MSMEs, it does not make a viable business case. With technology, these challenges are being addressed with complete analysis and business-centric products. Interestingly, as per data, it is estimated that more than 3.3 million members have registered on Alibaba.com- an e-commerce marketplace, which indicates that with the help of technology and sufficient access to credit, small businesses are going ‘glocal’ from local. Moreover, this shift to ‘glocal’ has also given rise to online transactions. These transactions are recorded and are used for analysis to serve these small businesses better with products and services most suited to them. This has opened new avenues for small businesses and lenders, respectively. While it helps small businesses in availing of formal finances, it helps lenders widen their reach in the market. Being said that, the primary customer base for lenders should not be MSMEs selling goods online. Principals or processes of lending digitally or using technology prowess can be extended to typical small business owners operating in the conventional format as well. Although the intervention of technology is to ensure quick and paperless lending, considering India’s rural population, conventional borrowers cannot be neglected. The key processes to be addressed for the same will be assessing the funding gap & credit requirement, capacity to repay (business fundamentals) and willingness to repay (identify and credit history). The critical success factors for digital lending in India will be transparency, turnaround time (TAT), process control and operational efficiency. The Pandemic Challenge for Small Business Owners Digital lending to MSMEs was poised to grow between INR 6 and 7 lakh crores in annual disbursement by 2023, i.e., pre-pandemic, as revealed by the Omidyar Network India. The pandemic brought to the fore the limitations of traditional lending to small business owners who suffered from a severe lack of access as reaching out to physical outlets became impossible. This was more so in non-metro locations that faced longer, unplanned business closures. To fill the gap, digital platforms are playing an instrumental role in improving financial assistance to small business owners. The online service of document verification, creditworthiness assessment and loan approvals have cut short the overall processing time from ‘many days’ to a ‘few hours’. This has brought about cheaper and quicker access to lending and better prospects for small businesses.

India as a market is fairly complex and dynamic in terms of geography, consumer behavior and preferences. The consumer market is vast and diverse for any given product or service. Needless to say, the unifying force in all these segments is the acceptability and usage of mobile connectivity, application and platform. Fintech has anchored a spot for itself in this vast market by leveraging the ubiquity of mobile connectivity and internet connection. While Fintech has penetrated the market with need-specific products and services, it is interesting to understand who are the borrowers largely- the underserved or the credit-worthy borrowers. Fintech lenders target areas where traditional banks do not operate or have very little intervention. Due to their low fixed costs, Fintech has laxer lending standards. Therefore, the entry of Fintechs has aggregated credit frictions and imperfect competition between traditional financial institutions and Fintech. The increase in competition has led to access to credit for financially constrained and underserved households and MSMEs, respectively. Furthermore, the use of data analytics also enables Fintech lenders to capture credit-worthy borrowers. The different business models that Fintech has devised and observed allow them to cater to larger demographics- As per data, personal credit is one of the fastest-growing products in the lending business. Fintechs seem more interested in unsecured lending owing to its standard policy, loan size, quick maturity period and interest rate. While traditional banks focus on more credit-worthy borrowers, borrowers from Fintechs, although more diverse, are predominantly the underserved ones. Fintech lenders start with less credit-worthy individuals and slowly branch out and increase their market share. As per reports, most Fintech borrowers have credit scores in the mid-range, i.e., between 640-720. Traditionally, unsecured lending in India is majorly controlled by community finance- a segment of focus for Fintech today. Fintech is filling the credit gap and offering receivables financing, working capital financing, equipment financing, unsecured financing, etc. and is eyeing the borrowers who require these.