India remains one of the largest markets where the structural conditions for the incubation and exponential exploitation of fintechs have come together strongly. As the broader economy shifts from reaction to recovery, new opportunities for fintechs in credit are likely to be created.
Challenger’s financial innovators are at the forefront of creating disruptive digital credit innovations. Credit fintechs worldwide have leveraged a common approach and theme: customer centricity with a comprehensive end-to-end digital experience and a simplified process to create a “wow” moment for the customer. This segment has also recently attracted a lot of attention due to the convergence of digital innovation with regulatory rigor as most fintechs in this segment are eventually brought into the regulatory arena.
The Current Opportunity
The current environment in the financial sector is putting considerable pressure on the credit market. Open banking offers banks and NBFCs the opportunity to leverage fintechs and better serve their customers. This partnership enriches the entire digital lending process – better sourcing by leveraging a fintech’s digital and ecosystem access; insightful credit assessment using financial as well as alternative/non-financial data points that a fintech is best at aggregating; and also better monitoring and compliance based on the fintech’s access to real-time information.
Fintech companies are more successful at constructing a more robust economic profile of their customers. This leads to more efficiency in the system – customers can better prove their creditworthiness and banks better assess their risks. Fintechs’ ability to profile economies from traditionally “credit invisible” and “thin filers” is expected to provide access to a segment that has clearly been underbanked over the years.
Fintech players are tackling structural issues of lower credit penetration, information asymmetry and reducing the TAT for lending to customers and businesses. Rapid advances in technology and IT infrastructure, increasing digital penetration, favorable regulations, significant funding and finally – the emergence of open APIs offer enormous potential to provide a 360-degree view of the customer and offer on-demand, personalized products and services . while driving operational cost efficiencies and creating truly disruptive business models.
Emerging business partnership models
As opportunities and innovative disruptions continue to proliferate, various models of collaboration have emerged between fintechs, traditional banks and NBFCs, ranging from mutually beneficial partnership models to hybrid models. The decisive difference between the models lies in the moment of truth – who owns the customer?
Under the white-label model, banks/NBFCs utilize the technical functionalities of fintechs throughout the credit value chain – underwriting, application processing, early warning system, collections, etc., while remaining the client-facing entity at all times. This partnership works as a pay-per-use or subscription model that helps increase fintech revenues.
The Point of Sale (PoS) financing model uses data from PoS machines/gateways to offer unsecured instant loans. Peer-to-Peer (P2P) lending is also an innovative model for transferring credit risk from banks and financial institutions by spreading it among individual lenders.
Marketplace Lending (MPL) typically tends to connect individual borrowers with institutionalized lenders including banks and NBFCs, with most of these fintechs playing the role of originators with an agency relationship with the banks and NBFCs. MPL models can have two variants; The MPL platform as an originator (acts as an aggregator to route leads to banks/NBFCs) and the MPL platform as a matchmaker (connects lenders with borrowers with no/limited loan servicing role). The MPL model can be leveraged for the MSME sector in ways we have not seen before and can bring real value to this customer group and eventually the larger MSME ecosystem. Hybrid models (partnerships as well as stand-alone financing) have emerged, where fintechs serving niche market segments such as travel, healthcare, F&B, etc. work with banks to provide financing to their customers/merchants based on their specific needs.
Bank-led digital lending models are also emerging, with banks launching their own independent digital lending platforms to enter the digital lending market by leveraging existing capabilities in traditional lending. The key to the success of this business model lies in delivering a seamless customer experience and the latest microservices architecture, in short: creating a “fintech-like” nimble business proposition. Most of these models also try to leverage point solutions from fintech partners.
The way forward
The robustness of partnership models, even if the financial services provider leverages the lending algorithms of fintech players, remains to be tested as the industry has yet to go through a full lending cycle. Fintechs must be on the path of continuously accelerating partnerships with financial institutions that offer the benefits of capital, distribution access and compliance infrastructure, and can provide them with highly innovative and intuitive digital solutions. There is tremendous potential in holistic financial services that integrate consumers’ financial needs and behaviors in areas such as health technology, tailfin (retail) and wealth management. The real benefit to the economy would be if fintechs, alongside digitizing the current lending landscape that just shifts the channel from paper-based to digital, create new segments that transform credit-unseen into mainstream borrowers. That would mean a bigger pie for fintechs, financial service providers, customers and the economy as a whole.
The views expressed above are the author’s own.
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