The next wave of fintech evolution on the back of data, product and policy

The Indian financial ecosystem is witnessing a rapid and much-needed evolution, primarily led by the fintech industry. The growing prominence of Fintechs is due to their effective financial services, accessible in a quick and convenient way. It is estimated that the Indian fintech market, currently valued at $31 billion, will grow to $84 billion by 2025, at a CAGR of 22 per cent.

Currently, India has over 2,100 Fintechs, with around 67 per cent set up in the last 5 years. The significance of fintech adoption grew particularly during the pandemic, rightly so, owing to its digital-first nature. This has particularly resonated with the rising digitalization, enabled by over 600 million smartphones and 700 million Internet users, increasing the overall digital footprint of Indians.

Further, data democratisation and greater technology integration have allowed Fintech firms to offer more insightful services characterized by ease and convenience, as compared to traditional setups. Fintechs are increasingly leveraging the power of AI/ML and analytics to extend customized and effective offerings to a wider customer base.

AI-based models

The nuances are particularly visible in the lending space. Digital lenders are utilizing robust AI-based models to extend the scope of credit assessment, to identify and evaluate the precise needs and provide tailored financial offerings. Their credit assessment or the underwriting process, in particular, has undergone a transformation, and they are now able to provide in-principle approval within hours.

Traditionally, lenders would examine borrowers’ debt levels, salary, financial history, and repayment ratio as well as the debtor’s capacity to repay debt. The evolved Fintech lenders are now able to quickly gather financial information from a variety of data sources such as power, telecom, banking, residential and commercial data. They are also utilizing non-traditional parameters like the payment history of the borrower for periodic expenses such as phone, rent, and utility bills, bank balance, e-commerce purchasing, travel size, and expenditure patterns. It capitalizes on the optimization of emergent technologies and digital footprints like social media, email, and internet usage which bring forth insights regarding borrowers’ employment status, lifestyle, and spending habits.

This well-rounded data analysis allows Fintechs to undertake a more comprehensive credit scoring process, to analyze prospective customer’s digital traces and their creditworthiness. Their enhanced underwriting capabilities has allowed Fintechs to extend credit to the sections which are unserved or underserved, including new to credit (NTC) customers.

Effective lending to new customers

Financial inclusion is a key factor to achieve a $5 trillion economy, especially considering the fact that less than 10 per cent Indians have access to formal credit. Effective credit access to every citizen is critical and unlock rapid growth of businesses. In this imperative, Fintechs are critical stakeholders, as they offer custom and effective lending products at scale.

According to a TransUnion Cibil report , India adds 0.6-0.8 million NTC commercial borrowers each year. Even for products such as business loans, which are usually unsecured, an estimated 20-25 per cent are NTC who generally gain credit on the basis of tax return documents and bank statements. Digital lenders are able to leverage these simple data sources like GST, Banking and Bureau in their underwriting process, to understand borrowers’ credit behaviour and their future cash flows. Integration of technology and automation in the underwriting process enables Fintechs to provide in-principle approval within minutes, and its virtual nature renders the entire procedure seamless and convenient.

Fintech adoption

The operational capabilities and tremendous potential of Fintechs have attracted requisite policy and regulatory support. The government has undertaken important digital initiatives which have boosted the prominence of digital lending in India. Incepted in 2016, the India Stack has built a robust digital infrastructure bringing in varied public and private entities to operate within the robust regulatory framework of the Reserve Bank of India (RBI). Its API-driven multi-layered structure inclusive of Aadhaar based identification, consented Digilocker and cashless functionalities, has allowed individuals to access fintech services quickly and conveniently. Together with the recently announced account aggregator and OCEN (Open Credit Enablement Network) frameworks,we now have a higher degree of data democratization. Account Aggregators allow individuals to share and access data from one financial institution to another in consolidated networks and in a highly secured manner. Initiatives like Jan Dhan Yojana, demonetisation and the introduction of GST, among others have further aided Fintech adoption.

Digital currency

RBI’s digital inclination is evident from the announcement regarding the operationalization of Central Bank Digital Currency (CBDC), towards lowering the economy’s reliance on cash, simplifying the implementation of monetary and fiscal policy and promoting greater financial inclusion.

The Fintech boom is significantly catalyzed by the country’s emerging start-up ecosystem, which has seen a higher capital infusion in Fintechs, amounting to $10.73 billion in 2021 alone. In India’s fintech space, there are several segments offering solutions in niche financial domains. These include Payments, Lending, Wealth Technology (WealthTech), Personal Finance Management, Insurance Technology (InsurTech), Regulation Technology (RegTech), among others.

What creates an even more encouraging picture is the collaboration amongst Fintechs and traditional financial institutes. This has allowed the two entities to combine their individual capabilities, liquidity and trust of traditional setups, technology and operational flexibility of Fintechs, towards a greater financial inclusion. The respective importance of both entities was highlighted by the RBI deputy Governor. He emphasized the importance of banks in the financial intermediation process and the role of Fintech companies as enablers and partners. This certainly is an exciting phase as we are witnessing a remarkable transformation in the financial ecosystem, with the fintech sector’s expansion backed by a tripod of data, product and policy. This has resulted in the creation of a healthier and more inclusive financial ecosystem.

Madhusudan Ekambaram is Co-Founder & CEO, KreditBee and Co-Founder, FACE (Fintech Association for Consumer Empowerment)

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