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Fintech Changing The Landscape Of Lending

The advent of fintech led alternate lending has also given rise to concerns around data privacy as the apps seek permission to access data on smartphones

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Off late, Fintech has been the buzz word. But what actually is fintech? For the layman, it essentially means computer programs and other technology used to support or enable banking and financial services. Lending by fintech companies essentially involves two essential component viz Use of Digital channels vs traditional channel and Use of Digitised data. Both these component enhances the customer experience as customised products are offered at door step.

Financial services companies have been adopters of the mainframe computer earlier than other Industries. These have helped Fintech companies in not only solving human problems but have also enhanced efficiency in its operations. Technologies like Big Data Analytics Machine Learning, Artificial Intelligence (AI), and much more have allowed computers to crunch huge varied, diverse and deep datasets than ever before. Digital lending is a powerful force for financial inclusion.
Innovations in digital lending are enabling financial service providers (FSPs) to offer better products to more underserved clients in faster, more cost-efficient, and engaging ways. Like always, initially, the early entrant captured the low hanging fruits by concentrating on developed markets and higher-income segments. But today, many are turning their attention to emerging markets and competing for traditionally underserved, down-market customers. Improved connectivity (3G, 4G roll out) together with digital literacy which was aided by affordable smartphones, have helped fintech companies to roll out customised products as well as larger loan sizes. The Market size is humongous. One of the report found alternative finance globally had become a US$145 billion industry (in 2016).

MSMEs despite contributing close to 29% of GDP and over 45% of industrial output have had limited access to formal means of financing. A primary reason that they were not adequately served by Banks was due to lack of data / documents and the high cost of credit delivery relative to their small size. This is further substantiated by the fact that CRISIL estimates only a quarter of MSMEs demands were addressed by the formal channels of finance. It further pegs MSMEs potential credit demand at INR 45 Trillion (as of 2015-16). Hence, given that a large portion of these borrowers are unbanked or new to Credit, there is immense potential to grow and serve this space. While NBFCs with their agility have taken a lead over Banks in the pace of addressing the demand in this segment, the new age fintech enterprises with their alternate scoring mechanism and quicker processing times by leveraging technology have made the access to finance even swifter.

The demand for digital credit cannot be met by fintech players alone. Fintech companies face challenges in funding as well as managing asset liability mismatch.

Further, in some countries, terms of licensing also limit their product offerings. It is therefore essential that the old FSP's such as Banks digitize its product portfolio and offer a similar or better customer experience than traditional methods. It is crucial for them for staying relevant in a changing financial landscape. The adoption of technology in lending by older FSPs, provide added advantage as it lowers operating expenses, reduces turnaround time, helps reduce the delinquency (due to better decision-making & improved understanding of client behaviour) and at the same time enhanced customer engagement through personalized products. At the same time, it can also provide previously underserved clients with the high quality, affordable financial services.

The advent of fintech led alternate lending has also given rise to concerns around data privacy as the apps seek permission to access data on smartphones. Further, given the easy availability of credit, over burdening of customers is another major concern. A non-discerning borrower in this case may easily borrow more than his corresponding financial capacity, hence, he may not be able to repay. Also, some in the traditional banking channels term it another 'credit bubble' in the making. Eventually, how the risk-return matrix are handled by these enterprises would separate the Men from the Boys in this club.

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.

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Rajesh Sharma

The author is Director, Capri Global Capital

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