The last decade has made it amply clear that India’s fintech and banking sectors have a collaborative relationship and not a competitive one.
The Indian economy has undergone a radical transformation in the last decade. The confluence of technology and finance, or fintech, has been at the centre of the change. India has emerged as one of the biggest fintech hubs in the world as new-age companies leveraged technology to change the way people and businesses avail banking and financial services.
In the next five years, the valuation of the sector is expected to touch $140 – $150 billion, according to a joint report by BCG and FICCI. Attracted by rapid growth, domestic and foreign investors have poured in $10 billion into Indian fintech companies in the last few years.
The current scale of the fintech sector was unimaginable a few years ago. From payments to lending and advisory to security, no banking or financial activity is bereft of the influence of technology. In the initial days of the fintech boom, the sector was seen as a competition to the established financial system.
But, t he last decade has made it amply clear that fintech and banking have a collaborative relation rather than a competitive one. The digital payments sector is a prime example of the symbiotic relation between the two sectors .
Digital payment companies have developed front-end applications that use the infrastructure of existing banks to execute transactions. The collaboration has democratised basic financial services and has taken banking to the remotest corners of the country.
The payments boom
The impact of the fintech revolution is apparent in consumer-facing services. However, a number of B2B solutions have remained under the radar. A wide variety of fintech offerings are on the cusp of revolutionising banking services like lending, analytics, customer onboarding, and security.
For instance, payment providers have gained attention for the ease of usage and simplified customer onboarding processes, but technological intervention in areas like data security and new form factors like voice banking have gone unnoticed.
Services like voice banking are underpinned by advanced technologies such as AI/ML, which can also be used for other banking activities.
If the last five years were about technological solutions for basic banking services like payments, the next half-decade will be defined by fintech offerings for complex financial activities like lending, analytics, and fraud detection.
Multiple fintech companies with differentiated offerings are operating in the lending space. While a majority of fintech players are focused on consumer lending, a few are offering financing solutions for businesses.
Digital lending to consumers takes place primarily through three mediums — digital arms of established banks and NBFCs, fintech companies operating in collaboration with banks/NBFCs, and peer-to-peer lending.
While collaborating with banks/NBFCs, fintech companies provide the lending platform and the partner financial institution provides the capital. The processes in the domain of the fintech partner may become the cornerstone of the entire banking system in the near future.
Generally, sourcing of borrowers, assessment of creditworthiness using alternative data and recovery is handled by the fintech partner. Fintech players have developed advanced analytics systems, powered by AI , that process multiple data points to assess the creditworthiness of the borrower.
The traditional method of assessment largely relies on the credit score of the borrower. However, the credit score of many borrowers and small enterprises is not available with credit rating agencies, which has deprived millions of access to capital.
Business made easy
Just like consumer lending, fintech companies have also developed proprietary solutions for lending to businesses. New-age companies have simplified access to working capital and supply chain financing and increased the efficiency of small and medium enterprises.
Fintech offerings include pre and post invoice trade financing programmes that use advanced algorithms to provide funding in real-time to the borrower based on the receivables. Processes ranging from credit assessment and disbursal to monitoring and repayment have been automated by fintech companies.
In contrast to the traditional trade financing system, fintech offerings do not require lengthy documentation processes or collateral. Efficient trade finance models, championed by fintech companies, is expected to become the banking sector’s backbone in the next five years.
Peer-to-peer lending is another emerging phenomenon in the Indian market that may become a major component of the banking sector in the future. Peer-to-peer lending is in a nascent stage in India but has witnessed an unprecedented boom in the US and China.
P2P lending companies use technology to match borrowers with investors. Through the use of technology, the P2P platform reduces various overhead costs to offer borrowers competitive interest rates. The technologies that support peer-to-peer lending can become crucial tools for banks in the future.
A number of peer-to-peer platforms are leveraging the interdependence of individual constituents in the lending chain to improve financing processes. For instance, some platforms have created a web of borrowers, lenders, consent managers, industry associations and technology developers to improve credit assessment on one hand and increase financial awareness on the other.
Many fintech products are backed by AI and certain fintech companies are working solely on improving the quality of AI for the banking industry. AI has uses from predictive typing to targeted advertisement. However, the banking sector has unique requirements, which has led fintech players to Ethical AI.
An AI system without supervision and monitoring can lead to unintended consequences. In China, banking AI systems have been known to contact friends and family of the borrower for recovery in case of delay in payment. To make borrowing a pleasant experience, fintech companies in India are working on Ethical AI, which aims to put in place suitable monitoring systems and make AI responsible.
While AI-led debt collection has been proven to be more efficient than traditional methods, unsupervised algorithms can lead to borrower stress. With the improvement in AI models being offered by fintech companies, it may form the core of banking services in the future.
The Indian fintech industry has emerged as one of the most dynamic sectors of the economy. With offerings backed by blockchain technology, artificial intelligence, machine learning and data analytics, a number of fintech products will find mainstream adoption in the near future. With the current speed of innovation, a product yet to be introduced may become the foundation of certain banking services in the next five years.
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