What was the last innovation in banking?
18 Mar, 2016
Let’s leap frog 10 years from now and imagine you are sitting in 2026.
You’ve woken up in the morning with your smart(er) phone that keeps a track of your sleep timings and calculates the estimated time (with all the traffic) to your office. Your coffee machine has already received the signal that you are up and your coffee is being prepared.
You’re driven to your office in a driverless car. You go out for lunch where a meal curated as per your calorie intake is waiting for you on the table. You enjoy the meal and the bill comes to your phone itself. You pay using your fingerprint, or tap your phone or just NFC from your smartwatch (or even pay with the blink of an eye — who knows!)
When we think about the future of banking, contactless payments is the first thing that comes to mind.Innovation in banking in the last decade has largely focused on payments too. Think about it. What was the last innovation that happened in banking?
I have asked this question in all of my talks ranging from an audience of 25 to 400, and I always get the same responses: ATMs, internet banking, mobile banking. If you pause for a minute and think, all of these technologies have existed since early 2000s. There has been NO real innovation in the financial sector since then.
But we badly need innovation in other sectors of the financial industry. We need innovation in credit.The core business of banking remains that of saving and lending i.e. taking money from savers and giving it to borrowers and making profits in between. That business has almost remained the same with the only innovation of a credit score (a tad too late though, the FICO scoring algorithm was introduced in the US in the 1960s!)
Why do we need innovation in credit?
Anywhere from 20–40% of people in India do not have access to basic financial services. As the former Economic Advisor to the Government of India C. Rangarajan recently said, “There are two aspects to financial inclusion: one is bank accounts and the second is access to credit. The scheme announced by the prime minister addresses the first problem. The issue of making credit available to small borrowers remains.”
The Jan-Dhan Yojana along with the Aadhar card has helped people get access to a bank account at least. And while getting home loans, car loans, large corporate loans or loans of value above Rs 5 lakh is not that difficult for certain segments of our society, small borrowers still don’t have easy access to credit worth less than Rs 1 lakh.
Small ticket size loans are what banks or NBFCs are least interested in. We can keep cursing the banks but small ticket size loans don’t make any business sense for banks because of the following two reasons:
1.Cost of acquisition / servicing : Traditional branch led / sales representative led models will never make small ticket size loans profitable because the cost of acquisition and servicing the loan itself is higher than the smaller interest charge the bank will ever earn.
2.Constraints of traditional risk assessment models: Typically the small borrower is not somebody employed in an MNC earning a six-figure salary who can show his/her payslips, ITR,credit card statements and CIBIL score to get a loan. The small borrower is somewhere in the middle,probably running his/her small kirana store with no official proofs of his/her income, or young graduate working in his/her start-up with no paperwork whatsoever for his /her salary. Traditional risk assessment models with banks are not capable of handling such complicated cases and neither are their processes tailored to meet the needs of this segment.
When a student is sitting in a bank to get his/her Rs 30,000 laptop financed as he cannot afford it in one shot and beside him is another customer asking for a car loan for Rs 500,000, the banker will obviously give preference to the latter.
But we at Finomena are working hard to change that! We are providing these small borrowers, be it retail borrowers, young working professionals, SME borrowers, students or housewives with loans less than Rs 1 lakh to buy gadgets and electronics.
We are challenging the status quo. We don’t have to work with the age old traditional models of assessing risk. We use machine learning algorithms to train our big data scoring models to evaluate the creditworthiness of borrowers.
We’re debating with regulators. We’re being laughed at by mighty banks. We’re being pushed against the wall by naysayers. But we’re being applauded by our customers . And we’re not fanatics for no reason. Let me give you a sneak peek into the limitless possibilities of innovation in credit that drive us crazy every day!
What can you innovate in finance?
If you want something new, you have to stop doing something old — Peter Drucker
Finance has ample opportunities for innovation, starting from the product design itself. Who has forced the word EMI into our brains — Equal Monthly Instalments? Why do instalments need to be equal? When my salary is increasing every six months, why don’t my instalments adjust with that?
That’s what we at Finomena are trying to challenge and helping financial institutions come up with innovative products such as FMIs — we call them Flexible Monthly Instalments or Finomena Monthly Instalments. There are some good months when people are able to save more and then there are some tough months, when people are trying to make both ends meet. Why not tailor the monthly payments according to the borrower’s financial health in that month, keeping in mind all the financial regulatory and risk modelling constraints?
Product innovation is just scratching the surface. I have not even gotten into the innovations possible in financial processes, delivery and servicing yet.
How does it differ for Ram and Shyam?
Ram works in a government job and earns Rs. 50,000 per month while Shyam is working in a new- age e-commerce (or hyper local delivery) startup and earns the same. When both approach the bank for a home loan, both are offered the same 10.10% rate of interest. Shyam is super happy as he is getting the same product as Ram ,while Ram is very annoyed as he believes that he has a more stable credit profile than Shyam and therefore should get better interest rates (because God knows when Shyam’s company will shut shop and/or fire him).
Traditional risk assessment models that banks use are not capable of customizing rates of interest uniquely for every customer as they need a lot more data about the customer to be able to tailor a product specifically for him/her.
That’s where big data comes in and we at Finomena are trying to train these new-age risk assessment models to provide people very customized and personalized interest rates according to their risk profiles. But rates are the low hanging fruits in this realm of personalization. There are many more areas to customize that will make people feel that the suit is really tailored for their fit.
Banking might have been a laggard on the innovation front in the past 10 years, but the next 10 years belong to fintech. As Arthur C. Clarke said, any sufficiently advanced technology is indistinguishable from magic. We at Finomena are trying hard to create this magic in retail banking in India :)
