Indian FinTech: 2018 to 2019

FinBox wishes you a very Happy New Year.

While 2018 was a momentous year for FinTechs with multiple technical advances, shifting market dynamics and ever-changing policies, 2019 has finally arrived with all its promises, threats and opportunities for the Indian FinTech & Digital Lending landscape.

In this piece, we cover the major events which significantly affected the industry in 2018 and what the industry must expect in 2019.

The recap of 2018

1. Lending by Technology Companies

Google, Samsung, Amazon, Xiaomi, Paypal, True Caller etc. started Retail Lending operations in India in 2018.

Google offers credit products on its Google Pay app and has partnered with multiple financial institutions while True Caller and Amazon have acquired Indian FinTech players to get their foothold.

Favorable macro-economic conditions and huge unmet demand for credit makes India an attractive destination for the technology companies to start lending.

Whether their entry brings a head-on competition or a series of partnerships with incumbent lenders remains to be seen in 2019.

2. Paperless Journeys & Aadhaar Verdict

JAM — Jan Dhan Yojana, Aadhaar Ecosystem and Mobile Phones.

With smartphones reaching 340 million Indians and the 4-G revolution changing India forever, the Digital Lending and Paperless Lending models further received support from legislative initiatives like Jan Dhan Yojana and Aadhaar Act.

Honorable Supreme Court of India passed a landmark verdict on September 26th 2018 discontinuing the practice of Aadhaar based e-KYC authentication by corporations.

As a result, Aadhaar based enablers of Digital and Paperless customer journeys like — e-KYC, e-NACH, e-Sign etc were discontinued. Realizing the impact, RBI and other regulators are actively seeking seamless and digital alternatives but they are yet to make a decision.

3. Privacy & Google Project Strobe

For the first time since the advent of the internet age, data privacy and customer consent became mainstream topics of public discourse.

Governments across the globe passed laws in favour of tighter data security, privacy and customer consent norms. GDPR in EU, Justice Srikrishna Committee report in India are prime examples.

Private entities like Google followed suit, coming up with Project Strobe with the intent of restricting access to sensitive data from android smartphones. Many Fintechs relying on digital footprint to generate individual-level insights were forced to rethink their business models and data collection methods.

4. MSME is the new retail

India has more than 60 million MSMEs. Largely untapped due to their unorganized nature and lack of available formal-data, MSMEs are the top priority for many Digital Lenders and FinTechs. Government schemes like GST have supported formalizing initiatives for MSMEs which will facilitate risk assessment by lenders for fair loans.

40% of MSME still finance from informal sources at exorbitant interests, which affects their competitiveness. Government recently opened the GST database for private entities which allows more comprehensive risk assessment for this sector.

MSME lending is expected to grow 10–15 times by 2023.

5. Data Access: PCR & NBFC AA

Data Availability is a huge challenge for India. Lack of data leads to inferior risk assessment, collections etc. and acts as a barrier against preventing identity theft and fraud. RBI’s initiatives — PCR and NBFC AA are expected to mitigate against this prevailing issue.

Public Credit Registry (PCR) will comprise of data from all debt instruments — corporate borrowings, bonds, retail loans etc. and will also include alternative data sources like utilities, bill Payment record etc.

With NBFC AA, customers will be able to get consolidated information on all their financial products which can be shared with lenders for better risk assessment and customer profiling. It will cover different financial products from the financial institutions — savings bank deposits, fixed deposits, pension, insurance policies, Mutual Funds etc.

2018 was a year of highs and lows for the industry. Many a doors opened with higher funding and digitization push, the industry suffered shocks due to the Aadhaar verdict, privacy policy concerns and new market entrants.

In the segment below, we highlight the top-trends expected to create an impact on the FinTech industry in 2019.

The promises of 2019

1. Ubiquitous Financing

With the rise in smartphone penetration and high-speed internet coverage, Indians are using services app much more. shopping, food-delivery, travel bookings, higher education and coaching classes are all available on the Indian customers’ smartphones.

Technology players, service providers and traditional lenders are partnering to provide small-ticket size and curated loans for the customers on the servicing platforms for financing their usual purchases.

Zomato, Amazon, Flipkart, Make My Trip, Swiggy etc. are all equipped with a checkout on credit option. While these players are all gung-ho about this paradigm shift, allowing these options has many systemic benefits like –

• Enhanced customer experience
• Increased credit coverage
• Improved credit reporting
• Better customer insights

2019 will see the mainstreaming of the facility with increase in customer awareness.

2. Hyper Personalization using Big Data

In the digital age, customers are generating huge amounts of digital footprint every second. Digital footprint has proven to provide deep insights about the customer’s profile, preferences and behaviour.

More data presents service providers to create personalized offers and curated communication strategies for their customers, significantly increasing the chances of a sale. With digital footprint getting mainstream, Indian lenders can cater to a wider market while providing hyper personalized services eg.

• Risk Based Pricing: With better insights, lenders can price loans based on the risk profile of the customer
• Sachet Loans: Concepts like short term cash loans for 1-week tenor will become a reality. On a macro level, lenders will be better equipped to offer personalized products fitting exact need of the borrower
• Higher Cross Sell Opportunity: Cross Sell leads to exponential increase in profitability. With personalized offerings and communication, Big Data will lead to significantly higher cross sell for both lending and other products. Eg. Offering attractive Mutual Funds investment to salaried person with ample savings in the month of February and March

3. Information Security and Data Privacy

“Right to Privacy” was declared a fundamental right by Supreme Court of India in August 2018.

A committee, headed by Justice (retd.) Srikrishna submitted the draft law, Personal Data Protection Bill, 2018 which is expected to be turned in to a law in 2019.

Legal impetus coupled with increasing private sector conscience will define the course of the Indian FinTech industry.

Leveraging customer data is crucial for lenders for a profitable delivery of digital lending experience. New regulations around data privacy would empower users with better control & visibility over their data. Thus lenders need to design user experiences which are more transparent & user-centric. Customer consent must precede data collection and consent must only be gathered upon an affirmative action.

These statutory requirements will force financial institutions and FinTechs to curate their privacy and data storage policies accordingly while will also change the evaluation criteria for third-party partnerships.

4. Open Banking

Open banking is the opening up of bank financial data, with consumer consent, to third parties, and is fundamentally changing the retail banking landscape across the globe. In India, too, open banking has made its presence felt through the government’s Unified Payments Interface (UPI).

“We need Banking, we don’t need Banks” — Bill Gates

The statement of Microsoft’s co-founder is the underlying philosophy of Open Banking. Financial Institutions, FinTechs and other service providers can create innovative and scalable products for the customers using the network of Open APIs.

UK has been the global proponent for Open Banking since 2013 and mid-income countries are also joining the bandwagon with Nigeria’s Open Banking Regulations coming in to action in January 2018.

India is expected to follow-suit in 2019.

5. Rise of Middleware

The preceding trends highlight the growing relevance of customer centricity in the industry. For the trends to achieve their full potential, it is imperative that the challenges faced by the industry players are sorted out.

Complexity of business processes, security concerns, speed and timeliness of information, and customer satisfaction are issues common to the financial services industry. There is tremendous pressure to achieve maximum scalability, performance and effectiveness while simultaneously keeping costs low.

As illustrated, Customers and Lenders stand on the two ends of Middleware and Middleware optimally matches customers with lenders, keeping in mind the exact credit requirement of the customer (eg. large housing loan, 6-month working capital loan, 1-week cash advance etc.) with the risk appetite of the lender (eg. small-ticket size lenders, digital lenders, housing finance companies etc.)

Middleware is both a one-stop solution to the core issues and an enabler of the industry’s aspirations.

Middleware will result in the following advantages –

For Customers –

• Enhanced customer experience — 100% digital
• Single application process
• Wider range of available offerings
• Ability to choose the best deals

For Industry –

• 10X operational efficiency
• Wider reach in the market
• Consolidated customer data
• Lower customer fraud and identity theft
• Easier integration with State-of-the-art technology
• Enabler of innovative and customer-centric products

2019: General Election year, Global Trade War and an expected slowdown of global markets coupled with an ever evolving technological landscape, FinTechs are required to be at the top of their game to survive.

We wish every one all the very best and a prosperous 2019.

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