Streamlined Fintech-Bank Partnerships — The Key to Solving India’s Credit Needs

I’m hopeful that my previous blog Product Life Cycle Management at Rupeek was helpful. With this blog, I will attempt to illustrate the importance and potential benefits of strong Fintech-Bank partnerships.

Strong partnerships between Fintech startups and Banks can influence the advancement of India’s lending ecosystem in a massive way. Banks are the most efficient source of capital in the market. They can provide the lowest cost of capital in the ecosystem; they have years of experience in efficient capital management (including collections, risk management, etc.); and most importantly, they are perceived as the most trustworthy financial institutions by customers.

Fintech companies, on the other hand, can provide customers with the best-in-class experience and delight them with prompt and efficient customer service. They can also attract the best talent in the product and technology market and, as a result, can innovate with new product features much faster.

A seamless partnership between Fintech companies and Banks in a marketplace model will bring the best of both worlds together for the customers. i.e., the best rate of interest from banks and the best customer experience from Fintech companies.

Though many challenges deter such partnerships, interestingly, streamlining industry norms and regulations can help remove these obstacles. But before we jump into these challenges, let’s take a quick detour to understand the current lending process (those familiar with it can skip the next section).

India’s current credit lending process - An example

The following steps illustrate, in a very simplified manner, the credit lending process between a fintech company and a bank to underwrite loans.

1. KYC: All financial institutions are supposed to do a KYC - Know Your Customer - before extending a loan. If a fintech company is doing KYC of a customer on behalf of the bank (e.g., as a business correspondent), they have two main compliance methods-

• eKYC - In this method, the fintech company calls the bank API with customers’ biometric information, which hits UIDAI to verify the customer
• Video KYC - Here, the bank personnel does a video call with the customer to complete KYC.

2. Credit Decisioning - Post KYC, the fintech company runs its own proprietary algorithms or relies on the bank’s underwriting modules to decide whether to serve the customer or not and how much loan to underwrite.

3. Customer Creation - Post credit decision and underwriting, the fintech company hit the bank’s customer creation APIs, which will create the customer as an entity in the bank’s customer management systems.

4. Loan Creation - Once the customer is created, the fintech company will pass on the loan information, e.g., sanction limit, etc., to the bank’s infrastructure to create a loan in the bank’s Loan Management System and Core Banking System.

5. Loan Management/Repayments - After a loan has been created and the money has been disbursed to the customer, the fintech company calls the bank’s loan information APIs to service the customer in their post loan disbursal operations like repayment of EMIs, renewal of loans, etc.

6. Closure of Loans - Lastly, when the customer has paid off all the dues, the fintech company will notify the bank to close the loan.

Current credit lending challenges faced by fintech companies

When a fintech company is trying to partner with 1–2 banks, they can invest in these API integrations once or twice and run their business. However, for a marketplace fintech company like Rupeek that aims to partner with multiple financial institutions and offer a wide range of product offerings to its customers in a comprehensive marketplace, there are many challenges to overcome in the current credit lending process. Few of these challenges are:

1. KYC

• eKYC - Currently, according to RBI compliance, only banks can call UIDAI directly to do eKYC for their customers. Hence, to partner with banks, the fintech company must integrate with the bank’s eKYC API to do KYC for their customers. And if a fintech company has to partner with more than 10 banks, it means 10 different integrations because these APIs are not standard, and each bank has its own customization.
• Video KYC - To simplify KYC, RBI launched the Video KYC system. While it is a good step in the direction of digitization, it comes with its own challenges. The success rate of Video KYC is not very high because of two main reasons. Firstly, the process is a bit long, leading to customer drop-offs. Secondly, it requires access to the customer’s Aadhaar-linked phone number, which is not the case for a significant percentage of the loan borrowers.

2. Customer creation, loan creation, and loan management - APIs are not standardized across the rest of the lending process as well, especially in case of asset-backed lending. Each bank has a different protocol of information exchange, lending workflows, and system architecture. This means that if a fintech company has to partner with 10+ banks, it has to integrate with 50-100 completely different APIs between these banks. With the bank’s core system and architecture not being very modern for some of their loan categories like gold loans, agri loans, etc. (the unsecured lending system is relatively matured), integrating with these APIs could be an arduous process for startups.

Standardizations that can boost these partnerships

While many norms and processes require streamlining to ease integration, I would like to touch upon the two significant changes needed in the industry.

1. Further simplifications of KYC norms

• eKYC - RBI could allow NBFCs or BCs to hit UIDAI on behalf of the bank to do customers’ KYC (edit: this was recently rolled out by RBI)
• Video KYC - Find an alternate to Aadhar-based phone number verification and simplify the overall process to increase its adoption

2. Standardization of lending journey across banks - The lending protocol across all banks and all financial products should be standardized. With this standardization, fintech companies can create one service for the lending process to communicate with all banks across the standardized rails.

Currently, a marketplace integration between a fintech company and banks looks like an N:N integration. Each bank has different APIs, workflows, data formats, etc., that forces the company to custom implement the same product and process for different banks.

Figure 1 below is a visualization of how the landscape looks like right now, specifically for asset-backed loans.

However, a standardized lending process protocol across the entire industry will result in more manageable integrations and workflows, where each company does implementation once for a particular product and then, it can integrate with all banks with the same implementation. This standardization will result in a much simpler 1:1 relationship between Banks and Fintech companies. This will further unlock massive productivity, creating a seamless marketplace where Banks and Fintech companies partner together to provide the best-in-class products for customers.

Figure 2 below depicts a visualization of this standardization.

It’s encouraging to see iSPIRT (Indian Software Product Industry Round Table) making efforts in this direction. The organization has launched a protocol called OCEN (open credit enablement network) that prescribes a common protocol for unsecured loans. But despite it being a fantastic step for standardization, there are few obstacles -

1. OCEN adoption is very slow - Relevant stakeholders have been working on it for almost a year now. At this pace, it might be a long journey for the industry.

2. The protocol is extensible to an extent but is highly focused on unsecured loans. Banks’ protocol adoption for other category loans might be an even longer and painful journey for all relevant stakeholders.

In conclusion, strong Bank-Fintech company partnerships can unlock easy credit access and boost the Indian economy. These partnerships can only flourish if norms are simplified and protocols/digital journeys are standardized. While we are happy to see the efforts made in this direction, we are hopeful that we can pick up more speed and build momentum further, thereby helping unlock the massive potential of India’s credit lending ecosystem.