3 Ways Fintech Is Disrupting The Indian Lending Space

finance

Fintech companies today are introducing a gamut of financial services comprising basic banking functions, lending, payment solutions, personal wealth-management and analytics-backed financial advisory services. The Indian fintech sector saw investments upwards of $1.6 billion in 2016 and has been growing at a steady rate, while investments in the global sector grew by 10% to $23.2 billion.

Armed with digital technology, expert analytics, and the promise of superior customer experience, the fintech sector seems to be ready to take the industry giants head on and lead exponential market growth.

In India, the growing relevance and demand for fintech services is the result of major socio-economic and demographic changes. As the current generation of millennials’ dependence on the internet increases, the demand for faster, tech-enabled and mobile solutions has also increased proportionately.

The demand for personalised services and self-service options among young professionals is quickly changing the way Indians consume banking and financial services. Moreover, factors such as rapid urbanisation, a growing middle class/aspirational mindset, and rise in disposable incomes are also contributing to the growth of the sector.

The fintech sector, through constant analysis of trends in the market has created various propositions that are disrupting the banking services sector globally. The Indian market is catching up rapidly with these trends and is building a robust fintech sector in the country.

Blockchain

The blockchain is an innovative technology which is an amalgamation of mathematics, cryptography and economics that creates and maintains a database of transactions involving multiple participants that does not require any third-party validation or reconciliation. In simple terms, blockchain is a ledger of transactions that builds a single, indisputable record of financial activities between two or more participants.

The ledger is updated when multiple, decentralised auditors validate a participant’s new entries by a consensus. The blockchain fulfils various banking functions such as storing, lending, moving, trading, reconciling and guaranteeing money through its consensus ledger system. The emergence of permission-less platforms and alternative currency such as bitcoins has been a significant factor aiding innovation in this domain. Acquiring loans against property will become simpler through the blockchain as money can be borrowed through digitally signed property.

Thus, the time period for disbursement of loans against collateral will reduce, leading to superior customer experience. Though at a relatively nascent stage in India, the blockchain technology has generated great interest among the major market players in the fintech sector and many of them are looking to invest in the technology on a domestic as well as global level.

Marketplace lending

There is a huge amount of buzz around online lending platforms (P2P) as they have penetrated the market in a dramatic manner. The platforms primarily use non-traditional data and alternative methods to determine customer’s credit scoring, using algorithms and data analytics to take quick and calculated decisions regarding the credit worthiness of borrowers. This has helped reduce overall operating costs. The cost advantage also helps P2P lenders to offer better prices as compared to banks. Since marketplace lenders are not bound by general banking regulations yet, it has created tremendous advantage for them to leverage opportunities and lead innovations in the financial system without having to pay the cost.

P2P lenders in India are primarily focussing their portfolio on categories such as personal loans, commercial loans and micro finance. The P2P lending model has great potential for growth in India considering the fact that there are over 5.5 crore small businesses operating in the country, a large percentage of which do not own bank accounts.

Though marketplace lending is mainly attached to P2P but in India, we also have marketplace lending platforms which aggregate the market offers from financial institutions on a single platform and help borrowers to find the right financial institution. Earlier these models existed as just aggregators but now with technology advancements, these models are evolving to be the ones who also provide the end to end fulfilment support in the lending process.

Robo advisory

The wealth advisory services landscape is set to experience a major upheaval with the growth of robo advisory technologies. Though robo advisory has a low market share, it is nonetheless expected to grow at a CAGR of 68% and manage assets worth USD 5 trillion by the year 2025. The factors such as scalability and low cost attributed to robo advisory will further provide an advantage to the fintech sector over traditional banking.

In India, the retail investing space is witnessing the emergence of robo advisory services with several new players responding to the emerging trends in the market and aiming for early adopters. Besides the new market entrants, traditional investment firms too, are increasingly adopting robo advisor services for wealth and asset management as well as lending services. Besides the above trends and services, the fintech sector has facilitated financial inclusion for a large segment of the population which has been unserved/underserved and has disrupted the market in the payments and remittances service through emerging technologies like UPI.

Moreover, there is increasing investment in the security and biometrics space. The banking sector faces a growing challenge from fintech and there are only two major choices for them – competition or collaboration. The recommended course for banks would be collaboration with fintech players which will them enhance customer experiences through digital transformation and capitalise on the innovations being carried out by the fintech sector to improve their functioning.