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D is for digital: Innovation, disruption and opportunity in the fintech sector

Alok Mittal
17th Nov 2017
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With the advent of digital experiences, the relevance of traditional banking is changing as quicker and simpler digitised processes and services continue to replace old legacy systems. Banking is an industry which has experienced major upheavals when it comes to digital services and automation.

Digital tools are enabling fintech companies to address under-served customers, save massively on costs, and offer a truly superior customer experience. Hence, new players in the market who have identified the potential for disruption in nearly every component of the banking value chain, are now breaking down hitherto aggregated processes into distinct components which are now being powered by the latest technology.

Re-inventing banking through smart technologies

As far as core banking services are concerned, lending is a function where the grass is greenest for new fintech companies as commercial banks continue to withhold credit, especially to small businesses. The resultant gap between the demand for and supply of credit in the market is where fintech companies have had their biggest growth opportunity over the past three years.

The small and medium-sized enterprises (SME) sector is one of the biggest beneficiaries of digital financial services. The SME sector’s contribution to the Indian economy is enormous; it contributes nearly 45 percent to the country’s GDP – about three times of what the corporate sector contributes.

Moreover, the sector employs upwards of 46 crore people employed in about 51 million units currently operating in the country. Despite this, the SME sector faces a credit gap of Rs 2.93 lakh crore, hindering a significant amount of potential growth in the sector as well as the economy.

This is where fintech companies are playing a major role in bridging the credit gap with cutting-edge technologies and automated processes, and facilitating an uninterrupted flow of capital for these enterprises.

The following are some of the ways in which fintech’s tech-driven services are helping the SME sector:

Flow-based lending

The emergence of digital lending stacks, powered by Aadhaar based KYC and Sign, as well as UPI and mobile penetration, is allowing smaller and shorter tenure loan products to become economically viable.

Thus working capital products for small merchants, grocery stores, and other small businesses, are becoming a reality. This has expanded the access to credit for small businesses. It is widely expected that availability of more real time transaction data, as well as GST data, will add to real-time working capital financing.

Seamless and efficient processing of loans

The biggest transformation financial technology has brought about is eliminating paperwork from the lending process, thus reducing the total time taken to process and disburse loans significantly. Through digital lending platforms, individuals as well as businesses can apply for a loan and receive the funds in their bank accounts in as less as 24 hours.

Fintech companies employ technological tools which can extract a borrower’s data from multiple online sources and by deploying rule-based engines to screen applicants, they can enable quicker and more efficient decision-making.

Innovative underwriting mechanisms

Traditional underwriting has been built on the back of slow moving data such as income tax returns – this poses the issue of working on stale information.

This is extremely counter-productive, considering the volatility in small businesses, which is reflected in most recent information. Therefore, fintech companies are investing heavily in data sciences and analytics to develop state-of-the-art technologies which offer alternative means of undertaking credible and relevant credit scoring when processing loans.

With the help of these technologies, lending institutions can now derive a business entity’s credit-worthiness from the past along with current cash flows, social networks, behavioural analytics, and feedback from peers, making the underwriting process less rigid and time-consuming.

Some of the more advanced underwriting mechanisms deployed by fintech lenders can also determine an SME’s real-time credit score by analysing its transactions with local suppliers or through the enterprise’s resource planning system.

Banks and fintech: A combined force to reckon

It has long been speculated that as competition between new fintech players intensifies, many of them will seek collaborations with traditional banks and financial institutions to consolidate market share as well as product offerings. Once both parties find that perfect combination of competition of co-operation and establish a common business model, the opportunity would be extremely profitable.

While banks will be able to fight the disaggregation of services brought about by fintech, the new digital finance companies will gain the trust of customers, access to client data and greater credibility in the market.

(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of YourStory.)

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