Fintech Unsecured Lending: Challenges And Myths Private sector financial institutions are leading innovation in various fintech products to enable more easy digital access to their existing as well as new financial products

Fintech, short form for financial technology, is the term used where intersection of technology and financial services happens. In India, fintech is disrupting all the sectors in financial services space such as payments, savings, lending, insurance, asset management, etc. As per EY Global FinTech Adoption Index 2019, fintech adoption has grown to 87 per cent in 2019 compared with 52 per cent in 2017. Private sector financial institutions (FI) are leading innovation in various fintech products to enable more easy digital access to their existing as well as new financial products.

For a country like ours, fintech is also playing a huge national role in governance and delivery of public services to achieve our targets of financial inclusion due to government's thrust on leveraging initiatives and policy measures such as demonetisation, Aadhaar, UPI, etc., backed by fast execution of digital connectivity across the country. Fintech adoption in borrowing space is 61 per cent as per this report but late-2019, we witnessed surge in various fintech-led digital lenders. Since it was an infant industry then for regulators and authorities, it had no strong guidelines and focus; these players tapped into the opportunity to lend to a big segment pan-India especially across rural and tier-II, III regions which does not have steady flow of income, almost no formal documentation in place, no credit profile, but require urgent funds for their non-business exigencies like to buy food, medicines, other essential items or to submit examination fees, utility fees, school fees, etc.

They deliver credit digitally in various capacities and business models which is lucrative for such segments which are well aware of apps-based lending. For the ease, we can categorize fintech-led unsecured lenders into two:

1. Companies with NBFC license from the Reserve Bank of India (RBI) and have their own fintech lending products and applications.
2. Fintech companies with no NBFC license but technology experience are usually the digital marketplace aggregators which help in sourcing the customers and connect them to one or more FIs.

Unsecured lending offers promising returns! Myth or true?

The business model is surely helpful for customers which is proven by stickiness to loan applications of around 50-60 per cent by existing customers as per my study. It is a lucrative business model for lenders as well. Returns are surely good (two-three times) in span of two-three years as customers do not mind paying the charges as long as services are fast and efficient. For this business to be successful, lenders need to focus on some key aspects: Availability of many data points of the customers to feed AI/ML models to underwrite and mitigate the risks since portfolio is unsecured in nature and such players do not operate on brick and mortar which means no physical interaction; customer service and operational efficiency and most importantly, how good commercials are negotiated with all technical stakeholders required across the digital lending value chain. However, this model is still in an infancy stage and filled with lot of challenges.

Payment and network infrastructure limitation of banks: Most of the customers in rural and tier II and III regions have bank accounts with cooperative banks, PSU banks and smaller universal banks. Basis the analysis, it has been observed that there are lot of failures during disbursements and repayments at customers' banks' end. This prevents the fintech lenders to do faster servicing of customers and eventually customers' grievances increase and impacts the user experience with the lenders. In many cases, when customers' account is still overdue after repayment transaction failure and customers' money does not credit back to their accounts for months and sometimes never, which makes customers assume that lenders have defrauded them. Lenders educate customers and guide them to raise dispute with their respective banks but most of them have manual reconciliation which takes many days to get resolved which again adds to customers' grievance with lenders. Another challenge is API infrastructure of PSU and cooperative banks and some smaller private banks. Their infrastructure capacity planning is not meeting the demand of their customers' who are transacting digitally more than they anticipated. API Infrastructure limitation often leads to transactions failure and hence poor user experience.

Compliances and stack limitation: The government of India has rolled out various innovative stack for full KYC of customers such as CKYC, Aadhaar, XML-based authentication, particularly for NBFCs, in V-CIP journey which are mandatory to ensure compliance. Without completing full-KYC, fintech lenders cannot disburse loans. When UIDAI portal is down, it hampers the customer loan journey since they are not able to download the XML and customers do not wait enough to complete V-CIP and drop off the loan application. Similarly, in CKYC, portal has limited database and does not match the speed of fintech lenders' business coverage.

Disrepute brought by unregulated fintech lenders and media shaming: The supervision and monitoring of unregulated digital lending companies was not in the scope of either RBI or the ministry of corporate affairs because they operated either without NBFC license or through tie-ups with low lying NBFCs who were indifferent to compliance guidelines. They got easy listings on Google Play Store which made their access easy to customers and with easy integrations with payment gateway companies, they were able to disburse and collect back. With such freedom, such lenders indulged into quick money-making business and used all possible non-compliant ways such as harassment, hacking and misusing customers' mobile and other personal data. Such unregulated fintech companies had brought the entire fintech lending industry into disrepute with their deviant actions. Media trial started for quite some months and perception was made that all fintech digital loan applications misuse the customers' data. However, it is important to understand that most of the licensed fintech lenders work on entire unsecure model in digital-only mode which means no field investigation and no face-to-face personal discussion with the customers in contrary to traditional financial institutions' underwriting model. Lending to unbanked/new to credit customers is a highly risky business model, but to enable financial inclusion, fintech lenders must depend not only on traditional credit bureau scores but also alternate data to validate identity, capacity, and intent to pay. Such alternate data also includes tapping into customers' mobile handset with consent and fetching of various parameters like number and names of apps installed, mobile version, analysing financial SMSs and various other data elements to validate.

Different challenges and turbulent times that this industry and customers have faced in 2020, RBI has come to the rescue of both by constituting a working group on digital lending. It would help not only in weeding out the unregulated players and their harassment tactics but we also hope it to be accommodating of basic business requirements of fintech unsecured lenders. All we hope is that all stakeholders understand the risk fintech unsecured lenders undertake to lend and accordingly come up with a balanced guideline.