Fintech is the buzzword for 2016. There are promises of a brave new world where banks would be decimated in favor of the tech brigade, and millions of underserved businesses will have better access to finance. The power of big data promises to overrun decades of underwriting wisdom. How much of this promise is true? Is “this time” any different from earlier attempts to reshape the financial industry? What really are the levers in a transformation towards better access to capital for countless MSMEs in the country?
It happens that there are several gains to be had from the wave of technology adoption we have witnessed in past few years – both by consumers and within enterprises. This has an impact on all elements of the lending value chain. Let us examine those in more detail.
Small businesses have two ways of connecting with the lenders today – walk into one of their branches, or a friendly neighborhood Direct Sales Agent. It happens that both these mechanisms of acquiring customers are very expensive for the lenders, and that cost is eventually passed back to the borrower. As more and more customers get onto smartphones, direct origination will start to bring friction down in the process.
There will be further proliferation in the points of access. Companies like Samunnati and Indifi are aligning themselves to existing value chains, and making financing available to small businesses through their business partners. Thus, a small business may get ready access to financing through the dairy where they sell milk, or the consolidator through which they buy their ticketing.
In short, financing will come where the borrower is.
The Holy Grail – Data
Much of the credit access for MSMEs is constrained due to lack of credible secondary data. In an environment where tax compliance is lower than desired, it comes down to a credit officer visiting the borrower and collecting information on a primary basis – this is both expensive and unreliable.
Fortunately, a lot of data is getting digitized - from data available in public domain and government, to identity itself, as well as data in supply chains. We expect this data to start to become available through electronic means to lenders. The JAM (Jandhan, Aadhar, and Mobile) architecture is already evolving in a direction where it promises to provide access to a wide variety of data sources for authorized parties. This will bring down the friction and costs involved in assessing small businesses.
Besides access to data, analytics holds the promise to draw insights that improve the quality of credit decisions and thereby reduce credit costs. As the cost of bad loans is segmented and understood in a more granular manner, risk based pricing models will ensure that higher quality customers can command better loan terms and rates. Data will feed on itself to create a virtuous cycle of better access.
Boring but Critical – Operating Costs
It takes same amount of effort to write a Rupees 5 lakh loan and a 50 lakh loan. But the revenue gap is ten times. Operating cost overheads are a critical determinant of financial inclusion. This relatively mundane area will bear bulk of the load in terms of improving access to MSME credit.
As mentioned earlier, proliferation in channels of origination and availability of secondary data will both expand access and bring down costs of lending. Further, automated workflow and data analytics platforms like Indifi will reduce the cost of processing and customer management. Thirdly, technology initiatives such as digital signing of documents, Unified Payment Interface, and Aadhar based KYC will reduce the transactional costs. All these developments put together have the promise of an order of magnitude reduction in costs, thereby making much smaller loans viable for lenders.
The Disruption – Business Model Shifts
Both regulation and technology are paving the way for new models of customer engagement. In my view, this is the most significant shift, and perhaps the only “disruptive” one. For example, the creation of payment banks has in one stroke removed the biggest advantage of conventional banks over other lenders – the ability to own the customer’s bank account. Lending is a business that, for most banks, rides on top of the accounts business, and contributes a bulk of profits. These businesses will now get unbundled, and this will enable more innovation on both sides of the business.
At Indifi, we are also seeing large supply chain aggregators start to develop the aspiration to be the primary financial services provider to their MSME partners, partly driven by their own need to strengthen the supply chain. Aggregators in many industries are now crossing the tipping point where they have the ability to become the provider – only much more efficient and transaction-aware than their conventional counterparts.While technology and data will affect all the elements of MSME financing, it is likely that conventional lenders will adapt to these changes. The business model shifts, however, may lead to creation of new players, who will look very different from current lenders. In either case, MSMEs will see far greater access to financing than they ever have in the past. For a country like ours, where MSMEs are the biggest engines of growth, employment and income distribution, that can only be a good thing. Policy makers and regulators will have the task of enabling these innovations to the benefit of small businesses.