How is Fintech Accelerating the Financial Digital Journey
With a large population and increasingly automated economy, India faces a heavy spectre of jobless growth
“A mile wide but an inch deep” may well summarize the state of financial services in India. Savings, Investments, Credit and Risk Management form the backbone of any modern economy. While financial inclusion schemes launched by the government has led to creation of another 200 million bank accounts, the depth of financial services being accessed by almost 800 million adult population and 50 million SMEs in India is woefully low. Lack of trust, poor transparency, high costs, few product choices and lack of knowledge are some of the major inhibitors which have resulted in the current under-penetration of the financial sector.
However, as Colin Powell had once said, optimism is a force multiplier. That, combined with mobile phones, widespread virtual connectivity, enabling regulations, a progressively cashless economy and Aadhaar stack, in my opinion will help accelerate the financial journey of the nation. Fintech companies are leveraging the aforementioned to continuously innovate and address the existing inhibitors of deeper financial services penetration.
Next Big Thing — Automation Economy
With a large population and increasingly automated economy, India faces a heavy spectre of jobless growth and a large unemployed population. In such a scenario, credit is a fundamental requirement to kick-start the virtuous cycle of savings, investments and risk management.
Organized credit does not reach more than 20% of the households in the country. SMEs, according to an IFC report, have a gap of over USD 50 billion in financing. Fintech players are operating at various levels – enhanced reach, innovative products, better risk assessment tools and operational cost reduction to reduce the gap in the system.
Fintech, a New-generation Financial Service
First-generation, micro-lender players based their success on a high-touch, low-tech model. Second generation micro-lenders believed a low touch, high tech model would help address the still vastly underserved population and businesses. What they didn’t realize was a high touch infrastructure was already in place in India. That coupled with good high-tech solutions was probably the most optimal way to increase the size of the credit market. Increasing innovations in areas like artificial intelligence, data analytics, digital authentication mechanisms, alternate data sources are further making the task of providing such financial solutions easier, faster and better.
The journey of the new-age financial ecosystem began from simple services like money transfer, payments, recharges and is now getting into more complex areas like lending, investment management/advisory. Both the government and the regulatory framework has been very supportive of nurturing this ecosystem and has not only provided the necessary guidelines but also the much-needed support financial or otherwise to make a level playing field for large and small companies alike. Many other countries, both developed and developing, have seen fintech transforming the way consumers access financial products. However, in India, as was with the telecom industry, we will leapfrog from archaic traditional methods of providing financial products to new age, paperless, instantaneous and transparent solutions.
What Lies in Fintech
Several companies are trying to provide online credit solutions, but in my belief one needs to leverage the wide footprint of offline retail in India to provision credit solutions to both individuals and SMEs. Paperless, low-cost operations, will allow for provisioning of smaller loans to individuals, whom the traditional MFI model has not been able to serve.
Leveraging various data sources, one can target consumers who have very little traditional credit history. Further, innovative, entry-level products allow for assessment of credit worthiness of SMEs better as well. Operations for partner financial institutions also become seamless as well as human errors get eliminated. I firmly believe that there’s no point in fixing what’s not broken. Most offline channel partnersalready have a sophisticated understanding of fraudulent credit practices in the old economy. With significant inputs from them, one can build reliable fraud detection models to keep delinquencies at the minimum.
Once credit penetration reaches a critical mass, I believe we will start seeing a lot more innovation in savings, investments and insurance products. Trust, transparency and knowledge will be the great enablers in enhancing this segment of the financial sector. Venmo and RobinHood internationally, are great examples of companies which have provisioned extraordinary user experience to build trust and loyalty amongst their customer base. Indian fintech startups will use local cultural methods to engage a wider audience.
No nation can become truly developed unless it has a deep financial sector. One can wait for India to follow its current path of progress or one can use fintech to help accelerate social and economic development of the nation. The choice is for us to make.
Sachin has over 18 years of investing, operating and consulting experience in India and the United States. Prior to starting EzCred he was Managing Director at Zephyr Peacock, a private equity firm based out of Bangalore, India. He has previously been at Draper Fisher Jurvetson and Opus Capital (venture capital firms in the Silicon Valley). He started his career in Silicon Valley with companies like EFI and Unimobile (wireless startup). He has a B.Tech in Computer Science from IIT Kanpur and an MBA from Wharton.