Fintech evolution affecting the retail loan segment.

Foundation:

Indian economic conditions and environment for adoption to new technologies has opened path for development of new technologies. Fintech’s are continuing to evolve with different customer centric products, & attracting younger generation of the country and showing its affect on the lending of public sector banks, especially retail lending segment. Retail lending is relatively easy in processing due to product nature. Retail lending products are tailor made products designed to suit the different needs of consumers. End utilisation is primarily consumption. India is such a country with growing young population, and growing consumerism. Fintech’s keeping this in view, developing small products to meet the requirements of the en mass population making everything paper less or digital the entire process of traditional credit appraisal and sanction processes.

Evolution of 4G (Faster internet services) and android technologies made usage of mobile phone convenient. A report published by statista research department, 2021, witnessing the fact that in India, smart phone reach is over 760 million with an average data consumption of 14.63GB per month. (https://www.statista.com/statistics/467163/forecast-of-smartphone-users-in-india/). It opens wide opportunity for digitalisation of financial services.

In this paper it is attempted to discuss the role of Fintech’s either as disruptors or as enablers in the Indian scenario especially in tapping opportunities under Retail lending segment.

 Fintech evolution:

Fintech often a short form for financial technology. It is a new technology which helps to make the existing processes simple, automatic, and make it possible to deliver the financial services at the convenience of the customer.

Fintech 1.0 ( 1886- 1967)

It is all about infrastructure. It is the time when people started thinking about financial technology. Financial globalization has stated with the evolvement of telegraphs, railroads have allowed rapid transmission of cross boarder financial information transfer. FEDWIRE- first electronic fund transfer started functioning since 1918 in USA relying on  technologies like telegraph and morse code. Credit card has evolved in year 1950.

Fintech 2.0: (1967- 2008)

It is all about banks. A paradigm shift from analogue to digital and is led by traditional financial institutions. Launch of first hand held calculator and set up of first ATM by Barclays bank happening during this period. Establishment of NASDAQ, world’s fist digital stock exchange in early 1970’s marked beginning for how financial markets are operating today. SWIFT established in year 1973, most commonly used financial communication protocol even used today. During 1980, mainframe computer put in to use, leading to online banking which has flourished during 1990, where internet acted as a catalyst for growth. E commerce has taken its birth. Till global financial crisis in the year 2008, the era has shown technological developments like, computerization of internal processes, digitalization of communication with outsiders etc., happened.

Fintech 3.0: (Since 2008- present):

After global financial crisis, mind set of general public changed and developed systems to destruct traditional financial systems. The shift in the mind set paved a way for the new industry i.e, Fintech’3.0. Release of Bit coin, in year 2009, is a major technological advancement having high impact on financial world. It has led to development of different crypto currencies.

Another important factor, that is smart phone has penetrated in to mass market with access to internet for millions of people across the globe has changed the shape of Fintech.

Google valet in year 2011, followed by Apple Pay in year 2014 are the developments paved the way.

(A diagrammatic representation of Fin Tech terminologies over different periods)

As of now, countries with highest usage of fintech are china followed by India with usage of 69% and 52% respectively followed by UK. Graphical representation showing adoption rate of fintech’s in different countries is as shown below.

As technology has become evermore central in the financial environment, actually banks and fintech’s, are fighting with each other to improve and protect their share in the market.

Fintech’s being evolved with an objective to threat the traditional financial services & to grab the market at a faster rate. Because of tech solutions, the processes involved are nimble. Services will be offered to underserved population of the country at an affordable cost and in a faster way, thereby disrupt the traditional financial service market.

Fintech in the market:

Some evolving fintech in the financial service market are,

1. AFFIRM is offering short term loans to e commerce users, there itself on the site. It can take away larger share of business of credit card by traditional banks as it offers credit even to individuals with less or no credit history.
2. BETTER MORTGAGE, streamlining the home loan mortgage processes, through digital-only technology, by rewarding to users with verified pre approvals, within 24 hours of applying.
3. GREENSKY is acting as a bridge and linking banks and persons who intending home improvements and saves interest by offering zero interest loans during promotional periods.
4. TALA entered in to micro finance world, by offering credit to individuals with poor or less credit history by doing deep data analysis of the smart phone they are using for transaction history as well as seemingly un related things like what games user plays etc.,
5. Google pay, phone pay and Paytm etc., have changed the payment habit of the citizens. Due to their easiness in their operation, seamless and successful transactions, have penetrated in to Indian market and laid a platform for digital revolution in the financial market in the country.

Why retail credit is affected by Fintech’s more than any other credit segment?

Retail credit, is a special kind of segment evolved in banks even centuries before. Tailor made products specifically to meet the consumer demands (End-use) – is a simplest definition for retail credit.

It is also known as personal credit because of its character, in helping the individuals to meet the personal obligations, as most of the products are for consumption purpose.

• Growing consumerism in the country
• Growing young population
• ‘Consume today pay for it later’ attitude
• Simple product, to meet specific purpose
• Increased brand image
• Capital optimization are some of the features of retail products.

Services under Retail segment include, savings accounts, mortgages, personal loans, credit cards etc.,.

Growing disposable incomes, increase in literacy levels, higher adaptability to technology, Nuclear families are the driving factors for retail segment growth.

Simple product nature and widely available opportunities in the consumer market, making fintech’s to enter in to financial service sector.

What is the effect of fintech on retail banking segment?

Fintech’s started disrupting the retail segment since past few years. Some of the traditional banking products becoming obsolete due to deep penetration of fintech’s in to maket.

Ex.

1. Offering of easy EMIs on consumer articles on e- commerce websites, changed the format of consumer loan concept in the traditional banking segment.
2. Digital valets like paytm, Mobiquick have impact on by deposit held in the bank accounts
3. QR code enabled payment systems, became an alternative for traditional money transfer/POS transaction etc.,
4. Usage of Vedio KYC in account opening processes
5. E Rupi, an SMS or vochure based, rupee backed asset, helpful for offline payment, a latest launch in direct benefit transfer activity to avoid broker or middle man while delivering government benifits.
6. Lot of Personal loan offering platforms gaining their momentum.

Interdependence of Fintechs and Banks:

Fintechs evolved as disruptors, by launching customer centric, easily adaptable products simultaneously with the rapid growth of smart phone technology, internet usage.

Fintechs’ using latest technologies like, artificial intelligence, machine learning to assess consumer behaviour from the back ground itself. Emotions of consumer also being taken care while launching new products.

Funding is a major obstacle in the fintech evolution. Fintechs which are funded by banks and many banks chose this an opportunity as it helps the banks to penetrate deep in consumer market. Automation of different stages of lending with use of fintechs, viz., Lending automation solutions (Helping to handle credit from application register stage to finalisation of eligibility and sanction), online loan products like dial for a loan, credit at a single click, digital document execution, pre approved personal loan offerings and OTP based two factor authentications for e signing the documents etc., technologies increased customer experience

What are the shortcomings from the banks side?

Increased competition from Fin Techs, and non traditional players: due to increased competition, even banks today concentrating on technologies. Customers are getting choice to compare between two different offerings

Lack of personalisation: it is an open secret that even today, many of banks follows traditional practices, on the other hand Fin Tech start-ups capitalized on the technological innovation. As a result of which banks lose customer segment, especially those who are happy with Fin Techs.

Lack of security measures: is a serious concern. Even in today’s open online banking environment, threats of cyber security breaches are immense. It has an impact in sharing of data during the processes of innovative technology implementation through outside agencies.

Possibility of Banks & Fin Tech partnership:

If banks and Fin Techs partner either by way of joint venture or venture in an alternative business,

1. Safe and secure transactions can take place
2. Tranctions happen at an ease
3. Regulatory support and RBIs incentives for increased customers experience are some of the expectations.

Leading Fin Techs in Indian Market:

• Instamojo
• Razorpay
• Paytm
• Policybazar
• Shiksha Finance
• Pine Labs
• Zest money
• ePay later are some of the leading Fin Techs in Indian market.

Impact of Fintech on Retail credit of traditional banks:

Customer centric products launched by using updated and modern technology is the main activity of a Fintech. It is finding loop holes in the lending activity by the Retail banks and coming up with solutions. Big data and new analytics capabilities are needed to extract value and personalize the customer segmentation and service in all unbundled segments.  Most often by using artificial intelligence and machine learning techniques even they trying to read emotions of consumers. This is creating extraordinary capabilities in software developments and changing the face of financial sector.

As the services are offered at the door steps, customer may perceive it as a good one even though the services are costly. Furthermore, due to use of technology, most of the services are cheaper than services offered by banks.

Opportunity cost, Turnaround Time in receiving the product or service, will play lead role in decision making process at consumer end.

Some of the above listed Fin Techs, taken larger share in fund transfer ecosystem, and other are leading in providing personal and even MSME lending.

At the end!

No doubt, technology will definitely change, users experience in availing any kind of services, and financial services are not exempted from that. Technology helps to fill up the loop holes in the existing practices. In this paper we have seen the journey of Fin Techs, from 1.0 to 3.5, how rapidly the technological innovations changed existing practices. Start ups in Fin Techs posed so many challenges before traditional banks even questioning existence of banks. Due to regulatory concerns and shortage of funds for establishments of Fin Techs, they depend more on Banks. Tie up between banks and fintechs will solve problems of both.

Banks and big tech giants may decide to expand internationally not via a universal bank model but by selecting the most efficient and streamlined vertical services.

For better customer experience and safety, fintech and banks acting as two sides of a coin in the days to come.

‘Sustained growth depends on how broadly you define your business- and how carefully you gauge your customer needs’- (Lines by Theodore Levitt, professor, Harward Business School in his article- Marketing Myopia).

Financial Institutions must and should tap the opportunities unveiled by Fintechs to gauge the customer needs, for mutual benefit & sustainable existence.