SUMMARY
Amidst the most favourable circumstances of contactless regime and increasing digital adoption, the BNPL industry is projected to grow by 65.5% to $11.57 Bn in 2021
Multiple data touchpoints are being utilised such as social media, telecom activities, spending patterns, demographics and psychographic traits allowing the digital lenders to perform effective customer profile evaluation
The share of personal loans of less than INR 50,000 ticket size has increased nearly five times in a span of 2 years, as per a recent CRIF report
Financial inclusion gained serious momentum, amidst the pandemic. The dire circumstances resulted in a financial crunch amongst individuals and business entities. To cater to the dynamic and varying capital requirements, there is a need for augmented credit products and efficient delivery. It has resonated well with the overarching mission statement of fintech companies.
As traditional setups like banks/ NBFCs became risk-averse and conservative, digital lenders have emerged as a significant medium to bridge the credit gap. While digital lending has witnessed tremendous growth, we have only started to realize its true potential.
With rapidly evolving operational capabilities, technological integration and digital adoption, lenders are staring at a plethora of opportunities, to further enhance credit delivery and work towards the greater goal of financial inclusion.
Here are a few opportunities which can further drive the financial revolution.
Untapped New-To-Credit (NTC) Customers
Digital lenders have emerged to be a prominent stakeholder when it comes to extending credit to the unserved and the underserved segments. Traditional setups are typically averse when it comes to serving the NTC customers owing to the lack of formal documentation and high operational costs involved.
With robust technological infrastructure and enhanced operational capabilities, digital lenders have started serving this niche. However, there still exists a significantly large portion of individuals and businesses who lack credit access. There is an addition to the millennial customer segment inclusive of Gen Z and millennials, with demographics such as salaried and self-employed. Their credit requirements can be fulfilled with streamlined and customized products by effectively leveraging technological capabilities.
Alternative Data Utilization
The utility of data by digital lenders has been extended from assessing the borrowers’ risk profile to design and serve tailored credit requirements of vastly diverse demography. With dynamic conditions, further stimulated by the pandemic, there has been a realized need for contactless and quick credit delivery. This, coupled with the increase in mobile penetration and low-cost internet tariffs have posed great opportunities for innovative lenders to leverage their data analytics capabilities powered by AI/ML to provide access to formal credit to the underserved borrowers.
There are multiple data touchpoints that are being utilized such as social media, telecom activities, spending patterns, demographics and psychographic traits allowing the digital lenders to perform effective customer profile evaluation.
It has been speculated that over 90% of the data ever produced has been generated in the last 2-3 years. This is only bound to increase with growing digital footprints further allowing digital lenders to put it to use to promote financial inclusion. This data would assist lenders in devising loan schemes based on average ticket size of different customers, across sectors. Further, parameters like intent to pay, variation in income and future cash flows have empowered them to accurately underwrite the borrowers.
Product Innovation
Financial credit products have greatly transformed from being luxury based to utility-based. As the existing/ new customer segments are evolving, it has become imperative for digital lenders to precisely identify different kinds of credit needs of the borrowers, with varying ticket sizes and degrees of urgency. Further leveraging AI/ML expertise and automation, lenders need to design tailored financial products to effectively serve the borrowers. The product customization and personalization are received with great enthusiasm by the technologically aware customers.
One prime example is the Buy Now Pay Later (BNPL) offering. Popular with Gen Z and millennials, a huge portion of them prefer BNPL financing while shopping. Amidst the most favourable circumstances of contactless regime and increasing digital adoption, the BNPL industry is projected to grow by 65.5% to $11.57 billion in 2021.
The rising importance of customer-centricity has allowed lenders to introduce products like sachet loans, EMI financing, and various forms of small-ticket loans. Due to their effectiveness, these products have become well sought-after by the customers. The share of personal loans of less than Rs 50,000 ticket size has increased nearly five times in a span of 2 years, as per a recent CRIF report.
Data Security
Increased digital adoption has called for the strengthening of cybersecurity norms for businesses. Digital lenders utilize data analytics to collect, store and analyse varied data pockets. With this set of essential activities, they have a tremendous opportunity to enhance the robustness of data security architecture, to derive appropriate benefits of digital and technological integration.
The vulnerabilities exist in the form of cloud security risks, application Security, weak passwords which might create a chance for data breaches, malware attacks, phishing, and vishing. Key fundamentals to consider while devising data security architecture are regular backups of their data, encryption of personally identifiable information and other sensitive data points to stop data loss incidents, implementation of multi-factor authentication, and use of VPN service.
Further, it is essential to conduct frequent Information Security Audits, to ensure that any inadvertent misses are taken care of in a very agile manner. The increasing importance of the DevSecOps methodology resulted in the integration of cybersecurity in the production pipeline, including architecture design, coding, and testing phases. It has, in turn, boosted the resilience of organizations IT products and services while allowing service delivery to be efficient and quick.
There have been actions being taken at the regulatory level, as RBI formed a working group towards reviewing the digital lending ecosystem. The group is now considering a structure where the entities regulated by the RBI will be held liable if third-party mobile applications flout lending norms. The overarching regulation, if resonates properly with the security structure of digital lenders, would prove prudent for creating a healthy credit ecosystem.
As financial inclusion is gaining much-needed steam, digital lenders are now staring at an ocean of opportunities with a combination of product innovation and technology integration. The corresponding efforts by the respective stakeholders will usher in greater financial inclusion.
