In the wake of the pandemic, pressure on the world's financial institutions to adopt cutting-edge technologies has increased dramatically
There are a number of obstacles facing the Indian fintech industry, including a lack of clarity on regulatory concerns and a scarcity of qualified tech workers
2023 is a watershed year for the financial industry, one that will have far-reaching consequences for the next decade
In the wake of the pandemic, pressure on the world’s financial institutions to adopt cutting-edge technologies has increased dramatically. As a result of the shift toward digital-first platforms by consumers, there was an uptick in full-stack automation in the digital lending market in 2022.
Automation has made it feasible for banks to provide instantaneous loans after speedy credit approvals, streamlined processes, and improved personalised goods like cutting-edge chatbots, resulting in a phenomenal digital lending experience. Financial institutions also provide their customers with a technologically enhanced omnichannel experience.
Innovations in financial technology are driving a sea change in the digital lending industry. A loan used to be difficult to obtain and time-consuming to process. The paperwork was lengthy, and the loan companies’ approval processes took weeks. Remember that most folks couldn’t get the help they needed with their finances because they lacked credit.
The present-day situation is quite different. The banking and financial services industries are interwoven with technology. Now more than ever, thanks to innovative fintech companies, loan applications are processed in minutes and funds are deposited within a couple of hours. The unbanked have been brought into the banking system, and the goal of a fully digital India has been advanced.
Challenges Faced By The Indian Lending Industry
Indebtedness is the primary obstacle. There is either current debt stress or a substantial likelihood of debt crisis in over 60% of low-income countries. Progress has been achieved with a few nations in resolving their debt thanks to the shared framework produced by the G20.
Although much more can be done to speed up the process of resolving countries’ debt, India is at the forefront of advocating for such concrete measures. Cooperation in terms of climate financing is crucial, and sustainable finance is a key component of this, especially for the global south. We are also working to ensure the smooth transfer of technology.
The rapid adoption of these digital technologies began before the pandemic and has only accelerated since then. While regional financial players displayed true disruption by providing banking services to underbanked populations, their counterparts on other continents were left with potentially obsolete legacy technologies and unable to serve the customers they had.
In order to survive and thrive in the future, India’s traditional banking institutions must catch up to the fintech upstarts and big tech players who have already begun to gain market share in the country.
They can do this by making use of APIs, which have allowed for more rapid payments, easier unbundling of services, and better data sharing in open banking. Improved customer service and accurate financial reporting in areas like payments and credit scoring are just two other ways in which cloud computing has made a difference.
The peer-to-peer (P2P) lending platform is an example of a product developed using the fintech model. While it did increase credit risk, it did so despite offering better services at lower rates (and hence, systemic risk).
The six major issues plaguing the P2P lending industry are information asymmetry, borrower scoring, moral hazard, investment choices, rules and laws, and the viability of the P2P lending platform. There are a number of obstacles facing the Indian fintech industry, including a lack of clarity on regulatory concerns and a scarcity of qualified tech workers. Before the pandemic, growth in digital credits was already linked to a surge in defaulted loans.
To overcome these challenges, several trends have emerged in the digital lending landscape.
What To Expect In 2023?
Impact Of AI On The Lending Industry
Artificial intelligence(AI) is now being used in a variety of back-of-house and service activities, such as customer-facing chat robots, credit judgements, sophisticated fraud prevention, risk forecasting, and regulatory compliance.
To improve their AI operations, many financial institutions have teamed up with fintech firms. By 2023, these collaborations will have yielded insights that will be used to fortify the institutions’ brands. Future use cases include search engine optimisation (SEO), lead generation, and sales closing, while back-end solutions act as pilot projects for AI.
Adoption Of Open Banking
Although it is still in its infancy, open application programming interfaces (API) banking has the potential to revolutionise the way we conduct business. APIs facilitate information sharing between financial institutions and fintechs or other third-party service providers. These programmes improve the speed, safety, and efficacy of online financial dealings.
In a world where banking and other financial service providers are becoming increasingly intertwined, application programming interfaces will become a potent tool for fintechs to explore new opportunities in cross-selling products or transactions.
In the future, open APIs will likely make it easier for financial institutions, third-party service providers, and customers to share data. Fintechs and their customers may benefit from increased speed in innovation and enhanced quality of service if they integrate their systems.
In the future, financial service providers may expect customer experience to be a key differentiator in building their brands and attracting and retaining customers.
Customers have come to expect more tailored offerings, such as incorporating their feedback and preferences into the creation of a product or service that saves them time and effort. By 2023, fintechs can help banks stand apart from the competition due to their ability to anticipate client expectations and create extraordinary experiences.
Using advanced analytics to enhance customer service while decreasing costs is a win-win. Soon, banks will be able to tailor their products and services to individual customers’ needs thanks to the insights gained via sophisticated analytics.
According to BCG’s predictions made at FIBAC 2021, valuation profiles of digital payment platforms will become increasingly obscured by the rising tide of interest and funding in platforms as the payment industry continues to expand.
With the rise of online shopping, there is an increasing preference among Generation Z and millennials to make purchases on credit. This is largely due to an easy and quick customer journey, low credit card penetration in India (less than 5%), and buy-now-pay-later (BNPL) has emerged as the intersection of payments and lending, demonstrating immense potential. It is expected to grow at a rate of 35-40% over the next five years.
Evolution Of Fintech Growth Drivers
Three growth drivers namely data analytics, digital payments and automated loan application will drive the economy. Understanding the borrower profile well is key to avoiding NPAs. The credibility of the small business will help evaluate available collateral.
Fintech companies are using machine learning to provide loans. Companies may receive payments fast and safely with UPIs and mobile wallets. Fintech platforms are offering more than standard payment processing. AI will help finance platforms process loan applications rapidly.
Contribution Of Fintechs To The Lending Industry Through Differentiator Strategies
This is an area where fintech platforms may help by letting banks and other lenders get a better picture of their ideal customer. People who are not part of the banking system may benefit from using alternative credit rating methodologies.
Borrowers and lenders can meet each other through this internet system. With the help of fintech platforms, marketplace models have emerged online where borrowers and lenders can be matched depending on their needs.
Both lenders and borrowers can benefit from the platform, as the former can earn a larger interest rate than their bank savings account, while the latter can obtain a loan with a cheaper rate than the bank offers.
Credit can be extended with the help of fintech platforms by analysing card-swipe data from point-of-sale terminals. There has been a rise in the use of point-of-sale terminals in India. Consumers’ growing comfort with and preference for using digital payment methods is likely a contributing factor.
For underwriting purposes, fintech platforms can employ borrower data collected via CRMs and other specialised tools. Borrowers can be sorted into several groups in CRMs depending on a variety of factors, including the loans they’ve applied for, their credit scores, and their demographics.
2023 is a watershed year for the financial industry, one that will have far-reaching consequences for the next decade. The digital lending industry will be driven by neobanks and fintech companies.
In the last few years, advances in financial technology have allowed for unprecedented growth in the realm of digital lending. Borrowers from all walks of life have been able to take use of these funds, which has fueled economic expansion and allowed them to fully realise their full potential.
The good news is that the environment for obtaining loans is improving all the time. It is expected that fintech companies would outperform traditional lending channels. They will continue to contribute to the creation of a financially inclusive India. A move that will be driven by the emergence of new disruptive technologies and the development of new use cases.