SUMMARY
Digitisation and innovation are helping Indian lenders engage with borrowers beyond tier-1 cities and facilitate financial inclusion through alternate data and open banking frameworks
Seamless onboarding experiences, enabled by real-time cash flow data and KYC/AML workflows, are key to building trust between lenders and borrowers, especially for MSMEs
Open banking consolidates financial data into one secure stream via APIs, allowing lenders to gather accurate information from more financial touchpoints and make more informed credit risk decisions. A good onboarding process is the cornerstone of lending
The digitisation boom spurred by Covid shutdowns changed the way banking works in India. Credit moved online, following consumers who were no longer going out, and lenders’ even started tapping into newer demographics. This created fertile ground for lenders to engage borrowers beyond tier-1 cities through new digital channels, new products and truly-digital loans.
However, the road to comprehensive financial inclusion is long and fraught with obstacles. One of the biggest speed-breakers happens to be the problem of the inaccessibility of formal credit for rural consumers and their inability to find a way to prove creditworthiness since most don’t meet the banks’ stringent criteria for formal credit history.
This is where digitisation and innovation truly make a dent.
Alternate Data As Fuel To Drive Financial Inclusion
Even with the lofty goal of inclusion, it’s a business imperative for lenders and one that requires data-driven decision-making rather than relying on intuition or storytelling.
Machine-generated data is expanding at roughly 50 times the rate of traditional business data, and the amount of data produced doubles every two years, equating to a 50-fold increase from 2010 to 2020.
This data explosion has created aggregators to help gather, organise, and manage data. For example, the Account Aggregator (AA) ecosystem introduced a consolidation of financial information that was sitting locked behind financial institutions’ siloed servers and made it possible for lenders to underwrite borrowers based on their cash flow and transaction data – even in the absence of a formal credit score.
For more seasoned borrowers, this means more comprehensive risk assessment, and hence, not only the quantity but also the quality of lending can improve with the right implementation of risk assessment workflows.
Financial Inclusion Doesn’t Stop At Data; Intuitive Onboarding Moves The Buck
Almost every week, our banking experience gets gradually better. This includes everything from routine tasks such as payments and communication with our banks to more intricate endeavours such as obtaining loans and purchasing a house. The user experience is being completely revamped, with customer delight at its centre. The novel ‘instant gratification’ approach, introduced by digital banking, has set a new standard for the industry.
A seamless onboarding experience establishes two-way trust between the lender and borrower from the beginning. However, an onboarding process that isn’t KYC/AML compliant, doesn’t capture real-time data, has a complex UX, will increase drop-offs and complicate risk assessment further down the line.
To understand this better, think about lending to businesses. Whether big or small, getting business customer onboarding right is a tricky balance for the banks to strike thanks to the sheer number of documents needed to approve a loan and the risk attached, which is significantly more considerable than in retail lending.
This room for more risk has left a gaping hole in funding. A 2021 IFC estimate suggests a credit gap of Rs 25.8 Tn, and only 15% of the 63.3 Mn MSMEs have access to formal financial institution credit.
Bridging the credit gap then means using more data points to assess a business thoroughly, rather than shutting the doors to small business borrowers. One of these innovations is using alternate data such as transaction data from PoS terminals, cash-flow-based indicators through bank statements and GST invoice data.
New-age onboarding practices must leverage real-time cash flow data instead of static parameters, such as salary or income, to identify risky borrowers and enable highly precise, automated decision-making. This helps lenders offer differentiated products to MSMEs falling into different risk buckets, while the lender can price in risk adequately with varying interest rates.
Open Banking Is The Cornerstone Of Intuitive Onboarding
Open banking frameworks, like the AA framework, consolidate financial data into one secure stream via APIs, allowing lenders to gather accurate information from more financial touchpoints than ever before. This paints a more textured picture of a borrower’s borrowing, spending and other financial habits, thus giving more confidence to the lender. With this increased confidence, lenders have the chance to be more borrower-friendly and build smoother onboarding processes with effective AML, KYC checks, real-time credit assessment and instant disbursals.
It’s worth highlighting here that, usually, regulatory imperatives like KYC, AML and other compliance checks on borrower onboarding are the biggest culprits in adding friction to the experience. But digitisation and open banking makes KYC/AML workflows smoother.
KYC is the first step during onboarding; customers submit self-attested copies of proof of identity, mostly their Aadhaar or PAN card, and then click a selfie, as further proof of identity. Most fintechs use a facial recognition tool that compares the selfie with multiple data sources to score and verify the user.
Once that is completed, AML checks take place in the backend. Users’ information is scanned to see if they are on any protected persons or terrorist lists, and then a thorough background check is performed to ensure the borrower is trustworthy.
The end-to-end automation of the entire process eliminates human error, reduces customer onboarding time, and allows real-time triangulation of customer data, reducing identity fraud rates.
A Good Onboarding Process Is The Cornerstone Of Lending
And yet, outdated systems and complicated workflows often lead to high drop-off rates and incomplete customer profiles. Open banking allows lenders to enhance the onboarding process’s quality, obtain critical financial data, and make more informed credit risk decisions.
India’s credit story is a work in progress, and the anchor to deeper financial inclusion is the ease of access, which can only be achieved by discarding antiquated practices and adopting digital tools and platforms that enable better assessment and unlock smoother experiences for the borrowers.
