Digital lending is now a major factor in finance, with many companies entering the market and providing credit even for small-sized needs with a single click.
With technological development, this new credit mode is slowly engulfing the sector with significant penetration within the small-ticket segment.
BFSI firms have been testing new ideas more vigorously than they ever have. While the lending business is a century old, FinTechs have revolutionized the entire process. They have eliminated the stacks of loan files and also stopped the raging queues at the counter for karj/loans at the branch. The loanees also avoided making frequent trips to branches because the officers would require an updated document every visit.
Traditionally, the sector was a mess. It has changed from pawnbrokers lending money to secure collateral to a more formal process involving banks or financial institutions. The rapid advancements in artificial intelligence, cloud computing and blockchain and the speedier and cheaper internet connectivity have fueled the growth of FinTech startups, and lending has changed and has transformed into “digital.”
What is fintech?
A portmanteau that combines two words commonly used in the field: financial and technology. It is the intersection point between technology and financial services. The term encompasses all kinds of technology that could enhance, digitize or even alter how traditional financial institutions and providers provide their services.
The term was initially restricted to back offices within the financial and banking space. But, over time, there was a surge in the usage of fintech in more customer-centric processes. Fintech platforms simplify everyday tasks like making deposits on cheques or applying for financial aid. They include crypto exchanges as well as peer-to-peer lending.
Although payments service companies (PSPs) have established themselves as leaders in the payment industry, several emerging trends are shaping the future of fintech companies in India:
- Payouts. Continued growth in real-time account-to-account (A2A) payments that are driving cash as well as payment gateways (PG)/payment aggregators (PA) as well as point of sales (POS) companies expanding their offerings from accepting payments to offering full-stack merchant solutions. The rapid development of cross-border payment solutions
- Loans. The proliferation of embedded credit options for consumption finance and the digitization of asset-backed loans as well as the experimentation of decentralised finance (DeFi)
- Wealth tech. Direct distribution merging with discount broking as well as the convergence of robo-advisory service with personal finance management and production of standardized portfolios; growing investment in alternative assets, particularly crypto
- Fintech infrastructure. Rise of banking as a service (BaaS) providers, the commercialisation of Distributed Ledger Technology (DLT)/blockchain-based use cases in corporate banking, the emergence of open banking service providers (e.g., account aggregators, Open Credit Enablement Network enablers), the launch of retail/wholesale Central Bank Digital Currency (CBDC)
- Neobanking. Expansion of millennial Neobanks, MSME-focused ones, and established digital hackers.
The fintech industry has experienced immense growth and facilitated digital adoption across many use cases in finance and securities. But in the coming years, we expect it to be subject to more scrutiny regarding compliance and regulation, which is evident from recent announcements by the Reserve Bank of India (RBI). This, along with a tightening of the funding conditions, is expected to result in a more collaborative approach with incumbents and possible consolidation within the sector.
Indian Fintech Cos Look To Beat Revenue Blues
The fintech industry’s revenue issues have been well-known for many years. The regulatory intervention has impacted the viability of revenue-generating UPI-based payment apps, as credit card-related fintech products haven’t made a difference because of the slow-growing population of credit card customers.
Other fintech-related areas like investment and insurance technology have not seen the same revenue boost. In the majority of cases, startups receive distribution commissions as well as fees for insurance and broking. However, this isn’t as much to the established players who possess the required licences (insurer and AMC) to generate directly from their customers. In addition, obtaining these licenses can be difficult due to the burden of regulation.
Given these operational and revenue difficulties, it’s unsurprising that most fintech firms have turned to lending as their income rafts. Personal loans and other lending products have become mainstays for super applications in the fintech industry since they earn a regular income and are unaffected by economic cycles or seasonality.
There are a lot of altercations as startups have switched from a distribution or payment game to lending. This is due to the greater revenue forecast for the lending industry, in addition to the well-established strategy to scale up.
What is the future hold in fintech?
As time passes, firms in the fintech sector must get prepared to assume the role of financial advisors and assemblers as and when required. Customers will expect them to offer high-quality products and services created to satisfy every customer’s demands. Nearly every company will attempt to establish itself as a fintech service provider, leading to a huge rise in competition.
Regulative scrutiny is another aspect that the fintech industry is likely to face. In light of the fact that the financial sector is usually the most tightly controlled sector across the globe, Fintech companies must be ready to comply with the technology and financial sector regulations. The majority of fintech firms deal with large amounts of data from consumers that are digitally stored, making them extremely vulnerable to hacking or theft of data. Regulations that guarantee accountability in an incident like this will soon be part of the market.
An increase in the acceptance of blockchain tech is an expected advancement. Cryptocurrency is an electronic or digital currency that works via blockchain technology and has shown its potential in the asset and investment management sector. Combining and embracing blockchain’s advancements can benefit fintech companies that want to be relevant over the long term.
One thing is certain that the fintech industry has earned the distinction as an essential actor within the world economy. With the tenacity it has demonstrated in these uncertain times, it’s clear that fintech will be around for the long haul.