How Technology is Shaping Financial Industry9 Nov 2016
Technology has ushered in one of the most major disruptions in the world of finance. The fintech industry has proved to be a game-changer in a sector that has traditionally relied on trust and credit ratings or credit scores. Technology in finance has begun to empower the SME (small and medium enterprises) sector in India as well.
SMEs underserved by traditional banking
Small and medium enterprises are the lifeline of our economy, but traditional banking continues to under-serve this segment. Conventional lending wisdom has it that payment history, credit type and length, the amount that is owed are all included in credit analysis. But what happens if a small enterprise doesn’t fit into this conventional model? What happens if a small firm has not been able to generate any kind of credit score? There could be a scenario where a firm doesn’t have huge assets or any kind of collateral to offer. In such a scenario, the fintech industry is a boon for businesses.
Technology in finance makes lending efficient, error-free and quick. Several alternative and non-traditional factors are looked into to decide the credit worthiness of a small business.
- Banking on the Internet via smartphones: Net banking and online transactions have already changed the way we transact, and there is going to be more of this in the future. Automation of payments, transfers and banking from anywhere is changing the face of the SME sector as well. Smartphones have also turned out to be the key harbingers of change in the Indian context, considering that India will be second largest smartphone market come 2017.
- India Stack: At the core of India’s banking and SME finance revolution has been the introduction of tools, collectively named India Stack. These tools include Aadhaar, eKYC (electronic know-your-customer) and UPI or Unified Payments Interface. These are game-changers in the Indian SME and fintech context. Aadhaar is a initiative that has already included more than a billion Indians under its wings and is a central database for identification. It helps banks and financial institutions to speed up time taken for customer verification and financial transfers. A customer’s Aadhaar card is linked to his/her bank account and also a mobile number, and is extremely useful in any transaction.
- Shift in payment systems: The National Payments Corporation of India (NPCI) has enabled the era of electronic payments. This year has seen electronic payments surpass cheque instruments and it would increase with introduction of UPI. Today businesses are using RTGS, NEFT, IMPS for making and collecting payments.
- Newer data points: New-age fintech firms are also focusing on social media conversations and profiles to understand a borrower’s credit history, profile, lifestyle, spending habits and personality. Underwriting templates are changing and financial institutions and lenders are leveraging unconventional data. New-age financial institutions are also using psychometric testing as a tool to understand how an individual thinks and his/her intention to repay. Gathering more data about customers can also happen thanks to mobile phone information and habits.
- IoT: Sometime in the near future, non-traditional lenders may also bank in on wearables and Internet of Things to achieve smarter and safer lending. This is gaining credence in some of the more developed markets, and is bound to catch on in India as well. IoT and wearables are also rich sources of data for lenders.
All this augurs well for the businesses in India, and real-time loan approval and disbursal will soon be the norm. Fintech companies will eventually force large banks to tweak their models and change how they transact with small and medium players like SMEs.