India’s Digital Lending Landscape – July'23
The digital lending industry has become a significant driver of economic growth in India, undergoing rapid progression in recent years. With government push on digitization and the evolution of digital infrastructure in the country through the setup of Indiastack, GST, Account Aggregator, etc, Banks and NBFCs have been pushing on digital lending along with Fintechs. Though Digital lending still constitutes a small percentage of overall lending, this is bound to continue to grow at a rapid pace.
Market participants have seized this wave of progress to embark on digital transformations, introducing innovative approaches and diversifying their offerings, with the aim of capturing substantial market share. Technological advancements in areas such as Cloud, APIs, and Artificial Intelligence (AI), have played a pivotal role in digital transformation for Banks & Financial institutions leading to improve customer experiences, digitization of the entire value chain, product innovation and facilitating the entry of new market segments into the lending space.
Customer centricity has become the primary focus for lending companies striving to gain a significant share of the consumer market as well as SME/MSME segment.
Consequently, these companies continuously evolve their services to provide seamless experiences and foster long-term customer engagement.
The Reserve Bank of India (RBI) has played a crucial role in supporting the digital lending industry by establishing regulations that ensure compliance and enable businesses to adapt their models accordingly. Recent guidelines on Digital Lending, Default Loss Guarantee, Co-branded Credit Card, Colending and others are in direction to push for digital lending. The regulatory framework has provided a foundation for the industry to thrive and has fostered an environment conducive to innovation and growth.
Recognizing the remarkable growth in the digital lending sector, The Digital Fifth has updated its Digital Lending Ecosystem by incorporating new players and segments that continue to propel the market to unprecedented heights.
Several criteria were considered when selecting the players, including the
- Company’s Size, Market Share, and Popularity,
- The Size of the Segment they Operate in,
- The Uniqueness of their Business Model,
- Fundraising Success
- The level of Digital Proficiency Exhibited by the Company.
To understand the overall digital lending segment better, the Digital Lending Ecosystem can be categorized into five distinct segments.
Banks and NBFC's (Regulated Lenders)
Banks and Non-Banking Financial Companies (NBFCs) form the backbone of the lending sector because of regulatory license holders for lending. These regulated entities operate under close monitoring and strict compliance with RBI regulations and contribute a significant portion of the lending capital and cater to credit risk in the market. Banks and NBFCs also play major roles in supporting Fintech-driven business models by being their lending partners.
Being there in existence for a long, the players in the Banking layer hold a large consumer base yet they aren’t accessible to everyone. Still, large segments of the population, especially Thin files customers, MSME segments remain deprived of credit. This gap has largely been attempted by the Fintech players which enable their access to untapped segments of the market.
Although customers continue to place significant trust in traditional banks, Fintech companies have been able to attract customers for their loan requirements due to their technological advancements, such as use of data analytics, etc. Fintechs have been able to enhance customer service by providing a comprehensive, holistic understanding of the customer and enabling faster and more efficient assistance. Fintechs have largely been partnering with Banks to support digital lending growth in the country.
Key expectations from Bank-Fintech partnerships are:
- Enhanced Customer Experience: Fintech firms excel in providing personalized and seamless customer experiences through user-friendly interfaces, intuitive mobile apps, and streamlined processes. Banks aim to leverage these capabilities to improve their own customer experience.
- Focus on Financial Inclusions with Tailored Solution: By leveraging core capabilities of banks and technology capabilities of fintechs, the partnership can create tailor-made solutions to serve specifically to the small businesses, women, and other niche segments of society.
- Asset Light Banking: The partnership model enables newer banks to adopt an asset-light approach by leveraging fintech partnerships for widespread distribution without heavy investments in physical branches.
- Leverage new technologies: Fintech companies are known for their innovative solutions and advanced technologies. Banks often partner with fintech firms to gain access to cutting-edge technologies, such as artificial intelligence, machine learning, blockchain, and data analytics. By collaborating with fintechs, banks can enhance their digital capabilities, improve operational efficiency, and deliver superior customer experiences.
Data Providers
Data providers play a pivotal role in establishing an essential API layer that facilitates digital lending and supports diverse financial services. By leveraging valuable insights extracted from Banking Data, Credit Data, these providers help meet customer expectations, improve the customer experience, streamline underwriting processes, and decrease turnaround time (TAT).
Integration of Know Your Customer (KYC) checks, Fraud checks, Credit Assessments, and Underwriting procedures streamlines customer onboarding and management. Furthermore, the implementation of an Early Warning System is crucial to proactively identify and address potential risks or challenges associated with lending operations. Segment includes multiple segments overlapping with each other.
KYC/AML/Risk Management
As the lending journey and process gets digitized, it is imperative to have platform support to perform KYC digitally and meet regulatory requirements including AML support. Thai category of technology enablers provides API-led solutions to plug in APIs in lending journeys to perform customer verification processes including support for Video-KYC. With continued regulatory push to support digital KYC, the segment will continue to see good traction among lenders and Fintechs.
Credit Bureaus
Credit rating and report are vital data points of creditworthiness for lenders and borrowers. It helps lenders make informed investment decisions based on the borrower’s risk level. With AI ML, Big Data Analytics, Credit scoring and interpretation of data elements within bureau reports have become more efficient, accurate and transparent.
Banking Data
Banking data encompasses financial and transactional information collected by data providers. It includes details like account balances, transaction history, income sources, credit card usage, loan repayment records, and other financial indicators. Lenders rely on this data to gain insights into a borrower’s financial health, creditworthiness, and repayment ability. Data providers collaborate with financial institutions to securely access and aggregate this information. With Account aggregators getting traction, this segment of data providers will see huge inroads into lending value chain for direct plugin & analysis.
Advanced analytics will provide deeper insights and predictive capabilities to complete the credit decisioning process for lending. Open banking and API integration will enable seamless data exchange across multiple institutions.
Alternate Data Platforms
Alternate data providers refer to entities that offer non-traditional or unconventional sources of data for assessing creditworthiness and making lending decisions. These providers gather and analyze data from diverse sources beyond the traditional credit bureau reports and banking information.
Alternate data can include a wide range of information such as utility bill payments, rental payment history, online purchase behavior, social media activity, educational background, employment history, and more. These data points are often used to complement or supplement traditional credit information to build a more comprehensive and holistic view of a borrower’s creditworthiness
The future of alternate data providers in the lending industry is promising, with advancements in technology and data sources. They will expand their data sources to include IoT devices, wearables, and geolocation data, while leveraging advanced analytics and machine learning algorithms for more accurate risk assessments. Upcoming digital data protection bill may provide clarity in future for wider use of alternate data sourced from customers.
Core platforms
Having a robust and agile API-ready Loan Origination System (LOS) and Loan Management System (LMS) is vital for any lender. LOS and LMS facilitate the origination and management of loans, ensuring a smooth lending journey. These capabilities can be developed in-house or acquired from third-party providers.
The LOS segment has witnessed significant growth with the entry of new players, and Low Code – No Code platforms are also diversifying their portfolios into the LOS/LMS sector. Collection platforms have also experienced advancements, particularly as players tap into rural areas and other underserved regions. These platforms allow lenders to deploy personalized reminder messages through appropriate channels also including collections through digital payment modes improving the customer experience and increasing the recovery rate.
Credit Card Management Systems (CCMS) are entities that enable financial institutions to roll out credit card programs for their customers, managing the end-to-end lifecycle of cards, including customer approval, card issuing and logistics, customer-specific targeting, engagement, and more. In the face of increasing cyberattacks, securing customer data has become a paramount concern for CCMS providers.
Lending Fintechs
The arrival of fintech companies has revolutionized the way financial services are consumed by customers. By incorporating technology and leveraging alternate data sources, fintech lenders have expanded their risk-taking abilities, resulting in improved financial inclusiveness. The Lending Fintechs segment can further been segregated into Retail & MSME Segment.
SME/MSME Lending Fintechs
MSME sectors are seeing an increase in Loan disbursements in FY ’23 Q2, which grew by 24% Y-o-Y from USD 20.87B in FY’21(Q2) to USD 26.2B in FY ‘235 (Q2), though this segment largely remained untapped. Lending Fintechs in this category are building business models to cater credit needs of this segment.
Government is also taking a keen interest in boosting this segment, and has announced a revamped credit guarantee scheme to provide MSMEs with more collateral-free credit. The implementation of the Open Credit Enablement Network could also become a major game-changer for the players in this segment.
The segment also includes Trade Receivables and Discounting System (TReDS) companies which is an electronic platform for facilitating the financing/discounting of trade receivables of MSMEs through multiple financiers. These receivables can be due from corporates and other buyers, including Government Departments and Public Sector Undertakings (PSUs).
Subsegments within Lending Fintechs will include participants involved in POS-based lending, Revenue Based Lending, Corporate Cards and others.
New Startups are trying to provide new enhanced offerings for their customers and to support this progress various money raising initiatives have evolved, one such is Revenue Based Financing. Revenue-Based Financing through fintech is a modern and innovative funding model that enables business owners to secure the necessary funds without compromising equity or providing collateral. This alternative financing option is characterized by its simplicity, speed, and accessibility, setting it apart from traditional funding avenues. Lenders do prefer this model as it consists of low risk and with so much digitization happening now they can track the business performances real time.
Corporate cards are designed specifically for business purposes and are typically issued to companies by banks or other financial service providers. They are assigned to employees to simplify business spending. When an employee uses a corporate card for expenses like travel bookings or subscription payments, the corresponding amount is deducted directly from the company’s funds. This eliminates the need for reimbursement to employees, streamlining the expense management process.
The future of corporate cards in the lending market includes enhanced digital solutions, seamless integration with financial management platforms, customization options, focus on data analytics, expansion of value-added services, and integration of AI and automation. These developments will streamline expense management, provide actionable insights, enhance user experience, and automate processes for businesses using corporate cards
Retail Lending Fintech
Retail lending has seen a significant rise in the ecosystem with the millennials who have different priorities and are new to credit but want everything early, BNPL has seen good traction among millennials as it allows the customers to pay for their purchases in single or multiple interest-free installments planned for a sub 3 months period without access to Credit cards. Other categories in this segment include e-commerce consumer finance players who provide check-out financing,
Embedded Finance is one area which holds huge upside in growth due to inherent abilities to serve their captive customers. Industries such as e-commerce, ride-sharing, and food delivery recognize the value of providing integrated financial services to their customers, whose core capabilities lie in other verticals, and utilize their large customer base to cross-sell lending products. Retail credit card players, who provide credit-lines to customers that can be utilized whenever required but this segment is slowing down and converting into co-branded verticals due to RBI’s strict regulations, and also specialized lenders who focus only on certain loan products like education loan, gold loan, salary loan.
Education loan players have seen decent traction and funding after getting hit by the pandemic, it has shown improvements as students are relying more on education loans additionally many students in India have opted for pursuing higher education abroad and are keen to explore the range of education loans available.
Automotive Financing has seen a lot of activity with the future shifting towards EVs, many new players in this segment have come up with EV 2-wheelers, 3-wheelers financing as well as commercial vehicle financing.
Loan Marketplace
With the lending ecosystem adding new players every day, borrowers are often confused about which lender to avail credit from. This is where a loan marketplace comes in. These platforms allow borrowers to compare the loan products offered by different vendors and choose the one that best suits their needs. These marketplaces also play a role in ensuring that the borrower receives a competitive interest rate for his loans.
Investors
After digital payments, Lending Fintech has seen good traction from investors. Investors continue to fund this segment to support Fintechs to attain scale and growth. Though, segments have seen reduced funding in line with reduction in overall funding. Going forward, investors will be more cognizant on Fintechs ability to attain profitability as well as manage NPA within control. With continue increase in regulatory guidance within lending, investors will also focus on founders ability to comply better with those regulatory guidelines.
