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Digital Lending Landscape

Trends In Banking

1. Latest Trends in Banking in India

Banking has evolved a lot in India. From the good olden cash withdrawals at counters, to now 24X7 availability of all bank services, to Fintechs revolutionizing payments and lending, Banking has been at the forefront of change brought in by the latest technology and rapid strides taken by the Industry and the Regulators.

1.1 Fintechs Performing Banking Function

Fintech companies have entered almost all the areas within Banking. They started with Payments sometime around 2015-16, which got a tremendous boost due to demonetization. Prominent among Payments Fintechs include PayTM, RazorPay, PhonePe. With the advent of UPI, Google Pay has now become a huge success in the Payment Market.

On the Lending Side of the Banking Spectrum, changes have been happening in the last 2-3 years. Technology changes such as APIs, AI and ML, Cloud Computing, Open Source etc. have tremendously increased the reach of Banking to several hitherto unbanked areas, and also, reduced the cost of providing banking services. Several Fintechs such as LendingKart and Co-lending platforms such as Yubi (formerly Credavenue) are making inroads into traditional lending and expanding the market.

1.2 Banking As a Service (BaaS)

BaaS is an approach that facilitates fintechs and other third-party entities to connect with a bank’s system through APIs.

A lot of early-stage innovation in India was focused on better customer experience during Sales & Onboarding. This created space for investment in frontend apps with subpar delivery through archaic back- office processes. We believe that during this year, the focus will shift to strong and flexible backend platforms with integration capabilities & cloud readiness.

This would mean heavy investment in:

    • Core Banking Platforms
    • Open Banking Systems
    • Digital Banking Systems
    • Digital Lending Platforms
    • Open Insurance Platforms
    • Payments Infrastructure

We believe that investments in startups focusing on these platforms will soar.

1.3 India Stack:

India Stack is the moniker for a set of open APIs and digital public goods that aim to unlock the economic primitives of identity, data, and payments at population scale.
India Stack can be summarised as Presence-less, Paperless, Cash-Less transaction with consent

Source: indiastack.org

APIs included in India Stack
The following APIs are considered to be a core part of the India Stack:

• Aadhaar Authentication
• Aadhaar e-KYC
• eSign
• Digital Locker
• Unified Payment Interface (UPI)
• Digital User Consent – still work in progress.

The following APIs are also considered to be societal platforms built on similar principles like India Stack:

• GSTN – The Goods and Services Tax Network
• BBPS – The Bharat Bill Payment System
• ETC – Electronic Toll Collection (known under the brand FASTag)

1.4 Innovations in Banking Accounts: Neo Banking

The neo banking platform Open has partnered with ICICI Bank to provide business current account to its SME/MSME customer base.

It provides services like
• Automated Reconciliation
• Dashboard to help aggregate all banking details on one platform
• Integrated workflow management

Apart from this, the platform also provides accounting facilities, payment gateway and Payroll Management. Similarly, Jupiter is a neo-banking platform operating in partnership with Federal Bank. The platform aims to provide savings accounts and debit cards to retail customers. It enables customers to track their spends, set goals and also provide rewards on their debit Cards.

Nodal Account:

A nodal account can be set up by a Merchant to receive and make payments. These accounts are sort of a pooling account, set up only for the movement of money.

Nodal Accounts can be set up by –

a. Ecommerce and Marketplace
• Set up seller/ vendor commissions and settlement
• Issue instant refunds
• Reconciliation and automated pay-out
• Cashback and offers for customers

b. Lending
• Disbursing loans to customers
• Enables lending aggregators to manage funds
• Process refunds
• Maker & checker mechanism for lending partners and aggregators

c. Insurance
• Disbursal of claims
• Tracking of pay-outs
• Settle commission for vendors and partners

d. Prepaid Instruments
• Enable Realtime pay-outs Faster transaction processing
• Debit transactions without linking to the card owner’s bank account

Escrow Accounts:

Escrow Accounts are temporary accounts held by a third party to facilitate large transactions between 2 parties. These accounts Enable customised transactions and provides a secure mode for routing transactions. These are primarily used for transactions where money comes at regular intervals.

Escrow Accounts can be used for –

a. Revenue Sharing / Joint Ventures
• Milestone linked transactions
• Franchisor- Franchisee model

b. M&A deals
• Large sums being disbursed at different junctures

c. Investment and Lending
• Leasing equipment from outside the country
• Invoice Discounting
• Issue of debt instruments

d. Global Ecommerce transactions
• Especially when payment is help for a certain period
• Open Credit Enablement Framework (OCEN)-OCEN provides a standard set of tools representing the various components of a typical lending value chain
• OCEN provides a set of open APIs to allow lenders and LSPs ( Loan Service Providers) to plug in to provide loan access to large segments.
• Will lead to emergence of new age LSPs, which could be an opportunity
• Embedded Finance- Embedded Finance Infrastructure enables customer-facing digital platforms (the ‘anchor platforms’) to ‘embed’ financial services into themselves. Embedded finance is fast becoming one of the key drivers of future growth of Digital Lending. In basic terms, any platform managing its own set of customers & services that provides lending services to its captive customer base will fall into embedded finance. In the D2C world, embedded finance could potentially become a bigger growth factor. The opportunity of embedded finance has given impetus to API Stack players such as Finbox and SETU to develop APIs stack to allow any company to plug in to those APIs and start lending under embedded finance.

• Pivoting of Payments Fintech to Lending: Majority of payment Fintechs have already started lending services or may start lending services in future. This could give an opportunity to LOS/LMS players to a wider network of potential customers.
• Emergence of Neo Banks: India has seen quite a few Neo Banks in both retail and SME segments. Neo Banks are primarily Fintechs building digital banking layer through Mobile App or Portal to extend banking services in partnership with Banks. These neobanks are having segmental approach to tap financial needs for Millennials, Gen Z, Women, Traders, Gig Workers etc. Neo Banks will also start extending lending solutions to their customers. This would require them to build efficient LOS/LMS setup to manage lending services efficiently.
• Digital Banks: Though, many of Indian banks have launched their Digital Bank platforms such as Imobile Pay by ICICI Bank, or Kotak 811 by Kotak or SBI YONO; Niti Aayog has proposed issuance of Digital Bank license under regulatory framework to new age companies through their paper. This may take time to come into existence though, there is good possibility of this taking shape as regulatory framework and India may see launch of multiple Digital Banks.

1.5 Technology Trends:

Technology has been the real game changer in the Lending Business. Various technology changes such as APIs, Cloud hosting and computing, AI/ML/RPA and Analytics have greatly improved and aided the delivery and servicing of Lending products to the end customer. Lenders have been investing heavily to take advantages of availability of these technologies while LOS/LMS players have been enhancing their capabilities with use of emerging technologies.
With influx of smartphones availability and access to cheap internet, reach to large population has been made easy. The new age Lenders are keenly focused on using Technology and advanced data algorithms to improve Loan sanctioning and disbursals. Technology is being used to assess the Customer’s credit worthiness faster, and to reach unbanked customers.

The key technology trends shaping Banking and Lending are –

Use cases evolving in Lending business due to above emerging technologies:
• Artificial Intelligence (AI) and Machine Learning (ML)-
• Develop better customer engagement using data
• Driving Credit underwriting ( use of alternate data)
• Chatbots for handling interactions,
• AI’s predictive analysis for optimizes the lending process
• Advance reporting and analytical capabilities
• Open Source
• Advancement and improvement in open-source technologies across layers
• Lower cost of development and maintenance
• Cloud Computing
• Cloud repositories offer scalability, data integrity and security to provide agility and faster go to market
• RBI is aggregable to hosting in the cloud. NBFCs have migrated and banks will migrate soon.
• Application Program Interfaces (APIs)
• Standard set of APIs make integration easier with faster time to market

• Mambu offers a full suite APIs to provide programmatic access to nearly every aspect of our banking software.
• Setu APIs facilitate onboarding, payments, deposits, lending and data empowerment for their end customers
• Automation
• Workflows to handle different customer journeys BPM and Product Management automation to enable release of variants of loan products

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