Financial technology (Fintech) startups have been evolving at a superfast rate as technology disruption entrenches the banking and finance sector deeper each passing day. Just to understand the expansion of this behemoth, the number of Fintech startups funded in the first half of 2016 is collectively more than the aggregate of total startups funded in 2015.
Fintech companies are expanding at an enormous rate, majorly in three areas – credit, transactions and raising deposits. E-wallets have been a game changer when it comes to transactions, so much so that banks are tying up with them to get a slice of the action. Fintech plays a vital role in lending activities too, case in point – unsecured loans that consume a lot of time when done the traditional way (read: paper-based process) which can otherwise be enabled instantaneously with technology. Fintech organizations have superior technology and better products that generate a digital infrastructure for cashless, presence-less and paperless service delivery.
Fintech also has a major impact in the area of payment banks. The primary reason for the sluggish growth of bank lending is that very few of them carry licenses. The lending and deposit rate is also very high so there’s a lot of sticky money in the economy. With the arrival of Fintech organizations on the credit side and the upsurge of payment banks on the deposit side, the already established banks will face pressure on the debit and credit side. But, that’s great news for the customers as they benefit both ways – lower interest rates, higher deposit rates and better access to both.
Fintech is the revolutionizing agent of the existing businesses in areas of credit, deposits, and transactions.
Challenges are correlated with regulations. For example: If a Fintech firm has a product that excludes any human interaction with the customer while handing out a loan, then the firm finds itself in a grey area as the regulation states specifically to know your customer. A paperless process is fantastic and has produced great results but there are still a lot of grey areas in this procedure.
The second challenge is the lack of open APIs in several areas. For example The absence of an API where you can automatically frank an agreement electronically. There are numerous countries that have implemented an e-stamp mechanism, but India still lacks it.
The third challenge is the existing NBFCs and banks who will definitely want to retain their positions. That’s an expected competition to Fintech, but this pressure will only add fuel to the fire as finance and technology is an amalgamation of a digital infrastructure that is convenient and quick, tough to beat.
The fourth challenge is the absence of a single and distinct platform in the online space, this creates problems for the financial institution to assess customer profiles and vice versa. Also, retail banks reject loans at a rate of 60-70% as they fear it may supersede the bank’s risk appetite, an area where Fintech comes to the rescue.
There is a specific set of activities performed by Fintech firms that makes it unique and devoid of any direct competition. Fintech platforms employ end to end digitization for loan approval and credit system. For instance, from the time the customer applies for a loan, to the time he gets an approval, the entire digitized process is managed by Fintech firms. Customer acquisition, credit decisioning and loan processing happens on Fintech platforms.
Advent of Marketplace lending
Marketplace lending is one of the fastest growing areas in Fintech. The sector has evolved from individuals who obtained loans from other individuals to platforms that secure funding from organizations in an online marketplace. Fintech provides the users with an end-to-end solution by combining the aspects of digital lending and financial aggregators. According to a recently published Morgan Stanley report, lending platforms have risen at an average of 123% a year since 2010 globally. They predict that marketplace lending will reach $290 billion by 2020 at an average of 51% growth each year. Although the Marketplace lending sector is growing, the cost of obtaining customers still remains high. Also, till now finding borrowers is more difficult than securing lenders. Keys to the growth of this sector is a partnership with credit card lenders, tech firms and banks.