The Indian payments landscape has evolved rapidly over the past few years, driven by an increase in the number of digitally initiated consumers, rising personal consumption expenditure, increase in use cases supporting digital payments, urbanisation and improvement in technology and mobile data usage. While in the past banks played a central role in providing payments services, the landscape today has evolved with active participation coming in from non-banks players as well. Increasing smartphone penetration, reduction in the prices of telecom data use, growth in digital commerce and institutional support have been the key drivers for digitisation of payments in India.
Growth in the adoption of digital payments has also been supported by improvement in the supporting infrastructure. A combination of access to 4G data, mobile phones (cost reduced to near zero with telecommunication companies offering subsidised 4G-enabled phones), Aadhaar and Unified Payments Interface (UPI) has catapulted India to a payments growth trajectory. From market players’ perspective, banks, non-banks, government and institutional bodies have been driving and enabling digital payments adoption through several favourable policies and business measures, all directed toward a common objective.
Increasing usage of digital payments has led to critical data points for financial institutions to leverage it for credit scoring thereby giving rise to FinTech firms focusing on quick credit disbursement. A recent research conducted by EY (EY FinTech Adoption Index 2017) shows that India is ranked second globally in the adoption of FinTech services (at 52 per cent), second only to China (at 69 per cent). FinTech adoption in India is astonishingly high—more than half of our sample of Indian consumers claimed to have used more than two FinTech products in the past six months. Some Fintech products are helping validate background checks for employment, directors of the company (in case of SME), fraud detection, bank account validation and statement analysis to automate the customer onboarding and loan approval journey in a straight-through processing (STP) manner.
Payment services are the most popular among the Indian consumers, who have embraced tech innovations such as mobile wallets and UPI platforms for their day-to-day payment transactions.
However, when it comes to borrowing, a large part of the Indian population continues to rely on primitive methods such as borrowing from family and friends, chit funds and moneylenders. Unavailable or incomplete credit scores (which are obtained through ineffective means such as credit cards or loan repayment history) deny bank loans to this population segment (consisting mainly of SMEs, students, consumers seeking to consolidate debt and new-to-bank consumers), which accounts for approximately 90 per cent of the market.
Alternative lending business refers to digital platforms that provide low-cost loans, which are simple to obtain for the large unaddressed market segment in India. These modern alternative lending companies determine the credit worthiness of applicants by using advanced data analytics and innovative data sources. Moreover, the growing volume of digital payments allows these alternative lenders to access many more digital data points for credit risk assessments. As they use digital solutions, the speed of loan disbursal also increases manifold as compared to the traditional methods. The borrowers also have the option to repay the loan through multiple flexible repayment options.
Leveraging digital platforms, there is a new trend of financing by service providers who have strong captive customer connect from businesses like health care, travel, retail, food delivery, auto and consumer goods. This is expected to give a significant competition to incumbents given these players could have lower cost of acquisition and competitive pricing due to historical transaction data points and product/services subvention built into the product pricing.
In summary, there are three specific trends being observed. First, companies with captive base on consumer businesses such as health care, retail and e-commerce, and travel are venturing into digital consumer side financing, leveraging their captive customer data and offering “pay later” options. Second, companies with captive base on SME side (suppliers, distributors, dealers) such as retail and consumer goods manufacturers are venturing into digital supply side SME financing leveraging their captive SME side (suppliers, distributors, dealers) data. This could have a blockchain play in the near future as multiple players come together to collaborate in a larger ecosystem of industry, financial institutions and logistics players. Third, small finance banks and payments banks could use payments transaction data for flow-based financing of small-ticket daily/weekly business loans to the unorganised sector using digital payments infrastructure like UPI platform.
While the jigsaw puzzle of doing KYC and underwriting (based on customer ability and intent to pay, social media footprint, bureau tradelines and fraud checks) is getting solved, a new challenge for digital lenders is to find an innovative low costs digital mechanism for collections, especially defaults in the case of high-volume, low ticket size product.
(With inputs from Vinay B Narkar, senior manager, EY)
and innovation leader, EY. Views are personal