A Pune-based fintech, EarlySalary, offers instant bridge loans till the next salary credit to young working professionals. Bangalore-based Buddy is another fintech serving the student community, offering loans for shopping on e-commerce platforms. Fintech start-up Capital Float is serving the niche MSME segment. All these start-ups have one common thread - onbook lending.
Is there a future for such fintechs? These newbies are hoping to carve out a niche in a bank and NBFC dominated financial system. They are increasingly leveraging technology and alternate data sources for expanding the boundaries of credit access and are reaching out to underserved segments like SMEs, organised and unorganised sector employees. "Some of the startups such as Indifi Technologies, Capital Float, Aye Finance, Origa Leasing, Lendingkart, India Lends, etc. have emerged to provide fast, easy, alternate data based collateral loans to small businesses, in some cases in less than 48 hours," says Gayathri Parthasarathy, Partner & Head, Financial Services Advisory, KPMG in India.
The loans provided by fintechs, mostly short term, are in the range of Rs3 lakh to Rs1 crore but with slightly higher interest rates, between 15-22 per cent. In fact, some of these start-ups are active in the very short term and low ticket category loans, in the Rs15,000 to Rs50,000 range.
Clearly, innovation and disruption are the core strengths that fintechs can bring to the table. "They have changed the entire game in terms of products and services, and the products are used by several general customers. A lot of customers have entered new payments systems, making it a big area," says Mahesh Makhija, Partner, EY. A legion of fintech start-ups have sprouted, mainly over the past couple of years, riding on the government's enthusiastic promotion of cashless technologies - digital wallets, internet banking, mobile-driven point of sale (POS) and others - as well as the launch of IndiaStack including Aadhaar, eKYC, UPI and BHIM. Indeed, it has made India one of the hotbeds of fintech revolution in the world.
Fintechs which have deep-technical capabilities at their core are emerging as leaders in their respective areas. "Some business-to-business (B2B) areas like credit scoring, authentication have shown good traction, especially on completion of specific Proofs of Concepts (PoCs) with corporate partners/banks. Pure play business-to-consumer (B2C) players across domains - whether in payments, wealth management, alternative lending etc - are still building scale and profitability," says Amit Shah, Head- Corporate Strategy and Fintech at YES Bank.
Going beyond the formal credit assessment systems like credit rating, fintech companies have developed alternative credit worthiness assessment tools for those firms or individuals who cannot access the formal banking system. "If you don't have their data, surrogate their data is the new mantra," says Makhija. The surrogate data could be phone data or Employee State Insurance Corporation (ESIC) data for low income employees or how much deposit/savings individuals are making from their earnings. It helps in making a better lending decision.
India has seen several start-ups booming in the accessible and affordable credit segment using Artificial Intelligence (AI) algorithms for risk management, says Parthasarathy. Student lending is a new segment opening up in India. KrazyBee offers small-ticket loans to students through which the latter can fund short-term requirements like buying online products. GyanDhan provides education loans for students who want to pursue higher studies outside India. RedCarpet provides instant credit to students for online purchases which can be repaid in easy instalments.
Vying with banks
Banks either sponsor or buyout fintech products to leverage them for expanding their reach to new geographies, new customer segments and offering new services, despite integration of fintech products into their vast networks posing a problem. With the exception of larger tech players like Google with Tez, PayTM and Phone Pe, most fintech start-ups are currently too small to make a significant dent in the financial services market. "Some players like Zerodha and Capital Float have built scale, and are beginning to carve a niche. While they are not direct competitors to banks due to the comparatively small book size, this is an example of bringing in customer profiles not tapped by banks," says Shah. "Though their (fintech) growth rates are very high, some of them are growing 2-3 times every year, their denominators are very low," says Makhija.
Digital wallets, mobile PoS and P2P lending solutions remain key areas of growth for fintechs. They could pose a challenge to banks soon, if the latter fail to adopt them quickly. What differentiates fintech start-ups from traditional bankers is their focus on "providing a much more simple and fully-digitised customer experience," says Makhija of EY. Fintechs provide better customer experience, by customised and contextualised services through fully automated processes, thus doing away with manual processes and paper-based forms.
While latest technologies like artificial Intelligence (AI), machine learning (ML) and blockchain are assuming a greater role in fintech operations, "the change has been accentuated by the development of well-defined use cases," says Shah.
Using these technologies through collaborations, fintechs have the potential to comprehensively address financially marginalised segments and other financial inclusion objectives. "Increasingly, financial services giants and fintech firms have joined hands on PoC initiatives centred on the use of AI and ML to automate and streamline workflows in institutions," says Parthasarathy. This includes the use of chatbots to facilitate automated conversational flows and efficient customer service, intelligent agents such as robo-advisors for personalised financial planning, and advanced algorithms to facilitate fraud detection and prevention of money laundering. "According to us, voice and vernacular are going to be game changers," adds Parthasarathy.
Fintech financing rose 18 per cent in 2017, to $27.4 billion globally, with the value of deals in the US jumping 31 per cent to $11.3 billion. Deal values almost quadrupled in the UK, to $3.4 billion, and soared nearly fivefold in India to $2.4 billion, according to KPMG. Three Indian deals of PolicyBazaar, Mswipe Technologies, and BankBazaar made it to this quarter's list of the top 10 largest deals in Asia. India's digital payments startup Paytm had received $1.4 billion in venture capital in 2017. The number of fintech deals in India increased 65 per cent over 2016 levels. Fintechs get a lot of support from various quarters, including big companies coming in as accelerators.
If a fintech has good traction in the market, then it may not face any funding constraint. "Unrivalled youth demography, combined with almost a billion mobile subscribers and a primarily untapped financial services market provides a significant opportunity," says Kiran Kumar V., Program Manager, TechVision, Frost & Sullivan.
In a survey conducted among 600 fintechs, YES Bank found that fintechs face significant challenge in raising funds prior to a proven PoC/ early revenue, with 85 per cent stating a completed PoC is a pre-requisite to a successful fund-raise. Further, over the last 12-15 months, fintech funding has rationalised, and investors are keen to see demonstrated business and revenue milestones at pre-series A stage. One in three fintechs is unable to raise any capital. B2B fintechs face greater challenge compared to B2C fintechs - 89 per cent B2B players stated that fund raising has been difficult in the YES Bank survey.
In recent times, we have seen a few success stories - Paytm, FreeCharge, BankBazaar.com,Lendingkart, among them - but a growing number of fintech start-ups are closing down. Cautioning the fintechs of hidden dangers, Parthasarathy says: "Innovators need to understand that the solution they have come up with, albeit revolutionary, may not necessarily be required in the industry. An idea that may work in the US may nosedive back home, due to differences in economy, consumer dynamics, etc." Also, with a plethora of digital wallets around and UPI coming into the picture, consolidation in the payment area is in the offing, she adds.
However, with India slowly but surely making the transition towards a cashless economy, internet services and increasing transparency in transactions, the outlook for the future is most certainly robust. Many fintechs of today will become larger, and some will grow to a unicorn (above $1 billion valuation) status, while some will get acquired by banks. "Some may not be successful, but the fact is that these kinds of business capabilities, whether it is customer experience, alternative credit, surrogate data, fully automated data, Aadhaar or other data related capabilities, are bound to stay. In that sense, they have brought in a lasting change on the existing financial ecosystem," sums up Makhija of EY.
The writer is a Mumbai-based freelance journalist