Financial Services in India is witnessing an unbundling of products and services like never before. In the past, financial institutions like banks were responsible for the entire value chain for lending - acquisition, assessment and capital.
Borrowing was synonymous with visiting a branch or speaking to an agent throughout the lifecycle of a loan.
This led to three key issues:
1. Access to customers was limited because of a largely physical branch-based banking model.
2. Most of the data needed to assess the risk profile of a borrower was siloed and hence decision making was either biased or incomplete.
3. Restricted access to capital for borrowers. Not every financial institution was willing to serve the masses.
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Because of the above challenges, 2/3rds of Indian consumers a large part of the country remained under-served for credit from the formal channels.
These formal institutions still were the beacons of trust because that is where customers kept their money. However, the world is changing rapidly through newer business models powered by technology.
Today, there are multiple players in India serving customers through digital propositions like marketplaces, trade digitisation, payments services, logistics etc.
These ecosystems are aggregating customers on their platform, generating a lot of business and financial data, and building deep trust with these customers..
On the other hand, there are specialised technology players that offer regulatory-tech, credit scoring, multi bureau integrations, data pipes etc. which aid the lending activities and help a traditional lender become tech-enabled.
So, what is OCEN?
OCEN is a framework of APIs built over a consent framework between the three key participants of the ecosystem:
This is the perfect unbundling of financial services where every participant does what they do best. LSPs can act as agents of borrowers (since borrowers trust them), TSPs can offer plug and play capabilities that can reduce the barriers of entry for anyone to do lending digitally, and lenders can deploy capital while continuing their focus on risk and compliance.
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OCEN's first launch use case is the Sahay app which facilitates real-time invoice financing for an SME's unpaid invoices.
Currently, there are about 6 lenders live on the OCEN platform and many more are in the pipeline. As this network grows to include more LSPs, TSPs and lenders, the network effect will kick in that will allow a truly democratic flow of lending for Indian borrowers.
What OCEN truly enables is the power of embedded finance where any ecosystem can enable loans for their network by participating in the OCEN network as an LSP.
India currently has hundreds of such ecosystems and with the digital push, thousands more will emerge over the next decade.
Many of these ecosystems will either need lending to monetise their customer base or to engage their customer base through a Value-Added-Service approach. Either way, it is evident that most ecosystems will offer lending.
Through the OCEN participation, they will be able to do that without investing millions of dollars into building a lending technology stack and raising capital. That part will be handled by the TSP and the lenders on the network.
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Conceptually, this is the perfect approach and opportunity. There are however a few hurdles to clear as we ride along:
1. Real-time Decisioning Ability: OCEN is designed to offer decisions to borrowers within a matter of seconds. That means the Lenders will need to have the ability to underwrite in real-time and return the decision over an API within seconds. That means no human intervention at all. This may limit the type of products and loan ticket sizes since most real-time decisions are possible for low-risk products like invoice financing or taking small exposures via bureau-based scorecards since thorough underwriting is not sustainable.
2. Commercial aspects: Many ecosystems today offer lending in order to monetise their customer base. Currently, it is not very clear on how OCEN will allow an LSP to make money without needing to have a separate commercial arrangement with every lender. Today, there are Fintechs who have created an OCEN like network of partners and lenders to enable commercial aspects and non-standard products/user flows.
3. Truly Digital Dream: Apart from the standard lending flow of data -> Underwriting -> Decision -> Disbursement, there are nuances like escrow accounts, hypothecation, non-standard agreement clauses, FLDGs etc. which currently may not be available on the current API stack or through TSPs.
Just like UPI, the OCEN stack is focusing on creating a scalable API infrastructure and then it is up to the rest of the players to orchestrate the right user experiences and solutions. There is no doubt that OCEN will pave the way for real-time flow-based lending, like what UPI did for payments.
(Authored by Abhishek Kothari, Chief Data Scientist & Co-Founder, FlexiLoans.com)
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