Mumbai-based Valuefy Solutions offers banks and financial institutions cutting-edge analytics capabilities that help them take better wealth management decisions. Other similar start-ups such as CreditMantri, CreditVidya and CreditSeva use both traditional and alternative data points, especially social media, to build customers' credit profile. This gives lending institutions data for targeting new customers, even those without credit history, and also helps them process loan applications.
There are hundreds of such companies - almost all of them start-ups - that are bringing about a technology revolution in the financial services industry. These financial technology providers (fintechs in short) excel at making critical interventions in processes of financial services companies to make them more efficient, help them acquire customers and make better/faster decisions. The solutions provided by these value-added service (VAS) providers are as varied as the world of technology and include use of machine learning algorithms, artificial intelligence and data mined from social media.
For instance, lending start-ups like Rubique and Capitalfloat use innovative credit models and data sources to provide their clients access to capital. Then there are players such as PayTM, PayU and MobiKwik that are creating integrated systems to facilitate web/mobile payments. This is apart from retail investment and personal finance companies like BankBazaar, Cleartax and Scripbox that are using technology to help individuals save and invest. Fintech companies have forayed into other areas of finance as well such as wealth management and insurance where they are providing institutions better information so that they can take their products to new clients. In insurance, there are companies such as Coverfox and Policybazaar that are making purchase of policies seamless.
"Many large institutions have legacy IT structures that are complex. These slow down decision-making. Fintech companies are more agile. They often anticipate needs better and develop solutions faster," says Amit Kumar, Partner and Director at BCG.
Fintech companies have significant room to add value to the various parts of the value chain right from customer onboarding, KYC and credit risk assessment to backend, collections and customer service. That is why banks, especially the private sector ones, are taking the lead and opening their systems to developers by investing in API (application protocol interface) technology, which allows banks to open their core banking systems for connecting with solutions provided by fintech players. For example, ICICI Bank has over 450 APIs across segments, including retail, commercial banking, corporate banking and small and medium enterprises. One player it has tied up is Perfios, a Bangalore-based company that has come out with an automated platform to analyse data such as bank statements and business financials in seconds. This helps clients (especially big banks) take better credit decisions and process loan applications faster. Perfios today reads data for 250-plus financial institutions. Its clients include ICICI Group, Kotak Mahindra Bank, HDFC Bank, Bajaj Finserv, the Tata Group and the Aditya Birla Group, apart from some top mutual fund and insurance companies.
Fintech Growth
Banking has three main aspects - liabilities, transactions and assets. "Some areas have gained a lot of acceptance, especially payments. However, investment and wealth technology is still nascent, providing scope for immense growth," says Sharad Singh, Co-founder, Valuefy Solutions.
Post liberalisation, the liabilities side was the earliest adopter of technology, which helped institutions expand their business manifold. Then, the transaction business was opened up to non-banking players, which brought about major changes through use of technology. A host of mobile wallets, PoS aggregators and payment gateways made the transaction business easy and profitable as they collaborated with banks. PayTM, Freecharge and MobiKwik are among the top players in this space.
Experts say it is now time for the asset side of the business to see similar growth. Loans to corporates account for a major share of banks' lending books. However, there is still a deep hunger for credit among micro, small and medium enterprises (MSMEs). Not many players have found this segment lucrative and so technological innovation has lagged here. "SME borrowers care about two parameters above everything else - speed of decision making (turnaround time) and quantum of finance. Fintech companies are certainly faster and, for many borrowers, can deliver the needed quantum, either alone or in partnerships. They can participate in the SME space in a meaningful way," says Kumar.
In 2017, India was ranked second in the growth of fintech adoption among digitally active consumers. This surge was accompanied by a rise in funding to fintech players. The sector received over $200 million in the first half of 2017. "There has been exponential growth in the last two years. The Internet has exposed people to more products. This has led to wider acceptance of innovative products," says Singh of Valuefy. Availability of low-cost smart phones and data has also changed the landscape of the banking and financial sector. The revolution that started with payment banks today covers a gamut of services.
Business Model
The current partnerships are growing as both sides are leveraging each other's strengths. There are some fintech players that are lending their software as a service (pay per use basis), some are selling the complete solution, while a few are selling only the source code. In fact, fintech players that have scale are offering their solutions to multiple institutions on a pay-per-use basis.
Many say the big challenge for many founder-driven fintechs will be to keep innovating as there are areas such as customer data where banks are not very keen to collaborate. Many large private banks are building their own data analytics capabilities because of privacy and security issues. "The banks are also on a learning curve. Many of the solutions would be replicated by banks on their own in future," says an industry expert.
As fintech start-ups emerge as enablers, it is imperative that governments and other market players establish an environment for innovation and technological advancement. Kumar of BCG says,"For fintech players to become the mainstay, they and banks will have to foster mutually beneficial relationships and work together."
Also, considering that Indian consumers are known to be more conservative, fintech start-ups need to go the extra mile to instil confidence. The disruptive potential of fintech firms can trigger the much-needed modernisation of the traditional sector.