Need for Digital Infrastructure in FinTech

FinTech companies are reshaping financial services, offering streamlined user experiences across data aggregation, banking-as-a-service, lending, mutual funds, and more. This transformative wave holds promise for revolutionising sectors such as wealth management, lending, and payments.

Yet, with the escalating demand for diverse financial products, there's a crucial call for collaboration between FinTechs and traditional financial institutions to expand across this range of products. Compliance and regulatory standards, particularly focused on consumer protection, also highlight the essentiality of this partnership. However, bridging the technological gap between these entities poses a significant challenge, hindering their ability to orchestrate joint solutions effectively.

In response to this evolving landscape, banks and NBFCs have significantly fortified their technological infrastructure over the past 4–5 years. Regulatory pressures, as evidenced by the RBI's notices to major banks such as HDFC and Kotak, further underscore the pressing need for technological modernisation in the financial sector.

The Growing Need for Digital FinTech Infrastructure

As the significance of FinTech infrastructure continues to grow, the urgency has been further amplified in 2024 by recent security breaches. Additionally, numerous financial institutions have augmented their budgets for technological expenditures, spurred by several key factors:

Rise of Open Data Ecosystems

In an increasingly interconnected data landscape, FinTech infrastructure becomes indispensable for facilitating seamless integration. Initiatives such as the Account Aggregator stress the need for financial entities to integrate across the ecosystem, enabling real-time data sharing.
Increased Data Protection and Security Measures: Amid evolving cyber threats, there's a growing demand for advanced security protocols and encryption techniques embedded within the infrastructure to safeguard sensitive financial information and maintain consumer trust.
Recent Technological Challenges: Recent setbacks at major financial institutions underline the necessity to innovate infrastructure to cater to diverse customer needs. Serving Middle India requires a very different product basket compared to the top 100 million customers, needing continuous ideation and investment to maintain operational resilience.
Increased Scrutiny by RBI: With regulatory requirements becoming more stringent, financial institutions and FinTech companies are compelled to strengthen their infrastructure to ensure compliance and mitigate regulatory risks.

While, traditionally, financial institutions have relied on internal technological infrastructure, the increasing complexity of products is driving them towards adopting cloud-hosted, third-party, configurable solutions that can support their existing technology stacks.

Rise of Product-led SaaS for Banks and Financial Institutions

The evolving preferences of customers and the dynamic nature of financial services have driven a rapid surge in the adoption of SaaS products, catering to various sub-segments.

Within the lending sector, which has seen the fastest growth in third-party infrastructure, solutions have emerged spanning loan underwriting, management, collections, and embedded products. Modern loan origination systems now efficiently assist banks and NBFCs in underwriting secured and unsecured loans for new-to-credit segments, leveraging extensive unstructured alternate data points. Additionally, sophisticated, hyper-personalised algorithms within loan management systems can analyse repayment behaviours across various customer groups and predict portfolios at risk, aiding in the reduction of net non-performing assets (NPAs).

Similar innovations are being witnessed in credit card management stacks, co-lending programs, loans against digital assets, and investment products. Advanced RTA solutions are streamlining mutual fund issuances, distribution, and management. Furthermore, the insurance sector is experiencing the emergence of modern digital frameworks for co-creating and distributing microinsurance products.

Several key technological features have enabled these solutions to emerge

Modular Architecture and API Integration: These solutions are characterised by modular structures and API-driven functionalities, as opposed to monolithic architecture, allowing for easy customisation to meet specific requirements.
Data Consumption and Processing Capabilities: With a focus on data-driven decision-making, these solutions boast advanced capabilities to consume and process large volumes of data efficiently, enabling insightful analytics and informed decision-making.
Integration of Gen AI Use Cases: Leveraging the power of artificial intelligence, these solutions incorporate Gen AI to enhance operational efficiency, process unstructured data, and unlock new insights.

Increasing Technological Spends on New-Age Solutions

As technological evolution becomes imperative, there has also been a consistent uptick in technological spending over recent years.  According to Gartner's latest data, in 2023, the banking and investment services sector in India allocated a substantial $11.3 billion to technology, with IT spending in banks reaching as high as 10% of their operating expenses.

Notably, HDFC Bank and Axis Bank, leaders in digital-friendly banking, invested Rs. 5153 Cr (~$600 million) and Rs. 2428 Cr (~$300 million), respectively, in technology in FY 2024 to enhance their infrastructure. This surge in spending underscores the crucial role of robust digital infrastructure in modern banking and presents significant revenue potential for startups entering the digital infrastructure space.

The author is the Founder & Managing Partner of Eximius Ventures. The views are personal.