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At some point in our lives, we have all been advised never to borrow money, because once this one-time borrowing becomes a habit, we will doom ourselves to the debt trap; repay one lender by lending money to another. This common belief shared by a large portion of Indians is due to the legacy of banking and lending institutions having a long-established oligopoly, controlling the costs of credit and the supply of credit, in terms of interest rates and ancillary activities such as fixing collateral with an iron. fist.
In recent years, however, the introduction of fintech companies and their customer-centric offerings have entirely revolutionized India’s banking and financial services ecosystem.
Financial technology companies, commonly referred to as fintechs, have helped usher in a loan culture reset, enabling the average Indian to get rid of the inconveniences associated with acquiring loans. From personal loans to business credit to student loans, fintech companies have redefined credit from a constant and frightening liability to a strategic business/life decision for the ordinary person.
By providing digital credit to customers with faster credit analysis, better customer service and incredibly low interest rates, fintech has influenced and captured a significant portion of the market previously captured by traditional lending institutions in India.
How is fintech making big waves in the lending industry?
In a country heavily reliant on debit cards like ours, fintech is reviving the benefits of using credit cards through various payment products and instruments, along with nice perks and rewards. According to a study by the RBI in 2021, credit card issuance has seen a rapid compound annual growth rate (CAGR) of 20%, with over 60 million credit card holders. What led to this meteoric rise of fintech in a traditionally consolidated market?
Loans without collateral
In the days when people had limited loan choices, banks required borrowers to post collateral to establish their creditworthiness and ability to recover their loan money by seizing said collateral in the event of default. This proved to be a significant disadvantage for genuine borrowers who wanted to avail credit without pledging their personal assets. Fintech companies have solved this problem by using big data to assess the creditworthiness of their customers through credit bureaus and prompt repayments to ensure timely debt collection.
Reduced changeover costs
Fintech alone has reduced the cost to customers when it comes to choosing a credit provider. While legacy lending solutions are rigid and bureaucratic in their services, fintech companies are more flexible and accessible to customers. Customers can access digital lending services from another state or country with as much ease as a local bank. Extensive fintech compatibility and minimal user interaction to successfully avail credit has reduced search and switch costs in India.
Faster credit approvals
Fintech has massively paved the way for the automation of finance and the overhaul of legacy IT systems. While many banking and lending organizations have introduced digital lending solutions, most have been heavy-handed. Unlike traditional loans which can take up to 6 weeks to be approved and processed, fintech companies offer instant loans which can be approved within 48 hours.
Fintech vs banks: friends or foes?
For traditional credit providers who held a massive hold over most of the market, fintech companies could appear as an aggressive species, an open threat to their existence. While fintech’s disruptive technologies can make traditional banks seem old in their processes, fintech lacks the resources to venture solely into capital-intensive services such as mortgages.
According to the World Fintech Report 2018, over 75% of fintechs want to partner with traditional lending platforms. By leveraging big data, innovative fintech solutions and banking delivery infrastructure, India’s lending culture can see a sea change. This collaboration has already been done by some banks to generate quick credit for their customers on a prepaid basis.
RBI crackdown on digital lending standards: What’s the future of fintech?
The recent RBI ruling prohibited fintech companies that are issuers of non-bank prepaid payment instruments (PPIs) from loading lines of credit and issuing “credit cards” through this process. The move will cause a major shake-up in the business model of NBFC-linked wallets that offer a “Buy Now, Pay Later” (BNPL) system with on-demand lending. While many notable and well-funded fintech companies will be directly impacted by this decision, the most affected will be consumers and merchants who could find themselves in a debt trap with what are essentially loan + prepaid cards.
What does this mean for fintech in general? While this move could pose serious challenges for fintech firms that partner with NBFCs to offer lines of credit through digital wallets, fintech lending institutions that partner with recognized banks such as the State Bank of Mauritius are unlikely to (SBM) are affected.