5 technology advances which make digital loan and credit assessing process credible at fintech
FinTech companies have, in the past few years, been challenging the frontiers of traditional Financial Institutions. Payment and Lending are two areas where FinTech companies have specifically been bringing in significant innovation with respect to transaction speed and credit assessment capabilities. This increased ability of FinTech companies to credibly assess loan applications has been enabled by both (1) Technology development in general, and (2) Technology enabled infrastructure that has come up in India in particular. The top 5 Technology changes/ enablers contributing to this are:
Of the three important levers of (1) Identity Verification (2) Ability to Repay Assessment and (3) Intent to Repay Assessment; the Aadhaar stack has made Identification a smooth Digital Experience for most individual borrowers and individuals associated with Business Loans. The Aadhaar Stack has also enabled a host of services, some of which are discussed as separate Technology changes of their own accord.
Way forward: We need a similar identification system for all businesses through the ‘Udyog Aadhaar’ route or enabled by GSTN. While MCA has done a great job at assimilating such information for Companies and LLPs, majority of businesses in the country continue to be Proprietorships and Partnerships and a similar identification platform is required for them.
The Government pushed through 2 much debated agendas - push for Digital Transactions (triggered by de-monetization and enabled by UPI) and the GSTN set-up. Both are leading to higher transparency of business transactions that have enabled FinTech companies to build models to understand the business turnovers and therefore the ‘Ability to Repay’ esp. in case of business loans.
Way forward: While the government continues to push compliance, a wider consent-based information access infrastructure through this system would help in democratizing digital credit assessment
RBI seems to be on a very positive over-drive to enable FinTech practices, be it through set-up of CYC or proposal to set-up account aggregators for consent-based information access through APIs in banking system. Similarly, NPCI has been driving a lot of e-transaction adoption. The latest being the e-Mandate system that enables taking digital authorization to auto-debit a borrowers account for repayment. Similarly, the government has brought in Aadhaar enabled e-signatures to simplify documentation. While the CKY will aid with ‘Identification’, ‘Account Aggregators’ will provide access to digital copy of banking transactions enabling FinTechs to ‘Assess Ability to Repay’. Process control brought in by e-sign and e-mandates also bring a lot of credit confidence in the system.
Way forward: Account Aggregators becoming operational and clarity around usage of e-signature for on various loan documents will further this agenda. The CKYC is being populated by various Financial Institutions and multiple banks are coming on-board the e-Mandate platform. Continuous compliance drive will help further the impact of these.
One of the factors that triggered digital lending was also availability of digital data from technology-based ecosystems ranging right from Social Media to Personal Finance Managers to E-commerce Portals to Accounting Software providers. It opened new sources of information that FinTech players were quick to see tremendous value in; and, used this rich information network to build models and products around them.
Way forward: While both FinTech players and Technology based ecosystems continue to keep identifying ways to partner, there are several brick and mortar businesses that are identifying similar opportunities to work with FinTech players to build innovative products to service the capital requirement within their ecosystems.
Last but not the least, Fintech companies across the world have been able to bring in a lot of credibility in their credit assessment and enhance the understanding of customers using advanced technologies like Artificial Intelligence & Machine Learning to identify drivers of credit risk, Neural Networks to identify potential fraud and Natural Language Processing to sift through unstructured information like legal judgements to identify exposures. While the technology around some of these are quite evolved, others are evolving around the specific use-case of credit assessment.
Way forward: While these technologies are great weapons in fighting bad credit assessment they need to be used carefully as neither many Fintech players have enough data to build robust systems on these technologies nor have FinTech players seen enough credit cycles to know how these models would behave subject to credit cycles. It is therefore, important to keep building up the data while enhancing Technology based models with expert based models or vice versa. Deeper Banking and FinTech partnerships will also help in accelerating this process.
