Finezza Blog

Our Thoughts on Simplifying Lending Lending Lifecycle Management and Fintech in India

How Can Banks Monetise Open Banking Platforms?

Loan Origination System

COVID-19 led to a disruption in different sectors, and banking is no exception. Nonetheless, with the application of Open Banking in the field, banks have found their way back to stability. The recent waves of digitisation have broadened the scope of significant technological changes in the banking sector.

Be that as it may, well-established banks still need to discover the full potential of Open Banking. One such approach is to monetise the Open Banking platforms.

But before we dive into how banks can monetise these platforms, let us first have our fundamentals brushed up.

What is Open Banking?

Open Banking involves sharing customer data and other vital credentials with third parties by banks and other financial institutions. Third-Party Providers (TPP) require such data to improve users’ financial experiences with products and services.

With increasing technological capability and licencing, TPP can easily access banks through Application Programming Interface (API). However, You should note that the data is only available upon the customer’s explicit approval.

What Good does Open Banking Offer to Customers?

Before the Open Banking Platforms came into the picture, traditional banks were the custodian of all the customer data.

Only the bank authorities could know confidential details, such as the type of account customers own, their financial ability, credit limit, the whereabouts of spending, etc.

However, the emerging digital ecosystem has facilitated the need for personalised financial products for customers, and that’s where TPPs come in. The data fetched from the bank is analysed for a customer’s spending habits and made to offer custom product recommendations.

The data is used in consumer lending to gain insights into customers’ creditworthiness. This not only helps deliver customers faster conversion and approval rates but significantly reduces the operating and administrative costs at the bank’s end.

Furthermore, Open Banking has made way for ‘Buy Now, Pay Later’, enhancing credit offerings to customers and small businesses.

Open Banking- a Bank’s Perspective

Banks encounter a new challenge almost daily in the face of rapid digital transformation. The same software that used to be the sole proprietorship of the bank is now a differentiator between the customer needs and the bank’s internal processes.

This is because, earlier, customers used the interface with the banking services only through the bank’s branch, but now they use the same interface through their smartphones, laptops, voice assistants, etc.

Another major challenge for the banks is to innovate amidst the increasing competition facilitated by Open and Embedded Banking. Embedded banking is a broader term that suggests integrating financial solutions with a business platform through APIs. In contrast, open banking involves sharing customer data with third-party providers.

Since traditional banking services are getting commoditised vigorously, banks must focus on creating a level playing field by generating other revenue streams. Monetizing the Open Banking platform could be one way of revenue generation.

Some Business Models for Monetizing Open Banking through APIs

APIs are the Kickstarter to Open Banking monetisation in the current banking ecosystem. Once the banks can build APIs for public use, they can move on to selecting the most suitable model for monetising API.

Without much ado, let’s learn about such models:

1. Data Model

Banks pursuing a data-based business model must establish a two-way data feed where they receive the data every time a TPP consumes its API. The best way to monetise is to build a paid model where TPP is charged according to the volume and types of data consumed.

2. Transaction Model

This is similar to traditional transactional banking services, except that the TPPs can access and utilise the data through plug-and-play APIs. This model focuses on the APIs completing a transaction like paying the bill or transferring money. Once the transaction is complete, users are charged a fee.

3. Per Call Model

Per Call is one of the most widely used models, which mandates every call as chargeable. Simply put, the TPPs pay each time they use an API.

However, unlike other models, a pre-monetisation setup is required in Per Call Model. Banks must offer a clear value proposition by asking their customers whether they will pay for the service and how much.

4. Subscription Model

This model is streamlined to further two types of costs- fixed and dynamic.

The former is a straightforward pay-once-a-month model offering full access to APIs. While in the dynamic model, TPPs sign up for a fixed number of calls over a period of time and hence, pay for the API in a tiered way.

The cost may increase per tier, but the price per API significantly drops, making it the most preferred choice amongst TPPs. Moreover, TPPs always have the option of upgrading their dynamic subscription to the next tier if they exhaust the permitted number of calls.

More Direct Ways to Generate Revenue from Open Banking

While APIs may be the most favourable way to inject fresh revenue into bank streams, several other methods are available to accomplish the same.

Partnering with Fintechs

Fintechs are changing the competitive landscape of the financial services industry, and banks can make the most of this.

Wondering how?

Banks can create a marketplace by collaborating with fintech and offering their products to customers directly.

On the monetisation front, banks can charge a commission or a recurring fee from TPPs to offer their customers a wide range of products and improve customer engagement.

Delivering Marketing Campaigns

Since Open Banking allows data aggregation, banks can use this in their favour by creating a detailed and precise customer profile. This will help banks position the most relevant financial products or services for each customer.

The personalised insights will enhance the quality of marketing campaigns, drive sales and eventually, add to the overall revenue of the banks.

Key Takeaways

Open Banking has set in motion for banks to move away from their traditional banking systems and adopt cost-effective methods. If used tactfully, Open Banking platforms can provide innumerable ways for banks to monetise areas of their business for more profitable business journeys. The essence lies in analysing the current landscape and devising strategies with wit.

If you want to streamline your lending process, check out Finezza’s Loan Management System. Our flexible solutions can help you track and manage credit applications, process KYC documents faster, assess lending risks, and make your banking and lending decisions efficient and accurate.

Contact us to get started!

RBI’s Surveillance of Digital Lending Apps: Productive or Obstructive?

Lending Lifecycle Management

The Indian digital lending sector, an industry virtually non-existent nearly a decade back, has grown by leaps and bounds in the last three to four years.

The market valued at $14 billion in 2013, is expected to reach $350 billion by 2023 and $1.3 trillion by 2030. An enormous credit demand in the economy fuelled this exponential expansion of digital lending It was coupled with high customer fintech adoption rates and a rise in e-commerce due to mobility constraints during the pandemic days.

Despite the promising prospects, the sector was, until recently, the Wild West. It was full of problems like unethical lending practices and coercive recovery measures, unfair interest rates and charges, credit scams, data privacy violations, security issues, etc.

To safeguard customer interests and provide a legal framework for the operation of the industry, the Reserve Bank of India (RBI) issued the guidelines on digital lending in September 2022. It came to effect on December 1st, 2022.

The Industry Response and Implications

The guidelines are based on the study conducted by RBI’s Working Group on Digital Lending (WGDL) from January to November 2021. The new norms lay down through instructions about customer protection, lender behaviour, data collection, storage and sharing, regulatory framework, etc.

When the norms were published, the industry welcomed them with anxiety, caution, and confusion. While the stakeholders’ responses were generally positive, a few of these directives were considered excessively strict and vague. The objections arose because of the changes in existing operational models necessitated by the new norms.

Therefore, the guidelines will-

  1. Require the Regulated Entities (REs) to entirely re-calibrate their systems, business models, and service agreements with their Lending Service Providers (LSPs) and Digital Lending Applications(DLAs),
  2. Increase the operational intensity and operating cost in doing business, and
  3. For effective implementation require, further clarifications from the central bank on specific points.

The Rationale Behind Stringent Digital Lending Norms

From its advent until now, the Indian digital lending market neither had a uniform procedure nor a regulator to set the market discipline. RBI’s intervention is a response to the increasing customer complaints about credit fraud and dubious lending practices and a remedy for the uncontrolled growth of the digital lending industry.

The WGDL, after studying the sector, has identified some issues detrimental to the well-being of the digital lending ecosystem, such as,

  1. Presence of unregulated loan sharks
    There are many unregistered, unauthorised, and shady lending apps engaged in unfair business practices in the digital lending space.
  2. Unwarranted scrubbing of customers’ smartphones
    Before the norms, there was a prevalent practice of misusing customer consent and accessing private data in users’ mobile phones. Some digital lenders even used customers’ high-risk data to harass them into repaying the loans, causing mental agony to the borrower. Irresponsible handling of sensitive customer information also raises cyber security concerns like risks of synthetic identity fraud.
  3. Threat of money laundering
    There were widespread concerns of money laundering using shadow lending, where unregistered and faceless entities with no regional presence hide their activities under layers of REs. Loan repayment proceeds are often diverted to offshore locations where these app owners are based.
  4. The risks of using First Loss Default Guarantee (FLDG)-FLDG agreements between regulated REs and unregulated Lending Service Providers (LSPs) enable REs to lend on the underwriting skills of LSPs. In such cases, the LSP, usually a digital lending app, will bear the credit risk without maintaining any regulatory capital needed to cover that risk.

Restrictive Features of the New Guidelines

A vital point to note is that the new lending norms are directed toward the banks, Non-banking Financial Companies (NBFCs), and other Microfinance Institutions (MFIs) which come under the purview of RBI, known as the Regulated Entities (REs). The DLAs and LSPs are outside the central bank’s regulatory ambit.

In its report, the WGDL has recommended the government to formally establish a Self-regulatory Organisation (SRO) that oversees the conduct of DLAs and LSPs.

RBI’s strict directives to its regulated entities have increased the pressure to improve due diligence and transparency, heighten data protection measures, and augment privacy policies in the fintech lending market.

This change presents a few challenges to the DLAs in the short term until the ecosystem realigns itself with the extant guidelines.

  1. Prohibits non-bank Prepaid Payment Instruments (PPIs) from loading using credit lines

    According to another guideline issued by the RBI in June this year, non-banking finance institutions cannot use credit to load their prepaid payment instruments (PPIs) like e-wallets, prepaid cards, etc.This instruction directly impacted 37 non-bank PPI issuers currently operating in the digital lending market. Many fintech lenders paused their services until they could modify their operating procedures to comply with the instruction, while others were completely shut down.
  2. Increases overhead costs

The operating expenditure increases as the apps have to reshuffle their business model to fit into the new framework. For example, fintech lenders using foreign servers will now have to hire a server in India to store customer data.

  1. Discourage banks and NBFCs from undertaking digital lending

Restriction on using the first loss default guarantee will make the risk-averse banks and NBFCs reluctant to continue lending in the digital space. This will affect the availability of online credit, dampening the growth of digital lending.

Closing Notes

On the surface, the RBI’s Guidelines on Digital Lending appear to limit the growth of digital lending apps. However, the central bank’s goal is to remove undesirable entities and practices from the fintech lending space to protect the vulnerable and promote a healthy and competitive lending market.

To that end, the Ministry of Electronics and Information Technology has asked the RBI to create a safelist of approved digital lending apps that will be available for public download on popular app stores. Such moves can be considered progressive, concerted efforts to support digital lending in India.

As competition increases in the digital lending market and customers have multiple options to choose from, service delivery becomes the differentiating factor. Borrowers move to digital space for a fast, and seamless lending experience.

A robust application programming interface(API) plays a significant role in enhancing this competitive advantage.

Finezza brings mobile ecosystems and APIs suited to the requirements of both digital lenders and borrowers. We have custom apps for clients, the feet-on-street app for assisting the sales force on the ground, and credit management and collection apps for monitoring and managing the entire lifecycle of the digital loan.

Are you thinking of replacing your legacy lending platform? Contact us for a demo of our smart apps.

Why Is Supply Chain Financing a Lifeline for SMEs in Difficult Times?

Supply Chain Financing

In recent decades, small and medium-sized (SME) enterprises have become more prevalent in global supply chains because of globalisation.

However, the Covid-19 crisis has exposed them to the perils of transnational shocks and liquidity crisis.

In the tumultuous post-Pandemic economic climate, Supply Chain Financing as a financing option for SMEs has witnessed tremendous growth. It is also being seen as a lifeline through which SMEs can navigate the dangers of unforeseen events and maintain their operations efficiently.

Additionally, digital innovation in Supply Chain Finance (SCF) has offered a viable and effective means of streamlining much-needed funding for SMEs during difficult economic situations..

By embracing technology, SCF lenders are providing better and more profitable assistance to small and medium-sized businesses.

In this blog, you will explore Supply Chain Financing (SCF), its utility for SMEs in unexpected circumstances and how lenders can use it to increase profits.

What is Supply Chain Financing (SCF)?

Supply Chain Finance, commonly known as supplier finance or reverse factoring, enables businesses to grow their cash flow. Typically, they utilize their accounts receivable as collateral. Meanwhile, the process offers their large and small suppliers early payments.

Companies can use SCF to free up working capital to purchase inventory and raw materials.

Supply Chain Financing improves the transaction’s efficiency and reduces costs for all parties involved. Because the buyers with a better credit rating can easily access the capital at a lower rate than sellers.

The Workflow of Supply Chain Financing

  • Buyer and seller agree with the supply chain financier.
  • Transactions between the buyer and seller are recorded, and the seller issues an invoice.
  • The seller uploads the invoices to a cloud-based facility owned by the supply chain financier.
  • The payment is received from the financier, which is less than the invoice value because of financing charges for the early payment
  • Consequently, the financier approaches the buyer to receive the payment for the invoices on the actual due date.
  • the financing charges varies based on the agreement. Either party or both could handle it.

Supply Chain Finance(SCF) bridges the gap between incoming and outgoing payments by optimizing working capital and reducing supply chain risk.

Example of Supply Chain Finance

  • A customer buys goods worth 100,000 rupees from a seller on 31st October, the payment of which is due in 2 months. Now, the customer wants to delay the payment to utilize the funds in his own business, whereas the seller wants to get the payment immediately. They then approach a financier to get into a mutual agreement.
  • Now, after the invoices worth 100,000 rupees have been raised by the seller on the customer, it transfers the invoices to the financier. After due diligence, the financier transfers the entire amount, less the financing charges, to the seller, for example, 95,000. The seller can utilize the advance payment received.
  • Also, after a couple of months, due invoices are scheduled for 30th December. Then the financier approaches the buyer to receive payment for the invoices. The financier receives a total payment of 100,000.
  • The financier earns the charges of 5,000 plus any other interest it might have levied.
  • In this way, the seller gets advance payment by paying a small amount, and the buyer can pay on the actual date or an extended invoice date.

The Benefits of Supply Chain Finance to SMEs

Supply Chain Finance (SCF) is a set of technology-enabled solutions that connect SMEs, their buyers, and financial institutions onto one platform. SMEs can accelerate cash flow, receiving lower financing costs and visibility into outstanding customer invoices and payment schedules.

  • Increased efficiency: SCF is offered by lenders as a means to allow SMEs to simplify their operations and manage their risk more effectively by financing the supply chain activity. It reduces the time needed to secure funding and allows SMEs to recalibrate their operations and performance.
  • Improved cash flow: SMEs can increase their cash flow by getting payments in advance.
  • Improved customer relationship: SCF improves customer relationships and facilitates future trades, allowing the business to carry on production and invest in the firm’s expansion.
  • Reduced costs: The financing cost is relatively less than traditional borrowing. This can save the SMEs’ resources, which can be reinvested into other operational areas.
  • Improved access to Credit: Supply Chain Finance enhances access to credit for SMEs, giving them more flexibility in how they use credit. It helps them improve their chances of securing funding when required.

Challenges in Supply Chain Financing for the Financier

Large companies with robust cash flows and customer relationships have easy access to credit due to their reputation.

However, for small and medium-sized enterprises (SMEs), there is a need for due diligence on the part of the financier to check the creditworthiness of the SME and their customers.

Some challenges include:

  1. Digital and technological challenges: Building cost-efficient digital products for the customers becomes difficult for the financier and leads to dilution of attention from its core activity, such as lending.
  2. Compliance risks: Since SMEs deal in small business transactions, there are fewer compliance requirements. This is why the financiers have to ascertain that no compliance risks are involved.
  3. Credit evaluation: Financiers have to evaluate the SME’s creditworthiness and their customers’ SCF to decrease the risks of default.
  4. Documents verification: With the rise of digital transactions, malpractices have also risen substantially. The financier must ensure that all the invoices submitted by the SME and their customers are authentic and leave no scope of forgery.

Bottom Line

Supply Chain Finance was traditionally seen as a solution for more prominent companies with solid credit histories, with much of the process being manual, time-intensive, and paper-based. This is why it took a lot of work for lenders to assess the viability of smaller businesses.

With the advancement of digital technology, there are plenty of opportunities for SMEs to avail the benefits of quick financing options like SCF. As SMEs account for the majority of the economic activity in the country, Supply Chain Finance can be seen as a viable finance alternative.

How Finezza Can Aid Your Supply Chain Finance Journey

The financiers that recognize the economic potential of Supply Chain Finance and choose to partner with Finezza could equip their organizations to handle the financial landscape in the years to come. This is because Finezza has developed a wide variety of products that aim to solve all your lending needs.

For example, Finezza provides tools like

Contact us today to implement smooth and efficient processes for your financing needs!

How Is Technology Vital for the Positive Growth of BNPL Providers

Lending Lifecycle Management

The Buy Now Pay Later (BNPL) option, also known as interest-free loans, became exceedingly popular during the Covid-19 pandemic. Reports suggest BNPL services are expected to cross USD 7000 million in 2022 in India; 22% of consumers bought goods using this option.

BNPL services are popular among the young, tech-savvy population and also those who do not have access to traditional credit options.

With growing consumer awareness and more players entering the BNPL arena, the future of BNPL in India is full of potential. Notably, technology has an integral role in driving and sustaining this expansion.

Why Is Technology Important for BNPL Services?

Businesses are offering Buy Now Pay Later services to attract purchases which customers may have avoided otherwise. E-tailers are witnessing a reduction in cart abandonment rate and a rise in the total order value, which is a testament to the popularity of BNPL services.

The idea of paying for a purchase in instalments is not entirely new. Using innovative technology like open APIs, artificial intelligence, and the cloud is the game changer with benefits like scalability, speed and integration into e-tailer platforms.

A robust technosphere that integrates the above in an intelligent, secure, data-driven and flexible way is essential for the thriving future of BNPL.

Technology And Its Impact On the Future of BNPL

Undoubtedly, the future of BNPL is highly reliant on technology. For it to grow further, it has to benefit retailers and users without compromising aspects like safety and ease of transaction. This is where Technology can aid them.

Here are ways in which technology can have a positive impact on BNPL growth:

  • Real-time Credit Analytics

Online shopping transactions take only a few seconds to complete, with no scope to pause for analysis or make an error. Technology can help BNPL providers gather real-time data to establish the potential buyer’s identity and assess affordability risk.

High-performance analytics is required to deliver faster and more accurate decisions. Moving from basic rule-driven interfaces to Artificial Intelligence (AI) powered decision-making will help Buy Now Pay Later players to gain a competitive advantage.

Effective analysis delivered in real-time can be the differentiator between a profitable BNPL fintech and an NPA-ridden one.

  • Retailer And BNPL Systems Integration

Combining in-store and online BNPL options is an ideal strategy for retailers to boost conversion rates and cart size. The future of BNPL’s success will depend on how successfully retailers and BNPL Fintechs integrate their systems to provide the user with a quick sign-up process and a simple check-out.

Cutting-edge technology will enable seamless integration with the seller’s sites to provide a superior customer experience.

  • Reduce Fraud In Real-Time

A rise in cyber fraud has accompanied the boom in digital transactions. Well-established and accurate systems to detect fraud in real-time are essential for customer and e-tailer safety.

A significant gap between a purchase and the first instalment payment can provide fraudsters ample time to steal data and make transactions before they get caught. Hence, early detection of fraud, ideally within seconds at the point of sale, is critical. BNPL apps employ accurate, quick and scalable fraud score algorithms that sustain a multi-layered approach.

  • Security and Compliance

Cyber security is paramount for all the players in the BNPL chain, especially since this sector is still in the early stage of its lifecycle. A robust security layer in the setup is essential for the safety of the lender and the customer. Measures like data encryption across the transaction chain are critical for preventing cyberattacks.

Currently, the Buy Now Pay Later space is loosely regulated in India. However, its growing popularity among consumers and fraudsters requires regulators to form stricter norms and regulations. Countries like the UK and Australia are looking at rules that impose limits around the BNPL apps to arrest growing customer debt. However, BNPL companies still need to follow strict laws related to data privacy, payment compliance and cybersecurity.

Technology platforms supporting BNPL fintechs should be able to adhere to the current regulations and have the flexibility to enable compliance with future rules with minimum disruption and time.

As the BNPL sector matures, regulations and compliance will increase and become more stringent, meeting all of which will only be possible with scalable technology.

  • Full BNPL Chain Automation

Advanced technology has a crucial role to play in the automation of the entire BNPL chain. All aspects of the customer lifecycle, beginning with transaction approval and going to automated reminders for payment, interest calculation, penalty payments, debt collection, and credit line management, can be automated with the use of technology.

This will help BNPL companies reduce costs and improve customer experience.

Challenges Posed By BNPL 

Buy Now Pay Later offers customers a convenient option to finance products and services. At the same time, it encourages them to buy things they would have otherwise not bought.

As per a study, 47% of those surveyed indicated they had spent more than they would have if the option to Buy Now Pay Later facilities were not available.  The study also revealed that 25% of users of BNPL are financially vulnerable, and one out of four from this group found it difficult to make payments.

Just as technology is essential for the growth of BNPL, it will play an integral part in the supply side by enabling better customer selection and loan management for lenders.

Key Takeaways

Lenders, retailers and other players need a synergetic partnership with BNPL apps for a personalised and hassle-free customer experience.

Technology will play a crucial part in delivering a superior customer experience and aid BNPL Fintech to stay profitable, reduce fraud and adhere to regulations. Innovative products that leverage technology will enable Fintech companies to make informed decisions that aid growth and profitability. An elastic and strong technological base will spur and sustain BNPL growth.

For example, Finezza is one such Loan Origination and Loan Management Software that offers a suite of products that accurately analyse an applicant’s financial transactions, provide comprehensive loan management and streamline delinquency management. It will help lenders make data-driven intelligent decisions about which customers to lend to and manage loans better.

How Can Banks Unlock Sustainable Growth by Partnering With Fintechs?

Lending Lifecycle Management

Traditional banks have been around since the 14th century and have had a good run until now. However, the onset of new-age financial technology (fintech) firms has taken the financial world by storm.

So, how have banks responded to the arrival of fintech companies? Do they see them as unwanted intruders? Are they willing to collaborate with fintech companies to pave the way for a better banking experience for consumers?

This article provides answers to these questions and takes you through some of the key reasons why banks should partner with fintech companies.

Beginning of the Fintech Era – What to Expect?

Fintech companies have acquired substantial market shares that previously belonged to banks explicitly. That being said, many fintech firms are actively scouting for collaboration opportunities with established banks.

Fintech companies are predominantly startups that do not have a lot of resources when compared to banks. However, they have a grip on new technologies and innovations. This is exactly why around 65% of credit unions and banks have agreed to enter at least one fintech partnership in the past three years.

One may wonder what value lies in the collaboration of fintech firms and banks. The answer is pretty straightforward – this collaboration has the potential to address the challenges of both parties. While fintech companies have expertise in new technologies and innovations to improve the overall banking experience for the masses, banks have the masses on their side.

Therefore, traditional banks and fintech companies have the right mix to lay the foundations of the financial sector suitable for the next generation.

Why Should Banks Tie Up With Fintech Companies?

Today, businesses across all industries are either on the path to embracing digital transformation or already serving their customers digitally. Banks that have conventionally remained slow to adopt new technologies have identified the need to spruce things up by partnering with fintech companies. The blend of new technologies provided by startups and the banks’ rich and diverse financial expertise would open the floodgates to a new, secure, and modern banking era.

Here are a few reasons why banks should join forces with fintech companies:

  • Leveraging Tech Innovations

There is a considerable technology gap between fintech companies and banks. Partnering with fintech companies would mean that banks can deploy technology systems that are not bound by legacy. Partnering with fintech companies addresses age-old challenges within the traditional banking system ecosystem.

With new digital solutions and development, fintech companies have the potential to transform the current state of banking. All in all, fintech companies can help traditional banks fill the huge technology gap and, most importantly, revamp the bank’s existing tech architecture.

  • Curating New Products and Services

Fintech firms have the knowledge and expertise to develop customer-centric products and services. Their offerings can play an important role in improving the status quo of traditional banks.

Many fintech companies have rolled out niche solutions such as buy-now-pay-later (BNPL) for mainstream customers. Such solutions appeal to the younger and more tech-savvy population. Looking at how inactive traditional banks have remained in the past to roll out tech-driven solutions, it is safe to say that the entry of fintech companies would do more good than harm.

  • Saving Time and Resources

Time is money. Ironically, banks spend countless hours debating whether they should buy or build technology in-house. Today, these debates prove to be very counterproductive as many fintechs can provide the required technology and solutions to banks at affordable rates. Thus, when banks partner with fintech companies, they need not worry about discovering new ideas and innovations. Fintech firms lift that burden off their shoulders.

Thus, implementing new technology or building a tech stack is cost-effective and much faster when banks partner with fintech firms. Leasing technology rather than developing it in-house offers banks more flexibility to reject a course of action if it is unsuitable or does not align with its requirements.

  • Facilitating Cloud Banking

Cloud technology or cloud computing largely means that you can access and save your data on the internet instead of a hard drive. This enables you to access your data irrespective of your location, device, or time as long as you have a working internet connection.

Just like any other sector, banks save large volumes of customer data and banking details on their hard drives. However, things have taken a turn for the good with the arrival of cloud technology. Many banks have tied up with fintech firms that provide cloud-based services and solutions to store data. It is a win-win situation for both the banks and customers. Banks do not have to worry about erasing or losing customer data, and customers can access data from any place at any given time.

Final Thoughts

So, the main question is whether fintech companies complement the growth of traditional banks. The answer is yes. The offerings or product portfolios of most fintech companies can transform the services of traditional banks and take them to a whole new level.

With an increasing focus on digital transformation across the banking sector, banks cannot ignore what fintech firms bring to the table. Partnering with fintech companies has multiple benefits, and many banks have recognized the same.

At present, many banks have joined hands with fintech firms, and those who haven’t are exploring this possibility. If banks want to remain relevant, stay ahead of the curve, and acquire new customers, they should collaborate with fintech companies.

By partnering with a fintech company like Finezza, you can avail a wide range of brilliant solutions and leverage the new age technology. Finezza offers services like streamlined loan management, document identification, and KYC processing. Contact us today to know more!

Microfinance: What Lenders Should Consider While Approving a Microloan

Loan Origination System

Microfinance is generally associated with financial inclusion and poverty alleviation. It aims to help individuals and small businesses who have limited access to conventional banking services. In a broader sense, microfinancing refers to providing financial services like access to money transfers and savings accounts, credit facilities, and insurance to the economically weaker segments (EWS) of society. However, in the world of economics, it is often used as a substitute to refer to the loans and advances extended to the lower-income groups for productive or income-generating activities.

Looking back at the history of microfinancing, one can see that the concept’s origins were microloans or microcredits. The program initially started as an experiment, providing tiny loans to financially backward women and small businesses for sustainable development in place of financial aid. Today, millions of people across nations take advantage of microloans to generate livelihood.

Characteristics of Microcredit

Microloans are probably the most significant products in microfinance as they have a considerable impact on the economic progress of their beneficiaries. Microfinance institutions (MFIs) must balance the social objectives of the lending process with the due diligence of credit appraisals to achieve profitable credit portfolios.

Microcredit is different from conventional modes of loans and advances. Therefore, credit appraisals must weigh certain factors to assess the viability and success of such decisions. Before moving on to that discussion, it is necessary to briefly re-visit the features of microloans;

1. The Lacklustre Borrower Profile

The majority of microcredit beneficiaries are from low-income families. Due to demographic or geographic factors, they have very limited or no access to formal credit facilities, proven sources of income, and, consequently, insufficient credit history. Usually, the clientele includes women, entrepreneurs, and artisans from impoverished families.

2. Loans Linked With a Livelihood Activity

The main objective of microfinance is to enable the borrower to generate income. Therefore, monies are advanced for undertaking subsistence activities. Microloans are rarely advanced for consumption purposes.

3. Small Loans for Short Durations

The ticket size of the microloan is very small, and the loan amount usually depends upon its purpose. They have short tenures and get amortised in small and more frequent instalments.

4. Unsecured Advances

Households seeking microloans, with less than INR 3 lakhs annual income, do not need collaterals to secure credit as per the Reserve Bank of India.

5. Capability for Effecting Transformations

Microlending activity can bring a positive transformation in the beneficiary community and economy. It also builds the entrepreneurs’ confidence in entrepreneurial ventures.

Making Microfinance Ethically Profitable

Uplifting the economically underprivileged segments of society is the foundation of microfinance. Traditional MFIs were non-profit, non-governmental organisations (NGOs) or small finance banks and NBFCs, dedicated solely to their social objective. But as financial markets began to evolve, large consumer finance companies and fintech lenders began to enter the micro-lending space. MFIs are now faced with the dilemma of achieving profitability without sacrificing welfare objectives. They can ethically combat the competition and become more resilient by doing the following:

1. Scaling up Their Activities

While microfinance has benefited customers, it has not made an impact on a larger scale. Achieving economies of scale in microlending will ultimately benefit the borrowers. A growing clientele base will increase the profit margins and reduce the cost of funds. MFIs can pass on a portion of these cost savings to their borrowers in the form of lower interest rates.

2. Leveraging Technologies­

Fintech lenders are overtaking conventional MFIs and expanding their customer base with ease. Tech-enabled business models are more agile and scalable. They reduce the cost of operations, increase customer outreach, and promote innovation in product design, delivery, and service. MFIs can scale their operations by harnessing data and tech capabilities.

What Factors Should Be Considered When Approving a Microloan?

A microlending model sustains as long as it is viable to investors. The model will fail for the recipients if it does not work for those lending the capital. MFIs can adapt to market changes by focusing on their asset growth and returns. But such growth should not compromise their fundamental social goals.

Microfinance lenders must examine the following factors to proceed with the credit decision:

1. Identify the Target Beneficiary Group

Market segmentation focuses the resources on addressing the needs of those customers who can maximise the lender’s outreach, returns, and the social impact of the loan.

2. Determine the Amount of Loan

Lenders can bring down the cost of funds and reduce interest rates if loan ticket sizes are bigger. A study on Indian MFIs found that apart from the purpose of the loan, regional attributes, perceived income from the activity, borrower’s education, age, and loan experience and even the distance between the clients’ homes and MFIs’ offices could influence the loan amount.

3. Assess the Purpose

As microfinance lends to low-income individuals, lenders can determine if the activity will generate enough income to cover loan repayment. Moreover, lenders may be willing to advance credit for other reasons if they can relate to it on a compassionate basis, such as covering emergency medical expenses. By analysing the character of the borrower you will be able to make an informed decision.

4. Examine the Credit Score and Spending Habits

The credit score is useful in determining default risk. Microloan borrowers might have insufficient credit histories to get a credit score. Lenders can use borrowers’ bank statements to observe their spending patterns and loan repayment capacity and use it to make the final call.

5. Stay Socially Responsible

MFIs must finely manage lending to the underprivileged without compromising the due diligence of the credit process. Business growth should not dilute credit quality.

The Path Ahead

With the evolving fintech sector and faster technology adoption among the common people, the time has come for the microfinance models to upgrade their core competencies. Many digital payment systems have leveraged their capacities to offer digital microloans to their customers. MFIs must respond proactively to these changes to avoid becoming redundant.

Conventional lenders have the upper hand over digital challengers in the responsible credit delivery of microloans to the underprivileged. However, that advantage may soon vanish as digital lenders catch up. Adopting technologies and customising services according to the changing preferences of the target customers is the only step in the right direction.

Finezza presents cutting-edge products for credit evaluation and lending lifecycle management. Our agile loan management system supports various types of loans like salary advances, virtual credit cards, education loans, supply chain financing, etc. Contact us today to learn how Finezza’s tools can assist your lending business.