India has seen tremendous success in digitizing financial services infrastructure, with payments being at the forefront.
Authored by Suchintan Chatterjee
An amusing message went viral as the pandemic set in: It is not the CEO or the CTO of a company but the COVID-19 pandemic that led to digital transformation. As tongue-in-cheek as it may read, there is some merit in the message, especially for the Financial Services sector. Clearly, the speed of digital transformation that Financial Services players started 2020 with, may not be enough to see some of them through to 2021!
India has seen tremendous success in digitizing financial services infrastructure, with payments being at the forefront. The NPCI data tells us that in June 2020, India saw 516 transactions over UPI every second (77 percent growth over June 2019). The RBI expects daily digital transactions to rise from the present 100 million (Rs. 5 trillion) to 1.5 billion (Rs 15 trillion) in the next five years.
With the payment space well poised for this exponential growth, the end-to-end digital lending journey is the next focus area. Most of the success so far has been limited to segments where either the customers have been more digital-savvy or the products and processes have been more amenable to digitization. However, there are three themes playing out that are likely to boost the next stage of growth in the digital lending space.
Firstly, as the world emerges from the pandemic, consumer expectations are being reshaped. A recent consumer sentiment survey by Deloitte, shows that 72 percent of customers exhibit a clear preference for transactions over digital channels instead of dealing in-person with financial advisors. Consumers are also increasingly aware of credit access means and
enhanced uncertainties are heightening risk perception. This may lead to better personal finance management practices.
For e.g., while 47 percent of respondents mentioned that they are likely to spend less in discretionary luxury goods, 74 percent were wary of how their credit scores will trend under stressed incomes.
Secondly, we are seeing an enabling regulatory environment encouraging the offtake of digital lending. RBI’s recent introduction of video KYC notifications will stimulate straight through the processing of loans. The regulator also encouraged lenders to leverage the latest AI/ML technologies to facilitate consent-based identity management through image recognition.
As part of the EASE 3.0 Public Sector Bank (PSB) Reforms Agenda, the Finance Ministry has unveiled the vision for tech-enabled banking. Some of these will see PSBs introduce initiatives like Credit@click for end-to-end lending process digitization.
Thirdly, we are going to witness concerted focus to increase last mile credit access to MSMEs as they struggle to survive the impact of the pandemic. This systemic push and alternate data sources will encourage cash flow based lending. As the government also announced credit guarantee schemes, we are likely to see financiers taking a platform-based approach with higher collaboration between banks, NBFCs and fintech reimagining the traditional brick and mortar route of credit delivery, together. As Account Aggregators
scale their operations and ecosystem enablers like OCEN come into being, this narrative of collaboration is likely to strengthen further.
Financial Services organizations will need to be mindful of certain imperatives as they look to emulate the success of digital payments in digital lending.
As banks and NBFCs revisit their digital lending strategies, they need to innovate on product design and perhaps can take a leaf out of other Financial Services players’ experience. Take the example of non-life insurance. Home insurance is traditionally a space that is heavily underserved in India. However, new-age digital insurers have seen this as an opportunity and innovated with short-term home insurance plans to secure one’s home while going for a vacation. Such ‘byte-sized’ products are extremely amenable to digital journeys.
Lenders will need to focus on gleaning insights from the enormous amount of data generated from digital channels and use it for differentiated experience design. For example, when a ‘friendly’ chatbot pops up to two customers, one may see this as much needed help while the other may view it as an avoidable irritant. The better the lender understands such nuanced differences, the more likely it is to be successful in designing a differentiated digital borrowing experience.
Finally, digitization of the loan lifecycle, especially the collections process is going to be the key to building a sustainable digital lending portfolio. Digital lenders will need to train their frontline to engage with customers in an ‘assisted mode’ of loan servicing and debt management. This will call for both, tool-based enablement and cultivating a digital servicing mindset in their employees and channel partners.
The COVID-19 pandemic may have triggered the race of digital transformation, but it’s now over to the tag team of the CEO and the CTO to decide how fast they can race to the the podium of a profitable scale!
Suchintan Chatterjee is Partner at Deloitte India
First Published: IST