Fintech to be Future Backbone of Traditional Banking System

Manish Khera,  Founder & CEO, HappyTo say that traditional banks are in hot waters right now might be making a bit of an understatement. They are currently burdened with $150 billion in Non-Performing Assets – an amount that exceeds the GDP of a majority of countries that we share our borders with. For others, it is quite comparable except China.This fact, by itself, explains to us the gravity of situation that our banking system currently faces.

However, this isn’t all. Even after more than 70 years of independence, the unbanked ‘adult’ population continues to be 19-crore strong. The ambitious Jan DhanYojana must be given its due credit in bringing this figure down by 33 crore, but still, 48 percent of the overall bank accounts in India are currently dormant as per a World bank report released in April this year. It can be understood that a large chunk of these accounts, if not all, belong to the marginalized section of our country.

By the look of it, it is clear that the Indian banking sector has to incorporate massive reforms. Thankfully, with the increasing proliferation of technology in India, they now have the opportunity to solve their current conundrum and come up with a resolution.

Financial Technology and why is it meant to be the backbone of the Indian banking sector?

Financial Technology, also popularly known as Fintech, is a confluence of traditional financial solutions with the digital technology. It aims to deliver financial services online viaa range of digital processes. Of late, India has been the experiencing digitization across all walks of life. From utility bill payments to e-ticketing, e-filing of taxes to buying and selling products on e-commerce platforms, a majority of processes are now being transferred to the digital domain.

Incidentally, the digital adoption in India hasn’tbeen entirely restricted to urban cities. Rural geographies, home to around 66 percent of our national population,
have witnessed growth in internet penetration of 22 percent from October, 2015 to October, 2016 and 14.11 percent from December, 2016 to December, 2017 as per consecutive IAMAI-Kantar IMRB reports. These figures have been higher than their urban counterparts, which grew by seven percent and 9.66 percent respectively during thesame tenures.

The ongoing digitization has not left the banking sector untouched either as the nation has also been adopting cashless transactions more proactively. For instance, UPI-based payments have now increased from Rs. 50 crore in October, 2016 to Rs. 59,000 crore in September, 2018. ACI Worldwide and AGSTTL further suggest that Indian digital transactions will be worth $1 trillion by 2025 and 80 percent of these transactions will be done via UPI. This constantly increasing digital trail of customers and transactions has been increasing the visibility within the market, which can eventually help Indian banks to boost their overall productivity.

The fintech players of the country have been using state-of-the-art technologies such as Machine Learning (a subset of Artificial Intelligence) and Big Data to conduct credit profiling of their customers. Despite being in an embryonic stage and a relative absence of customer data, the approach has enabled them to ensure zero to negligible NPAs. This is while catering to the MSME sector, which is largely perceived as a black box by traditional lenders. Some of these revolutionary lenders tap data sets as far-reaching as PoS-based transactions. The proprietary system developed by them then establishes a relationship between the available customer data – alongside macroscopic and microscopic parameters of the given industry – and the eventual short-term and long-term outcome of the loan. For instance, if a loan turns into a stressed asset, the system automatically analyzes the possibilities that could have led to this result. It does the same for good loans that timely fulfil their loan obligations.

Given that banks also have historic data of their target customers, including people and larger businesses, they can derive greater value by joining hands with fintech platforms and using them as their backend systems. Such approaches will also pave the way for delivery of cost-effective financial services to the other marginalized sections of our country counting farmers and artisans, who, at present, have to source credit via loan sharks at interest rates as high as five percent per month (or roughly 80 percent per annum). As yet another benefit, it will also encourage more people to more proactively use the banking services and bring superior financial inclusion.

The convergence of fintech and banking sector will significantly add to the financial value chain. It will help in formalizing the economy and ensuring the last-mile delivery of financial services. When this happens, the best part will be that it is going to prevent a future lock in of capital to the tune of $150 billion, which can be used in nation building. We have to just eagerly wait and watch till that happens.