Information technology has revolutionized every aspect of our lives from accessing information to shopping, getting medical aid to financial transactions. Monetary transactions like money transfer, bill payments, insurance and investment of funds are all happening digitally through options like net banking, payment wallets, UPI, and credit cards. More and more people are switching to online services as these are not only convenient and user friendly but also available at our disposal round-the-clock. With digital technology making inroads in the financial world and the rise in tech-savvy customers, here are five major trends that will define the ‘new normal’ for financial sector in the year ahead.
1. Digital finance
Digital finance empowers individuals and companies to access financial services, be it payments or credit products, at their fingertips. Application of technology has redefined the movement of money. Mobile payments, online wallets and UPI are all results of this revolution.
With the availability of a low-cost smart phone and access to data, Indian customers can be reached out digitally and there is a big opportunity for the lenders to build intuitive customer journeys for interacting with them. With the emergence of the API based data ecosystem, institutions can complete the KYC, underwriting and verification process digitally. A lot of work has also been done in the space of lending product design, eg. checkout financing, click payments, buy now pay later credit solutions. This trend would continue and the number of transactions and the size of transactions which are fulfilled end to end digitally will increase.
The increased adoption of a digital demand to digital fulfilment or digital demand to digital decisioning journeys will also accelerate the cross-sell and up-sell programs at multiple lenders. These customer interactions will benefit from the availability of industrialized behavioural information on a lender’s portfolio, entire credit bureau information for a targeted customer, updated digitized customer profile, established disbursement and repayment channels. This will allow more and more lenders to choose customers on whom they spend, as they try to maximize lifetime relationship value from a selected customer.
2. Real-time credit decisioning & Underwriting
Real-time credit decisioning will make funding of loans completely online, seamless, and instant. This technology allows lenders to digitize their credit policies and provide customers with a convenient online application and the value of immediate account funding.
Real-time credit decisioning transforms the traditional and physical loan application and approval process with intelligent technology and data analytics. A dynamic shift can be witnessed in the requirement of real time decision making, digital KYCs and digital underwriting.
The impact of real time decisioning will be felt increasingly in post-acquisition customer interaction points such as cross-sell, up-sell, early warning portfolio actions and collection portfolio actions. Lenders who will devise data structures that allow them to store unstructured data (eg. collection call notes) in addition to structured data, will in the medium to long term, create sustainable sources of competitive advantage through sharper portfolio segmentation.
3. Mass-Market Loans will keep growing
We are already seeing a trend that Indian customers are fulfilling their small ticket, short duration loans through various digital lending platforms. From the lenders point of view, they can service this segment of customers as they are digitally connected. The cost of acquiring these customers and underwriting them has reduced as most of the data is available on API real time at nominal per unit price. The transaction numbers indicate that, lenders offering buy now and pay later and short-term sachet loans have found a strong product market fit and is expected to grow through 2021.
Home ownership is one of the key priorities for the government and is also aligned with the rise in employment opportunities. In the coming years, the demand for affordable housing is expected to grow through initiatives by the government and regulatory bodies to encourage the bottom of the economic pyramid segment to dream of owning a house.
Similarly, another segment expected to grow is Rural Finance triggered through government initiatives and digital solutions being offered by the fintech NBFCs. Increased mobile adoption, the new wave of fintechs and improvement in technology, has made the interface easy and user friendly for the people in less developed areas to have credit accessibility.
4. Incorporation of AI, ML, Analytics & Alternate data to increase credit approvals
As India is becoming data rich, institutions want to be able to use the available data in an objective manner to meet their business needs.
Some of the data attributes that are available for the lenders might not have a historical precedent of predicting risk eg, phone data, ecommerce transaction data, cash flow data. As the variety, velocity and volume of this data is high it is difficult to use traditional approach to build predictive models, Artificial Intelligence and Machine Learning risk assessment models have made it possible for the lenders to ingest the vast data pool that is available on their potential customers.
Artificial intelligence coupled with Machine learning can find patterns that predict behaviour and determine the credit worthiness of a borrower. Lenders can also use AI to reduce underwriting overhead and delays, which can increase profits per loan. AI/ML based digital systems will be the future of lending that will greatly reduce the cost and time involved in underwriting loans. Furthermore, AI-based chatbots can handle low-ticket items and customer queries for a faster turnaround time.
5. Online Security & online data protection
With the growing dependence on technology and cloud computing, there is a growing concern and rise in cyber crime. The adoption of remote operations has led to exchange of critical and sensitive information, especially financial data on the cloud.
To protect data, reduce or eliminate loss, and meet the regulatory compliance requirements, cyber security and access management are going to play a major role. Organizations will continue to embrace new edge and remote technologies and implement more security practices like data encryption to further safeguard the distributed workforce of the future.
2020 was the year of adaptability, forcing financial institutions to scramble and digitize their customer-facing processes to survive. 2021 is going to see a renewed focus on digital and lead to the emergence of connected banking. The time is ripe to accelerate digital and leverage technology to stay relevant, competitive, and future ready.
The article is authored by Mr. Navin Chandani , MD & CEO , CRIF Highmark . Navin has over 20 years of valuable experience in Financial services industry.