Embedded Finance
Open Credit Enablement Network

What is Open Credit Enablement Network & what it means for Digital Lending

Devashish Mulye   /    Product Manager    /    2021-01-27


The launch of OCEN was the definitive step for India to move towards democratization of credit and financial inclusion. But OCEN isn’t a product or a service. It is a set of standards. It needs an effective implementation to show results. Technology companies are building according to the standard and are adding the necessary functionality required to actualize OCEN’s vision. That’s where Embedded Finance comes in. Embedded Finance is an implementation of OCEN in the real world. 

What is OCEN? 

India needs to go that extra mile in offering credit to the most deserving, smallest businesses and individuals. With most credit directed to large companies in large volumes, smaller companies and micro enterprises are left in the lurch with little or no access to credit at all which is a huge concern for the next growth phase of the industry he said

Nandan Nilekani, Global FinTech Festival, 2020

Open Credit Enablement Network (OCEN, pronounced O-ken) is a set of open standards to facilitate the various aspects of the lending value chain. It creates a common language for the collaboration and partnerships between lenders and digital platforms called lending service providers (LSP’s) in OCEN parlance.

OCEN aims to change the way credit is distributed to the end-user by introducing new touchpoints for the distribution of financial services. It empowers new players (such as digital platforms) to play crucial roles in the lending value chain. It is a complete reimagination of the credit ecosystem in India.  

But what is OCEN really? A common language. A credit protocol infrastructure. What does this mean for our ecosystem?

OCEN is a strictly defined spec of APIs that acts as a standardizing middle layer between lenders and digital platforms. 

OCEN contains an API for each step of the lending lifecycle. Digital Platforms, which until now had a very high barrier to entry for offering financial services, can now seamlessly integrate these APIs as defined in the spec and integrate with multiple lenders, digitise the entire lending life cycle and offer credit on their platform. Similarly, lenders can now open their financial infrastructure to multiple digital platforms to source new pools of borrowers.

OCEN defines three parties - 

  1. Loan Service Provider (LSP)

  2. Technology Service Provider (TSP)

  3. Lender

Loan Service Provider (LSP) - Any customer-facing digital platform that can source borrowers. A digital platform could be a webapp or an android app that already has a core offering and a customer base. They can augment their product offering by originating and enabling credit on their platform itself. 

Technology Service Provider (TSP) - FinTech companies that work with both lenders and platforms to successfully onboard onto the OCEN protocol and use it to roll out tailored credit programs.

Lender - Banks/NBFC/Small Finance Banks provide capital and access to core banking networks to the Embedded Finance Infrastructure company to build on.

Embedded Finance is the missing link between OCEN and financial inclusion 

Many of the lenders are willing to adopt this protocol. Now we need marketplaces, or loan service providers to also adopt this protocol, which then allows them to embed loans in their daily working. For example, if you are a small company that provides tax uploading facilities to its customers, you can also provide credit to them. And you can embed the details using the protocol, and offer it to the lenders. The lenders will use their automated underwriting tools and give a loan. So you can actually go to a model where you can give short high-value loans in real-time with good underwriting and instant credit to the bank account of the borrower.

- Nandan Nilekani, Global FinTech Festival, 2020

As mentioned, OCEN is a protocol. It is incumbent upon lenders and digital platforms to adopt these specs in the real world. That’s the gap between OCEN and financial inclusion in the real world.

Technology Service Providers fulfill that role. TSPs help both these parties adopt OCEN. Here is what adoption entails

  • Modifying the business processes and tech stack of digital lenders and digital platforms as per the OCEN protocol

  • Developing a digital acquisition channel with end-to-end loan application journey

  • Building fintech partnerships with multiple lenders, platforms, credit enablement ecosystem (eNACH, pan verification etc)

  • Writing cash flow based and alternative data based underwriting models

  • Developing a credit product configuration layer based on the digital platform and customer demographics

  • Developing analytics and business rules layer in collaboration with both parties 

  • Developing a borrower communication and servicing layer in collaboration with both parties

  • Developing a payment reconciliation layer

Essentially, the TSPs combine their financial know-how that helps digital platforms leverage their unique position, with their tech solutions that help lenders digitise the various processes of the lending life cycle. They make the entire lending lifecycle easily embeddable for the lending service provider (aka digital platform).

Platforms that can bundle the above things and make it such that they can be seamlessly embedded by any digital platform, will gain prominence and become the torchbearers of OCEN’s vision. They will be able to empower platforms to embed financial services and actually let OCEN’s real power be unleashed.

The Impact

Effective collaboration between lenders and LSPs can improve customer acquisition, underwriting, collections, monitoring, and overall ROI for all parties involved. This makes a self-enforcing flywheel.

Just like UPI created a common language between debit and credit and so on, and allowed us to create this huge ecosystem, OCEN protocol also enables that. This is something that is going to have a big impact. For the first time, we can truly democratize credit, and make sure credit reaches all the small companies and street vendors and so on.

Nandan Nilekani, Global FinTech Festival, 2020

Democratization of credit - Embedded Finance and OCEN democratize credit data and the ability to offer credit services. This encourages new players to play crucial roles in the delivery of credit. Digital platforms can now leverage their positions to distribute credit to their customers and technology players can make meaningful additions to the lending value chain to make it effective and inclusive. 

Financial Inclusion - According to the International Finance Corporation, the credit gap in India’s MSME market is estimated to be an astounding USD 400  billion. Credit flow to MSMEs in India has always been broken. 

The lack of formal data to underwrite MSMEs makes it expensive for financial institutions to identify creditworthy borrowers.  In addition, MSMEs have very specific credit needs. They need smaller loan amounts, shorter repayment timelines, and quick access to funds, on a repetitive basis. 

Since underwriting MSMEs is complex and expensive, banks can’t afford to do small ticket sized loans, and usually take a long time to process their applications. 

OCEN and Embedded Finance help evolve this system. The entities closest to borrowers can deliver financial services. They can bring valuable platform data for underwriting new-to-credit customers.  By leveraging Embedded Finance, they can innovate and provide cheap and tailored credit solutions to MSMEs, leading to the growth of the MSME sector. 

Embedded Finance is our best shot at driving financial inclusion. People across socio-economic layers of society will get access to cheaper and improved financial services.

New Credit Products -  OCEN facilitates easier and effective partnerships, resulting in digital platforms with a deep understanding of their customers being able to do what is known as specialized origination. They can provide in-context, tailored credit products with favorable terms by collaborating with lenders that work for all parties involved (especially borrowers).

Recommended Reading

  1. OCEN & Account Aggregators will change digital lending in India

  2. Open House 1 – The ‘Landline to Mobile’ leapfrog for MSME credit

  3. Open House 2 – Loan Service Provider (LSP) products and business cases

  4. Open House 3 – OCEN API Specifications

  5. Open House 4: OCEN Market Opportunitie

  6. Technical Service Providers in the AA Ecosystem

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