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I hope you had a good week. This edition of the Pattern is coming to you straight from a picturesque beach in Goa, where the entire FinBox team has gathered for an annual offsite. Between the fun and frolic, we are out here engaged in deep conversations with the founders and across teams about the company’s future, the digital credit landscape, and generally, all things nerdy.
As I started working on this edition of the newsletter, where we wrap up the rumblings in the world of finance and technology, I remembered my chat yesterday with our CEO, Rajat Deshpande.
While answering questions from an open house forum about his vision for the company, Rajat stated that the biggest problem in building a FinTech infrastructure product is not product vision but reliability.
“We’re a reliability layer on top of a very volatile ecosystem,” he said.
This made me think about how it took 40 years or so for the credit cards industry to organize itself into shape where well-defined players play spec-level roles and take home neatly sliced incentives.
We’re at the 1% point in that maturity cycle when it comes to open banking and embedded finance. This is both exciting and scary.
Exciting because it tells us there’s such a long way ahead. The RBI recently published its Digital Payments Index for March 2022, which came in at 349.30. The index tracks the adoption and penetration of digital payments in the country, with the March 2018 number as the base of 100.
This is an exponential rise worth its weight in gold. As we have written earlier many times, the digital payments revolution sits at the heart of the FinTech revolution - both for its value in allowing distribution and product innovation.
Even Rajat himself mentioned in his newsletter yesterday how payment data aggregation can become the silver bullet for cash-flow-based lending and lead to the maturity of new-to-credit customers in the financial ecosystem.
The necessity for innovation
This comes at the heels of eight sizeable public sector banks, including the behemoths such as State Bank of India, Punjab National Bank, etc., joining the Account Aggregator ecosystem.
With banks now opening up a ton of financial data that was earlier siloed, FinTechs must innovate and build new use cases for better onboarding and underwriting. Be it a small ticket loan product or a pay-as-you-go insurance product.
This brings me back to the earlier point of reliability. An ecosystem still being created is like an aircraft being built while flying. In this case, the FinTech ecosystem is flying at a supersonic speed, but the specs are yet to be finalized.
For instance, the PPI limitation on offering credit lines turned off a business model that created many exciting credit products. Meanwhile, the push by the regulator for public sector banks to join the AA ecosystem opened innovation doors. In the next couple of years, we’ll see an abundance of data and a scarcity of use-cases.
A new Vyapar Credit Card scheme is in the works by the government which will become the all-encompassing mode of credit delivery to the smallest of the small enterprises a la kisaan credit cards.
It’ll be driven through cash-flow-based lending models, and FinTechs are likely to play a huge role in its distribution and adoption through building solutions on top of this tap.
This is the scary bit. Much of what’s currently understood as innovation solves the system's inefficiencies. BNPL is innovative because it creates a one-click checkout experience for the consumers and widens access as opposed to credit cards - which technically do the same thing but are slower and more regulated.
A new report predicts, however, that credit cards aren’t going anywhere, and BNPL itself will continue to grow.
The scary bit is that while founders will continue to innovate to solve systemic inefficiencies, much work will still need to be done to map these solutions to real problem statements that make the end buyers pay for these solutions - be it a B2B or a B2C business proposition.
This is especially clear as companies scale down their operations and focus on profitability and building a more efficient operational muscle instead of diversifying endlessly. Paytm, for instance, is expected to report a 90% quarterly growth in operating revenue for the third quarter while narrowing its loss margin to 13%.
Innovation might make the world go round, but an intense focus on product-market fit keeps the wheels steady.
Here’s to an exciting drive.
This was all from me this week. As always, sharing a bunch of reading recommendations below. I will see you next week.
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