The Pattern #29: Bringing the FinTech train back on track

Mayank Jain   /    Head - Marketing and Content    /    2022-09-30

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    Hello everyone. 

    Welcome to the 29th edition of The Pattern, a newsletter where we unpack the latest rumblings from finance, technology, and economy and make sense of it for you. Let’s get started. 

    First and foremost, it must be mentioned that the Reserve Bank of India is not done with digital lending just yet. After a series of regulatory notices and guidelines to set guardrails around the sector, the regulator intends to manage the launch and visibility of digital lending apps on app stores such as Google Play. 

    The regulator is reportedly working on a whitelist framework of sorts that will give approved digital lenders unfettered access to the app stores run by Google (and possibly Apple), thus removing uncertainty from the minds of FinTech founders who have been vocal about the constant fear of their apps being removed from the app stores with minimal or no warnings. 

    An in-depth story on The Ken tracks this, and the following graphic is a fascinating look at how the digital lending space has evolved over the last couple of years. 

    Old problems, new models 

    The financial inclusion and access to credit problems is a recurring theme in any conversation around financial services. However, new developments on the horizon shed light on just how FinTechs and lenders alike can seek to alleviate the $350 billion MSME credit gap. 

    First, there’s Cashfree - the payments company has secured an in-principle approval license from the RBI to be a payment aggregator. It is also reportedly coming up with a PPI license. These two together will help the company build a more comprehensive MSME credit product and improve the financial inclusion problem by offering add-ons such as overdrafts to its clients. 

    On the other hand, we have written a lot about how Account Aggregator and alternate data make a formidable underwriting stack for new-age lending. At the same time, our report on AA showed that it’s incredibly potent in reducing journey drop-offs for borrowers and eliminating fraud from digital loan applications. You can read it here

    There’s also Indifi claiming that it has disbursed Rs 2,800 crore worth of loans to small business owners. The company recently said in an event that it’s looking at new-age underwriting models to solve the chicken-and-egg problem of thin-file and new-to-credit borrowers not being able to get formal credit because they don’t have the required documentation. 

    Another way around this problem is cash-flow-based lending and sachetized lending. Our CEO Rajat wrote an in-depth piece on this just yesterday, and it’s a pretty insightful read if you’re looking for the specifics of use-case-based credit products and how to build them. You can read that piece here

    Hiccups abound 

    But this isn’t all. Even as FinTechs and banks run ahead full-steam trying to improve credit access, there’s the question of funding. Most non-banks and FinTech lenders depend on banks and larger NBFCs to provide them with capital that helps them run and scale their lending programs. However, the money seems to be drying up.

    Reports suggest that higher-than-usual credit offtake has meant that banks are chasing deposits that can then be converted into lending capital. While that’s a slower process, the cost of funds is shooting up for non-banks, and the market liquidity is set to tighten further in the coming days. 

    This not only means some rejigging in securing the capital for these NBFCs, but it could also potentially put pressure on the margins and the bottom line if the cost of funds remains high. 

    This is a recurring theme and why FinBox Lending Infrastructure stands out as the pioneering capital marketplace. Many non-banks and FinTechs use our network of lenders to access cheaper capital for their digital credit programs and, with the right co-lending approach, can scale and nurture their businesses much faster. 

    We’ve written an in-depth guide to co-lending that you can access here

    All in all, it seems like FinTechs have to move beyond product thinking and start by thinking about business metrics first and then working backwards. Exciting. 

    That’s all I have for this week—as always, leaving some reading recommendations below. Do write back about your thoughts on this newsletter and if there are specific themes or ideas you would want me to cover. 

    Reading list 

    1. State Of Indian Fintech Report, Q3 2022

    2. Under the hood: The secret science of predicting credit risk

    3. Built for Bharat: FinTech startups nailing the multilingual game!

    4. A digital lender’s guide to acquiring new borrowers (without burning marketing dollars)

    5. UX supremacy: What can FinTechs teach the rest of the financial sector about creating delightful products

    6. 6 things that may disappear from FinTech by 2030

    Update: This post was updated to reflect that Cashfree has received a payment aggregator license and not account aggregator. The error is regretted.

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