The Pattern #38: Storm before the calm and the digital lending anarchy

Mayank Jain   /    Head - Marketing and Content    /    2022-12-02

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    Hello everyone, 

    Welcome to the 38th edition of The Pattern, a weekly newsletter where we unpack the latest rumblings from finance, technology, and the economy. Let’s get started. 

    The more things change

    I wouldn’t be exaggerating at all if I categorized the last ten days in FinTech as revolutionary. Unlike the glacial pace of evolution, revolutions are anarchic by definition. The anarchy brings chaos, disarray, confusion, and their cousins - all hoping to achieve an ambitious goal that only becomes clear once the fog lifts. 

    FinTech lends itself to this anarchy like a fish takes to water. First, the RBI’s shakeup with the digital lending guidelines forced dozens of startups to apply brakes on their accelerating growth engines and rebuild some bits from the ground up. 

    The guidelines came into effect yesterday and have effectively rewritten the rules of engagement - empowering borrowers with more information, better visibility into what they are signing up for, and even the power to revoke consent or opt-out of a lending relationship - if they so wish - within a free look period. 

    While FinTechs, lenders, and technology players will be relieved to have complied with these guidelines - it’s hard to believe this will be the last of its kind. The grey areas in the world of finance grow every day, and the regulators mostly play catch-up with their policy recommendations. 

    As a result, a lot of the newer models as well as the workarounds FinTechs and lenders have found (or will find in the coming months/years), will be under scrutiny for further bullet-proofing of the entire sector and the financial system as a whole. 

    The bottom line is this - good companies built on value-based foundations and practices will thrive under the guardian wings of the regulator. At the same time, those trying to hack their way to growth will eventually be eliminated. Darwinian evolution much? 

    This is not all that contributes to this revolutionary anarchy. The Reserve Bank of India also leapfrogged many other countries as the digital rupee pilot went live yesterday. This pilot will test a first-of-its-kind central bank-backed digital currency. 

    While the digital currency will function exactly like its more tactile counterparts - notes and coins - it’ll be a technological marvel made possible with extreme collaboration, continued innovation and a focus of India’s banking regulator not to let an opportunity for digital leapfrog go to waste. 

    Two steps forward 

    The launch of India’s own CBDC was preceded by another exuberant piece of the announcement that’s set to revolutionize the credit access landscape for millions of Indian MSMEs. With the inclusion of GSTN network data in the Account Aggregator framework, a leapfrog is imminent as lenders, FinTechs, and technology platforms adopt more dynamic underwriting practices such as cash-flow-based financing, progressive tenured lending and sachetized credit. 

    We wrote an in-depth analysis of this development and what it means for the future of MSME credit that you can read here

    Last but not least - even without all this impetus, digital lending is already flying. 

    The amount disbursed by FinTech lenders jumped 200% in Q2FY23 as compared to the same period last year. This is a massive number in absolute terms too - Rs 14,000 crore disbursed in the second quarter of the current financial year as compared to just Rs 4,000 crore last year. 

    Cause for jubilation? Damn right, it is!

    “The credit expansion witnessed this quarter demonstrates that the fintech industry is seizing unmatched opportunities to contribute to financial inclusion and an inclusive economy. The fintech lending industry is accelerating customers’ access to credit with more loans. Implementation of the RBI’s Digital Lending brings tailwinds for the industry as it sets clear rules and standards, boosting the confidence of the customers, fintech lenders and other market participants,” Sugandh Saxena, CEO, FACE (Fintech Association for Consumer Empowerment)  was quoted as saying by moneycontrol.  

    Between the digits 

    Introducing a new section this week where we’ll highlight some data points that I found the most fascinating. Today, we have three numbers. 

    95% - Piramal Finance acquires more than 95% of its new customers through its partnerships with FinTechs. The NBFC seems to have more than 22 odd partnerships that contribute only about 5% of the loans disbursed overall but bring in 95% of the customers. Insane. 

    38.3% - The higher range of interest rates observed by the FACE report on FinTech lending. The lower end of this spectrum is around 14%. How much are lenders making? Spreads range from about 1.1% - 5.3% for processing fees. Taxes extra. 

    2.65 million - Cumulative count of bank accounts linked with the Account Aggregator ecosystem already. Doubled in less than three months! 

    This is all from me this week. As always, leaving some reading recommendations below. 

    Reading list

    1. Come rain or shine, BNPL is here to stay

    2. Why the fintech ecosystem needs clear data laws to thrive

    3. How can banks supercharge credit operations with AI?

    4. Hyper-personalisation is the key to transforming the debt recovery ecosystem

    5. US$2.4B Piramal Finance turns to fintechs to turbocharge its retail-growth story

    6. [old but gold] India's Banking Revolution Has Started Without the Banks

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