Indian financial markets are seeing a lot of upheaval nowadays due to the entry of fintech firms. The fintech sector has received investments north of $1.6 billion in the past year itself and continues to grow at a steady pace. Globally too, fintech companies saw a growth of 10%, cumulatively valued at $23.2 billion in 2016. One of the main reasons behind this spurt of investment and growth in fintech companies is the superior customer experience. These companies are using far better technology and data driven solutions, which allows them to compete effectively against the big players in the industry (namely the banks).
India has seen a rise in demand for fintech services due to changing demographics and socio-economic reforms of late. The new age enterprise is looking for quick and efficient personalised business loans and solutions, thus, is more dependent on internet and related technologies. And even those with restricted access to internet and its knowhow are now migrating to this more transparent mode of financing. This is but only natural, given the benefits offered by fintech companies when compared to banks and other financial service providers (more on that later).
A few other contributing factors to the fintech success in providing personalised business loans and solutions are rapid rate of urbanization across the country, an aspirational middle-class, and a general rise in disposable income of Indian SMEs. The Indian fintech market has responded positively to these changes and is expected to grow exponentially by 2020.
The significance of marketplace lending
Personal loans, commercial loans and micro finance schemes for short term are in a huge demand in India. The country has an estimated 5.5 crore small and medium enterprises, and most of them are outside the purview of formal financing. This creates a huge opportunity for marketplace lending firms and for this precise reason fintech companies are focusing expressly on providing small business loans and solutions at the moment.
Main reasons behind the success of P2P lending
P2P lending has created a lot of excitement in the financial market, and with the new government’s push to go digital, the online lending platforms are seeing quite a few takers. This has helped fintech firms to expand their offerings beyond their traditional strongholds in urban centers to Tier 2 and Tier 3 cities and towns. Since, the fintech firms are using non-traditional means of credit score calculation, they have more flexibility when it comes to offering terms of personalised business loans and solutions. Use of data analytics also gives them a cost advantage to reduce the day-to-day operating expenses. In turn, a fintech company can transfer this advantage to the customers, offering better interest rates and EMI repayments than banks and other financial institutions.
A relaxed regulatory framework in the country has also worked in the favor of fintech companies, giving them the freedom to develop and try innovative techniques without the attached additional liability. Some marketplace lenders are also acting as aggregators for financial institutions, listing offers from different institutions on their platforms and helping borrowers to choose the right personalised loan or financial solution for their business.
The fintech sector has effectively facilitated financial inclusion for many small and medium enterprises (SMEs), which have been shunned aside or poorly served by the traditional financial institutions. They have also changed the way payments and remittances were done through unified payment interface (UPI) technologies. An increasing investment in online identification and security technologies will further calibrate the financial markets to fintech’s advantage, leaving the big few with a choice to either compete or collaborate with the fintech firms. Hopefully, the digital transformation of India will be to the advantage of SMEs and small time borrowers.