How is FinTech driving financial inclusion in India?

With the growth and advancement of technology, financial inclusion has also come to be considered as a critical indicator of development globally today.

Nov 24, 2018 10:11 IST India Infoline News Service

With the growth and advancement of technology, financial inclusion has also come to be considered as a critical indicator of development globally today.

The Narendra Modi-led government recognized this issue and worked towards an inclusive financial system, eventually rolling out the Pradhan Mantri Jan Dhan Yojana (PMJDY), a scheme that allowed Indian citizens to open zero-balance accounts.

However, despite PM Modi’s best efforts, a 2017 Assocham-EY report claimed that 19% of the Indian population is still left out financially. 
If we analyze the entire scenario, the issue here is that traditional banks think that a ‘one-size-fits-all’ approach to financial solution will work for all Indian households. Unfortunately, that is not the case. 

Low-income segments still rely on non-institutional sources to power their financial needs, which could possibly be based on the fact that these sources account for inconsistent cash flows that can be tailored as per their needs and with minimum hassles. 

More so, many individuals do not understand the different Z(investment) product offerings and financial jargon associated with formal financial services.

So, how then can we achieve financial inclusion? Enter FinTech! Heralded as a feature that will drive ‘Financial Inclusion 2.0’ in India, fintech, as the word suggests, uses technology to tailor financial products for consumers. 

Here, advantages include a simple user experience combined with dramatically reduced servicing costs. 

In India, FinTech has progressed with great gusto. Unsurprisingly, the payments space leads the trend, with mobile wallets like Unified Payment Interface (UPI) and Paytm being used by scores of Indians to carry out their day-to-day transactions. 

What’s more? Consumers approach insurance and bank aggregator websites to engage in comparison shopping; increasing popularity of online stockbroking and investment websites, as well as digital lenders altering the borrowing experience. These services provide a simpler, paper-less browsing and borrowing experience that leverages alternate data and provides credit to non-traditional borrowers. 

Meanwhile, the way Indians have taken to FinTech services (52% adoption rate) is way above the global average (33% adoption rate), as per a 2017 report by Ernst & Young (EY). In fact, FinTech usage is significantly higher in large cities, with an adoption rate of 66%, while for tier-III and tier-IV cities, the adoption rate has been recorded at 51%. Though rural India still lags behind at an adoption rate of 33%, the Government of India’s digital initiatives would boost FinTech usage in these regions soon.

So, which sectors(s) benefit the most from FinTech firms? 
Reportedly, FinTech companies have captured the biggest slice of the personal loan market, literally transforming the manner in which we borrow money, right from loan application to loan disbursal. 

So, what it is it that makes them revolutionary in the instant loan space in India?
1.    Instant approval or rejection of the personal loan application after some risk-assessment algorithms evaluate the borrower’s credit profile. 
2.    Hassle-free digital verification process, which, at times, doesn’t even require the customary representative visit to verify the documents. 
3.    Loan disbursal could happen on the same day after the documents are verified. 
4.    These companies offer flexibility in loan amounts and tenures.

Another aspect which sets FinTech firms apart is their reliance on alternative credit data. This includes financial data collected from non-traditional lenders and non-financial payments data such as payments related to rental, utility, and telecom services. Thus, it provides a more holistic view of consumers. 

For example, most credit-invisible consumers pay rent on time and in full each month and could be great candidates for traditional credit. However, they don’t have a credit history yet. But, when lenders see their track record, they could take a chance with them. 

In conclusion, FinTech is breaking barriers and developing the banking sector, moving beyond the traditional practices of physical document collections and verifications and loan disbursals that takes weeks currently. 

In the future, there could be a time when consumers might not even have to request credit, it would be allocated to them on the basis of their behavior, age, assets, and needs. Consumers, who are already king, will have much more options to choose from. 

However, this would also be accompanied with greater risk, raising the need for strengthening regulations to ensure that the ‘click-to-apply’ culture of getting loans does not back-fire.

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