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Panel discussion: Growth of SME and consumer lending in the virtual banking world

De-stressing SMEs with digital lending offerings

The digital lending products have just begun in Micro small-medium enterprises (MSME) which is predominantly been the neglected segment by the traditional banks. A key reason for this lies with the conservatism that exists among the traditional banks due to the low-ticket size of loans, limited infrastructure to assess credibility, and high non-performing loan (NPL) ratios. For extending loans to SMEs, it requires a stable and risk-mitigated environment with the actual availability of borrower’s risk profile. Typically to create this profile, use of traditional norms like evaluating balance sheets and financials following a theoretical approach to lending, which refrains traditional banks to associate with SMEs. However, with the fintech companies coming into play, technology enables these companies to create robust credit assessment mechanisms with a variety of variables beyond financial statement analysis (e.g., centralized taxation, repayment behaviour analysis).

Hence, the opportunity in extending loans to MSMEs is huge (despite the caveat of deferment arising out of Covid-19) purely due to its market size.

  • In conversation with Shelly Arora to understand the scope of SME and consumer lending in the virtual banking world

3 reasons for Asia Pacific to attract global fintech investors

From a product digitalisation standpoint, the western world is close to reaching a saturation point, where the digital adoption rate is beginning to decline (currently at 48-49%). Whereas, Asia Pacific’s digital rate is nearly 80-85% with the massive mobile penetration drive since last 5-7 years.

Today, Asia Pacific is viewed as a lucrative market for global investors, mainly due to its:

  1. Vast unbanked/underbanked population
  2. Rise of millennial digitally savvy individuals which forms a ground for experimenting with new products and services.
  3. The regulatory environment with the region is now highly supportive of new, innovative tech-driven products and services in the banking industry.

However, the Asia Pacific market still lags in terms of technology, where an organized regulatory structure is still not in place. Recently, Indian regulatory authorities announced three technology systems: Fintech, Regtech, and Supervisorytech. With Covid-19, there is mindset shift in consumers especially in digital payments with a) an increase in the digital payments globally b) spending on lifestyle products to essentials. But, the regulatory environment (Regtech framework) is not agile enough to quickly adapt to a rapid change in the industry.

5 pressing challenges for fintech’s in digital lending market

  1. Narrow consumer awareness on the availability of products and services
  2. Limited usage of technology by the consumers
  3. Lack of trust and confidence in application safety
  4. Localization of products through vernacular assessment of regions
  5. Product-market fit to bring customization for consumers

2 critical costs associated with digital customer journey

  1. Acquiring customer accounts for the maximum cost for a digital-only banking company. Market players entering the market, spend a majority on its distribution and marketing channels.
  2. Customer stickiness forms another huge cost, which is purely dependent on the user experience.

Hence, the digital lending platform plays a vital role to help customer adapt to the interface and enjoys using it. For example, to cater to a set of individuals with featured phones, the platform is flexible to adapt to a featured phone capability. Despite the featured phone capability, it gives a remarkable user experience. Another example is to support the versatility of languages spoken in different Asia Pacific regions. The platform can understand and support the vernacular requirements, enabled through artificial intelligence and machine learning.

The rise of neo-banking environment

In the next 10 years to come, the region will experience a diverse set of products and services. Customers can pick and choose from a variety of players, catering to peculiar, customer-centric needs. This change in the industry is driven by the onset of neo-banks (virtual banks). Further, the change accelerates through the regulatory push toward digitalisation in the banking industry. However, it will largely depend on how the regulatory authorities make sure free flow of money. This means not to restrict fintech companies with a conservative portfolio of products and services.