A new David standing in front of the Large Banks!

The present day rendition of David vs. Goliath features a showdown between Fintech (David) and the Big Banks (Goliath), as they battle for customers within the commercial banking space. The tilt of power appears to be on the Fintech’s side, and if the Big Banks do not want to suffer the same fate as Goliath, it is absolutely necessary that they start taking steps to change the focus of their business model from the one reliant on physical distribution to a new one built for agile development and continuously evolving service delivery mechanisms.

Decoding Fintech

So what has Fintech figured out to beat the Big Banks in their own game?

But before that let’s understand what is “Fintech”? Financial technology startups or as we love to call it “Fintech” startups, is this ever expanding bunch of new innovative companies wherein technology forms the core of backbone used for doing business; be it at the B2B transactions level for a SME or large organization, or a single end user transaction level where the consumer is purchasing some daily essentials like milk & bread for the house. It’s an industry where young and driven entrepreneurs like David utilize the latest technologies to aim at the weaknesses prevailing in the system and create innovative products and help people do business better, faster and more efficiently than before.

Rise of Fintech

The Fintech revolution accelerated post 2008 financial crisis. The introduction of new regulations by various governing authorities made certain lines of businesses less profitable for banks and other large financial institutions; and that in turn created an opportunity and opening for startups that leveraged on big data, new communications modalities and other new age technology tools to serve ever evolving tech savvy consumer. Seeing and realizing that there was small competition budding just around their neighborhood, Banks/other large financial institutions also started developing many of these technologies themselves in a bid to keep up with those nimble rivals; but as the pace of innovation has accelerated, it’s becoming more and more difficult for the banks to innovate, adopt and execute at the same pace like the Fintech start-ups, and still have their conventional working style that’s been going on from ages and has not changed much. Banks have put complex processes in place to cater for virtually every use case and are spending on high support costs for their legacy architecture. Also, it costs a large chunk of change to maintain various physical branch locations, which adds a significant amount to the overall operational cost of supporting a huge Goliath alike commercial banking business. This is exactly where young and agile David (Fintech) has an edge over Goliath (the Big Banks), as they do not have to worry much about these existing legacy issues and concerns.

A typical Fintech Set-up

A so-called Fintech startup will often consist of several tech professionals with industry expertise and revolutionary ideas, having enthusiastic and passionate approach. The team puts together a solution, which in turn helps the local, regional or the country’s different business verticals, to have the desired output coming out by saving on a lot of time, money and reduced human labor.

Areas of Fintech innovation

Indian economy is majorly cash driven. At this juncture of time that we are as a country, we have got the maximum amount of youth population, that’s growing further. In terms of the internet evolution, Indians across age groups are at the perfect stage of being proficient in using mobile internet, that stepping up to use their mobile devices to learn and to internet based payment transactions is the obvious next step. With the present government actually working upon the digital India initiative, and other governing bodies revising or reviewing the policies to be able to support the entire country move towards more cashless and digital world, is indeed the perfect icing on the cake.

So you see here, when we put together all the above elements, these are paving the way towards disruptive Fintech solutions as the obvious next step.

The digital disruptors or Fintech startups can be well associated with key attributes like mobile functionality, simplicity, big data, accessibility, agility, cloud computing, context driven, personalization and convenience. For example, consumers now don’t necessarily need to go to a bank to apply and access small loans or transfer money. New age Fintech companies are increasingly servicing this market, thus disrupting the revenue stream which used to be a traditional bank’s area of expertise. Some other areas of the most intensive Fintech innovation globally include:

● Online/mobile payments: the journey of online and mobile payments has gone through its own cycle of evolution, always in line with the technological innovation. Keeping in line with the internet evolution, the digital India initiative started by the government, has put in a lot of effort to align, educate and drive the citizens to use the online payments and mobile wallets and directing them use digital payment mode in their day to day life. The acceptance to use online and mobile payments in India without any hesitation is still far from reality. People still are using the conventional modes of payment transactions. One of the main reasons of course is the lack of trust in such payment mechanisms. The obvious question that plays up in people’s mind is that, do these payment modes have got a high level of security built in to their systems? And to a great extent, this indeed is a vital question. Since all the online mobile payment modes are very new in the market, and away from the traditional banking style, people are taking time to accept them.

● P2P Lending (Crowdfunding): P2P lending or peer to peer lending, is a process of debt financing, that allows the individuals to borrow or lend money without the intervention of a financial institution or organization. P2P lending is actually a form of crowdfunding. It may remove the intermediaries, but it also involves longer time and higher risk. A conventional approach of a bank is where, if you apply for loan, they do a financial health check based on their existing checklist, and if you clear that, you are eligible to avail the loan. But if you get rejected on the grounds of weak credit history, even then you can get loan by approaching crowdfunding method of the P2P online platform. As a borrower, you upload your profile and details of your project for which you need the loan. Investors will look at your profile, and may be ready to fund the amount completely or partially, depending on the kind of risk they want to take. As investor, you get very attractive interest rates offering from the borrower, and that excites you to go ahead and risk your money for some great returns.

● Asset and Wealth management: This is another huge financial vertical whose conventional model is still not able to completely accept the rise, evolution and maybe an eventual biting off their pie by Fintech startups, if the conventional Asset and wealth managers don’t speed up to merge into the newer technological innovations happening around them. In time, the asset and wealth managers have started investing in technologies of data analytics and asset allocation automation (Robo advisors). An ideal scenario would be when the reigning asset and wealth managers and the emerging & nascent Fintech startups shake hands to work together and win this game mutually.

● InsurTech: As the name suggests, its indeed combining the technology with insurance. While the traditional insurance model uses the actuarial tables and assign a risk category to different policy seekers, and then expand and adjust this to larger group of people, to make the policies profitable for the company (but in return always ends up having certain number of people pay more than what they should); the newer technology driven Insurtech startups actually use a lot of different parameters which are closer to the scope of a given policy. For example in case of car insurance parameters like exact GPS location of car, methods of doing remote emission test, and many more use cases that help Insurtech startups do a more bifurcated grouping of people, and thus be able to offer competitive pricing. Though it’s just the beginning, and insurtech startups have lot of challenges to face. Insurance primarily is highly regulated industry vertical, where there are multiple layers of legal and regulatory authorities involved for many decades now. It won’t be a cakewalk for the insurtech startups for sure. For starters, they will still need the legacy insurance companies to handle the underwriting. As the insurtech startups start building more consumer centric models, they will gain a slow and steady interest from the markets.

Fintech for SME growth

It’s no secret that these fast growing Fintech startups are often on the cutting edge of new ways to utilize consumers’ financial information. Given that the SME sector has been ignored for decades, its an easy run for the Fintech startups. So no surprises that there are a lot of startups which have mushroomed with a focus to address the SME needs. Traditional banks have relied on securitized loans which has resulted in keeping most of the early stage SMEs out of the organized lending market. Most of this lending is done via family, friends and traditional lenders who charge almost 2% per month. However, since banks manage the single largest place of credit history, the SME owners had to use some sort of banking transactions. Accordingly, while fintech SME services offered are standalone but they do use the banking & financial information extensively while lending. Thus, in the current climate, it seems that there should be much more of a give-and-take relationship between Fintech and banks; one that both institutions should be wise to capitalize upon.

It’s a fact that SMEs face a lot of challenges while trying to secure a working capital loan and credit line. As the banks/large financial institutions have these lengthy procedures and collateral based capital lending, which reduces the loan or credit line accessibility for SMEs. Fintech startups are the new age digital platforms aimed at offering unsecured business loans and credit lines to SMEs with precise credit processing. All this is done with data based algorithms which provide a faster view of an SMEs health and assist with impartial credit distribution. The long application procedures, having a lot of paperwork and collaterals get cut down to minimal, with the use of technology driven scientific data tools that are able to assess the credit worthiness. With the help of these data mining technologies that Fintech startups use, they are able to better serve the customer with more precise data driven results.

The benefits of securing working capital through fin-tech startups v/s traditional lenders are:

1. Accessibility — Fin-tech startups like OfBusiness, Capitalfloat, Indifi etc are making it extremely easy for the SMEs to address their working capital requirement. Unlike traditional lenders like banks and distributors, it’s quick and hassle-free. Most of the companies claim to process credit applications within 3–5 workings days.
2. Impartial credit allotment — Data-driven algorithms for credit approval have made the process faster and impartial. The layman procedure involving paperwork and collateral submission has also been simplified.
3. Competitive interest rates — Fin-tech startups like OfBusiness offer unsecured credit line upto 2 crores at lower interest rates. Moreover, SMEs pay interest only on disbursed amount despite having bigger credit lines at disposal and only for period used.
4. Complementary services — In addition to financing, OfBusiness helps the SMEs procure bulk raw-material like steel, polymer, cement etc. from trusted suppliers; to improve service quality and prevent any credit failure.
5. Retaining ownership — Unlike banks, fin-tech startups let SMEs retain the ownership of their company by offering collateral free credit line. The transaction outlines every detail of the process with no hidden charges or any pre-payment for registration.

Companies like Power2SME and OfBusiness offer specific customized credit lines to meet urgent working capital requirement and assistance in sourcing bulk raw-material material. This has been extremely helpful for infrastructure and manufacturing companies. Infact, OfBusiness is going to another level by aggregating new business opportunities for SMEs on Bidassist.com. As of date they publish only government tenders for SMEs to access it for free, but they claim that they will be adding private opportunities to the platform in another 3–6 months.

So, is David taking Goliath head-on, or it’s still a long way?

In last half a decade, the way Fintech start-ups have come up or evolved, and grabbed and blocked the transaction time bandwidth of end users/SME owners, it clearly is visible that they are here to stay and conquer too maybe. Taking for the example the SME lending, Fintech startups are already building a healthy relationship with the SME community, by reaching out to them and making them understand about much simpler approach that they follow and help the SMEs get finance very easily and fast. These new age Fintech startups like Ofbusiness, are clearly in alignment with the growth journey of our country for the coming years; and clearly are there to stay and be the business growth ambassadors for SMEs growth journey and hence for the people of this country!

#Ofbusiness
Know more at: http://www.ofbusiness.com/

Originally published at medium.com on April 11, 2018.