Fintechs Will Take Over Financial Products Distribution
Subhash Chandra Garg
There are three main segments of financial businesses- payments, investments and credit. Fintech firms are surging in all the three segments.
Payments
Payments are made using either currency or deposits/money in bank accounts/ digital wallets. Non-cash or fintech payments, essentially amount to transfer of deposit from one account to another. UPI platform created by NPCI revolutionised fintech payments by linking all the 40 crore odd bank accounts into one single database, literally transforming all banks in one single digital bank for payments. Most non-cash payments are now made using fintech platforms like UPI, Bill-pays, IIMPS, NEFT, RTGS etc. These solutions have pushed out bank drafts, cheques and other physical payments. Payment-tech is the most advanced in the financial services business.
Small payments are, however, still majorly (more than 80%) cash-based. This is because the currency is physical and not digital. The payment space will become more completely fintechised if India moves over to a digital currency. Many central banks are mulling over creation of crypto-currencies based digital currency termed CBDC, which, however, are unlikely to replace physical currency as small currency users will not, for several reasons, adopt it. The most practical solution is to transform bulk of physical currency into digital by demating it which will allow it to be held in digital wallets. A simple application interface on personal phones, suppliers POS devices and other digital media can enable digital currency payments by typing a code, touching fingers or batting an eye-lid.
RBI may also combine its three payment platforms- IMPS, NEFT and RTGS- into one single platform and make it function 24*7 with the instantaneous payments. This platform should compete with NPCI as a public sector solution. The move to licence a few more National Umbrella Entities (NUEs) like UPI is absolutely necessary for bringing competition and innovation in payments.
Investments
Digital technologies are transforming investments as well though this segment is still quite under-developed.
While large equity and debt investment securities have got dematerialised and consequently digitalised, both are tightly regulated and still not opened to the fintech by the respective regulators, except some intermediary services. Investment in mutual funds, small investments in new pension products have seen better opening. Some start-ups have come up in the field, though bulk of the investment business is still done through traditional banking channels without much use of fintech.
Investment segment is definitely more complicated than the payments. The investor commits funds for longer periods. There are settlement, market, credit and other risks involved. Further, insurance policies, fixed deposits, etc. are still essentially physical, though electronic, and not dematerialised. Most government investment products like small saving certificates, accounts and other products and schemes EPFO, Shram Yogi Mandhan etc. are traditional physical products with some informational aspects only operating in electronic environment. Technology has found no real application in distributing and managing these investments.
The fintech agenda in the investment space is massive.
All the investment products- be it fixed deposits, small savings products, retirement savings and pension products, insurance policies, government securities, mutual fund units etc.- need to be turned into digital by dematerialising or creating a crypto blockchain.
Once this is done, the issuer can issue generalised deposits and other investment products like bonds or as customised deposits. This will allow fintech companies to join as technology intermediaries much in the same way they do today in the payment space for specific related services. Fintech companies will bring millions of investors in the investment universe by serving them well. This will free the banks, insurance companies, governments to focus on their core business of banking, insurance or debt management, rather than managing the retail end.
Credit
Credit segment is witnessing the biggest FinTech action currently. There are large number of small businesses- in excess of 80 million- with credit needs of both working capital and investments in assets. Accounting, invoicing, payments, taxation and other business systems are becoming digital. With this digitalisation taking place, assessment of credit requirement and risk is becoming easier and more robust. This has enabled a number of Fintech firm to set up businesses in the credit space- bill discounting, vendor payments, better cash management, peer-to-peer credit, extending of credit and so on.
There is, however, still a long way to go.
Credit is the most complex of the three key financial functions- payments, investments and credit. For credit, a decision has to be made in each individual case about the credit risk lender was facing which is crucial for certain other decisions like tenure of credit, interest to be charged, collateral etc. Digitalisation of businesses, cash flows, assets, registration of charges etc. has made it easier to assess the credit, register the security and take control on cash flows, when necessary.
Digitalisation of businesses and digitisation of data has made it possible to break down the credit businesses in specific discrete actions like collecting credit information, assessment of credit worthiness, doing KYCs etc. Digitalisation has also enabled decentralisation and disintermediation of lenders. It is now possible to do direct lending by small lenders. This has created right conditions for credit and loans fintech businesses to set shop, grow and thrive.
Small businesses (let us treat every unincorporated business employing one or more persons as small) are now getting connected to the credit system thanks to fintech platforms like peer to peer flatforms, digital NBFCs etc. E-commerce, card companies and others have also joined in the game.
Real unmet agenda is to serve the credit needs of 7 crore plus micro businesses (all single account businesses). With every such individual businessman having aadhaar card for identify and a bank account, it should be possible to record all her business transactions and build credit business using fintech thereon. Digital solutions can bring them in credit mainstream.
RBI regulates credit by banks and non-banks only. There is need to create a simple digital regulatory system for credit to small businesses.
Conclusion
Fintech development is the way forward to serve the payment, credit and investment needs of Indian businesses and households.
New Delhi/ 19-04-2021
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