NBFCs can be at the forefront

FinTech Innovation: Why NBFCs are at the forefront

Representational image. Money control

India’s FinTech revolution is now well underway. UPI is now the country’s most frequently used payment mechanism, on some measures ahead of cash or NEFT/ RTGS bank transfers. Millions of households check their credit scores every month on dozens of different smartphone apps. Households now have seamless and almost costless digital services available for every part of the financial lives, across savings, payments, credit, insurance, investing and financial-fitness coaching.

Yet, what is also clear is that India’s FinTech hasn’t gone far enough. Indian households and small businesses are still under insured, credit starved and mostly don’t understand how their financial instruments are supposed to work for them. This glass-half-empty view means that there are huge white spaces still left for the industry to cover.

A very diverse set of players will be looking to fill these white spaces. They include “intrapreneur cells” at incumbent banks, Tech companies with SaaS offerings (or even BaaS Banking-as-a-Service offerings) and quasi-governmental agencies like the NPCI. But I will argue here that NBFCs, who provide credit to the less-privileged sections of the economy, will lead the next phase of the FinTech revolution.

NBFCs have a few natural advantages over other parts of the ecosystem.

First, they are selling credit, which is the quintessential pull product. The majority of Indian households and small businesses remain credit starved. Unlike insurance, which is also a massive under-served market, but which needs a massive push to get the customer to consider a purchase, an NBFC’s customers come to the market seeking their product.

Second, they are selling a product that is profitable enough to be viable. This is a big deal in an ecosystem where most players are on wafer-thin margins. UPI is free-to-use because it is subsidized by the state. SaaS players and other “Tech-companies” have struggled with pricing for India for decades, and naturally shift their attention to markets that are used to paying for services. Digital marketplaces see their margins capped by good-enough analogue equivalents, B2C services like know your credit score and financial-fitness coaching haven’t quite worked out how to migrate from free to freemium. Investors have started asking tough questions about profitability. In this landscape, the sustained, substantial profitability shown by well-managed NBFCs looks like an oasis in a desert.

Third, NBFCs are hungry for the business. Public and private sector banks still have so much catching up to do in wholesale lending, prime-lending and other verticals, that it will be decades before they compete hard for the tougher underserved market-segments. The better managed NBFCs also have the tech capabilities and institutional design needed to serve emerging market segments.

One of the biggest sets of challenges the NBFCs will need to overcome are regulatory. While the RBI has generally been very supportive of FinTech innovation, a whole lot of challenges remain. For example, genuine credit cards remain off limits for NBFCs even though monoline card companies are common in other countries. The INDAS accounting standards used by NBFCs are harsher than the I-GAAP standards still used by banks. Requirements that mandate a customer’s KYC is physically seen and verified by a lender’s employee seem to have been written with branch-centric banks in mind, rather than digital-first NBFCs. Regardless, there is no doubt that the better managed NBFCs will rise to these challenges. Expect to see Tech-centric NBFCs emerge as the most creative and valuable innovators in the next phase of the FinTech revolution.

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