The world has been talking about Bank 4.00 since 2014 indicating the arrival of the 4th generation in the evolution of financial services comprising FinTech, online/ mobile banking, virtual global market and questioning the sustainability of conventional banking. The book “Bank 4.00” by Brett King published in 2018 carried the sub-title “Banking Everywhere, Never at a Bank”. India has been whetting its appetite for digital transformation in financial services, slowly but steadily. Digital lending is one of the most prominent off-shoots of FinTech in India.
It’s another matter that the trend of Bank 5.0 1 has already been set in motion, riding on cognitive banking, embedded banking, decentralised finance, robo-advisors, hybrid robo-advisors and bots, responsible banking.
Meaning: Digital Lending
Financial Stability Board (FSB) has defined FinTech as “technologically enabled innovation in financial services that could result in new business models, applications, processes or products with an associated material effect on financial markets and institutions and the provision of financial services”. In the absence of a universally acceptable definition of the term ‘digital lending’, FSB definition of the term ‘FinTech credit score’ as all credit activity facilitated by electronic platforms whereby borrowers are matched directly with lenders comes close. This definition has been loosely explained by FSB to include marketplace lending i.e., lending financed mostly from wholesale sources and non-loan obligations, such as invoice trading. FSB has also classified ‘peer-to-peer lending’ and ‘loan-based crowdfunding’ as the main components of FinTech credit. Taking cognizance of the lack of a universally acceptable comprehensive definition of ‘FinTech credit’ or ‘digital lending’, this report has not attempted to define this term, as new models and approaches are still evolving. One generally accepted feature of digital lending is that it means ‘access of credit intermediation services majorly over digital channel or assisted by digital channel’. For the purpose of this report, the characteristics that are essential to distinguish digital lending from conventional lending are use of digital technologies, seamlessly to a significant extent, as part of lending processes involving credit assessment and loan approval, loan disbursement, loan repayment, and customer service.
Digital Lending Eco-System
In India, the digital lending ecosystem is still evolving and presents a patchy picture. While Banks have been increasingly adopting innovative approaches in digital processes,NBFCs have been at the forefront of partnered digital lending. From the digital lending perspective, such lending takes two forms, viz. balance sheet lending (BSL) and marketplace lending (MPL), aka platform lending. The difference between BSL and MPL lies where the lending capital comes from and where the credit risks of such loans reside. Balance Sheet Lenders are in the business of lending who carry the credit risk in their balance sheet and provide capital for such assets and associated credit risk, generated organically or inorganically. Marketplace Lenders (MPLs) or Market Place Aggregators (MPAs) are those who essentially perform the role of matching the needs of a lender and borrower without any intention to carry the loans in their balance sheet. While P2P lending in India is a clear example of MPL, many other players who are in the business of originating digital loans, with the intention of transferring such digital loans to BSLs, can also be bracketed with MPLs/ MPAs. These categories of market players form part of the broader class of Lending Service Providers (LSPs).
Global Scene
Post global financial crisis, financial markets around the world have undergone a significant transformation driven by technological innovation. In the credit segment, P2P lending platforms have emerged as a new category of intermediaries, which are either providing direct access to credit or facilitating access to credit through online platforms. Besides, there are companies primarily engaged in technology business which have also ventured into lending either directly or in partnership with financial institutions. Such companies include ‘BigTechs’, e-commerce platforms, telecommunication service providers, etc. In the digital lending space, we have global examples of Person-to-Person (P2P), Person-to-Business (P2B), Business-to-Person (B2P), Business-to-Business (B2B) lending models.
A paper published by BIS has estimated total global alternative credit in 2019 at USD 795 billion in which the share of FinTechs and BigTechs is around USD 223 billion and USD 572 billion respectively. China, USA and the UK are the largest markets for FinTech credit. BigTech has exhibited rapid growth in Asia (China, Japan, Korea and Southeast Asia), and some countries in Africa and Latin America. The largest market for both FinTech credit and BigTech credit is China, although of late, it has shown signs of contraction due to certain market and regulatory developments. While the USA is the second largest market for FinTech credit, its share in BigTech credit is comparatively small. In BigTech credit, Japan is the second largest market with USD 23.5 billion lending in 2019. In the UK, FinTech credit volumes are estimated at USD 11.5 billion in 2019 (up from USD 9.3 billion in 2018). The BIS paper has highlighted that FinTech credit volumes are growing decently in the European Union, Australia and New Zealand while these have stagnated in the USA and UK and declined in China. In many emerging markets and developing countries, FinTech lenders are attaining economic significance in specific segments such as small and medium-sized enterprises.
Trends and Future
If past performance is key to predict the future, then it can be unambiguously stated that digital lending is the way to go. In the not-so-distant future, lending in general and especially retail and MSME lending through physical mode may be rendered obsolete as is the case with operational banking today. It makes sense for banking transactions to take newer shape as purchases, payments and record-keeping go digital. The growth in digital lending over the last five years, when other enabling factors and supporting infrastructure were still evolving, has been phenomenal and it is time for digital lending to operate in full swing, enabled by support and participation from all stakeholders. As per a Report, India had the highest FinTech adoption rate of 87 per cent as of 2020. This report values the Indian FinTech market at ₹8.35 lakh crore by 2026 in comparison to ₹2.3 lakh crore in 2020 thus expanding at a compound annual growth rate of ~24.56 per cent.
