A fast-paced word picking up across global economies is Recession. Worldwide as several Central Banks, including Reserve Bank of India (RBI), continue to increase their interest rates to combat this relentless high inflation, a sustainable yet inclusive growth for an economy is in dire need to be looked at through multiple lenses.
Recession by an easier definition means a downturn, a vicious spiral in the economic activity of markets, industrial production, GDP, and consumer spending. Economies faced the unprecedented blunt trauma of the crippling effects of Covid-19, slowly emerging strong from its plunging depths to be faced instead with economic and trade repercussions from the Ukraine-Russia war. So, with the onset of global recession, who stops this descent? And during a recessionary phase, who emerges victorious?
Its almost impossible to answer such questions. Why? Because no singular industry or category of market can halt or give a solve for ending a recession. The best-case scenario that a government or industry can strive for is to manage the recession through rational guidance, sharp strategies, and smart developments.
With an 87% global adoption rate (which is the highest in the world) and an estimated market opportunity of $1.3 trillion by 2025, FinTech industry in India has greatly disrupted the way financial services used to traditionally perform. Booming through the turbulent Covid times, FinTech India capitalized on the rapidly rising demand for Digitization and received $29 bn in funding since January 2017 up till July 2022 which is a neat 14% share of the global funding and Ranked #2 on the deal volume in the world.
"There is an explosion of fintech innovation and enterprise in India. It has turned India into a leading fintech and Startup nation in the world. The future of fintech and Industry 4.0 is emerging in India." Digging deeper into our Honorable Prime Minister, Narendra Modi’s words, FinTech expanded to its level today as a result of crisis.
Gaurav Samdaria, CBO, said “This industry has the unique ability to withstand environmental and economic challenges through its sheer perception of the situation, acute identification of pain-points and swift evolution of technology via extraordinary innovations within the gambit of Financial Institutions (FIs).”
Minimize FIs Stakeholder Impact
Since FinTechs largely cater to Banks and NBFC, to weather a recession, the first step for FIs is to focus on drastically minimizing the negative impact on their stakeholders. To not fall into the vicious trap of rising systemic NPAs and lowered credit underwriting, FIs must recourse their business model towards aggressive lending. FinTechs can open doors to newer categories of borrowers, catering to a larger base than the traditional portfolio data that exists with FIs.
“Through new age deep learning techniques, FinTech can enable Banks and NBFCs to tap into consumer spaces that were inaccessible to them earlier as their lead generation practices are narrowly aligned to their own limited historical data. With the adoption of FinTech solutions, FIs can manage external and internal risks with a more systematic approach and better cater to the confidence and interests of stakeholders as well.” Samdaria, added.
Weathering Tightening Credit Policy with AI/ML
The first response reaction to any economic downturn is tightening the credit policies that helps slow down the accelerated climb of inflation, but inadvertently makes consumer spending an expensive commodity. Borrowers find the interest rates extremely high to be able to make repayments or go for newer loans. Lending broadly and opening lending channels even where credit access is limited or restricted will equip FIs with forming strengthened credit policies and enable them with better credit underwriting decisions that factors in a robust risk grading mechanism.
The simplified UX/UI design capability of FinTechs, backed with complex, advanced AI/ML algorithms, are in step with the dynamic ecosystem, creating holistic democratic credit leads by altering the financial infrastructure model of FIs to recognize encouraging opportunities for the unbanked segment. To plug the INR 25 trillion credit gap in the MSME sector, FinTechs are revolutionizing accessibility of credit by developing cost effective solutions that allows FIs to disburse credit in an easier, efficient, and more secure manner.
Restructuring the Financial Service Sector
To strengthen FIs focus on scaling consumer acquisition and bring about higher retention, FinTechs need to go beyond the legacy methods practiced by Banks and NBFCs. Leveraging technology carefully in line with the capacity of FIs and subsequently their consumers to adapt to.
The demand of the current economic situation is to completely transform the financial services sector into a sophisticated, new millennium, tech-enabled industry. To achieve this goal, FinTechs need to;
1. Identify specific demographic target segments,
2. Drive value propositions in lead generations,
3. Innovate credit models continuously,
4. Create strategies for deeper consumer engagement,
5. Lower consumer acquisition cost,
6. Create revenue synergies using technology and,
7. Develop higher ROI intensive B2C solutions for FIs
Adapting to the FinTech way of digitization requires complete rewiring of older financial operations as we know it. Technology today works as a critical shield for stakeholders and consumers against the silos entrapping the Banks and NBFCs for so many years.
Embracing Open Banking APIs and Account Aggregator Mechanism
Customer data is the backbone for both FinTechs and FIs. While FinTechs are relentlessly trying to bridge the FIs with the unbanked segments, a large quantum of customer data lies with individual entities that remains obscure and out of reach for others in the same ecosystem to create value synergies from. Open banking principles allow FIs to open up their Application Programming Interfaces (APIs) for third parties such as FinTechs to develop new apps and services, allowing healthy partnership opportunities to grow rather than engaging in competition.
To withstand this recessionary phase, banks need to commercialize their infrastructure by moving into the Banking-as-a-Service (BAAS) space, facilitating sharing of financial data with one another. This allows FinTech innovators to streamline customer data and insights into aggregated enriched data that showcases highly relevant trends and patterns that can be leveraged by FIs to offer consumer-centric and personalized services.
The Indian Account Aggregator (AA) system, an RBI brainchild, allows for consented customer data to be shared amongst providers and the users of information i.e., FIPs and FIUs. This is where FinTechs deliver value proposition by applying complex customer analytics to ultimately break it down into simplified data-driven insights and advice for FIs to increase convenience, improve consumers’ financial situations, and drive new revenue streams.
Way Forward through Recession
Critical asymmetries in the financial services sector caused due to an inorganic recessionary phase can be slowly yet certainly turned around by FinTechs that pursue innovations proactively and expand the financial capacity of the segment with their constant vigilance of the changing dynamics around them.
An intelligent combination of ‘human touch’ with technology enablers will pave the way for inclusion and growth in the true sense, going forward.
: Gaurav is the CBO at Perfios Software Solutions, a state-of-the-art banking and business intelligence solution provider, set out to create cutting-edge products that empower lending institutions and corporations with cloud based solutions for informed and intelligent decisions. A highly erudite and adept accounting professional, Gaurav in his existing leadership capacity supervises existing and new business development at Perfios.
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