Increased presence of major technologies in the loan market in India

Banks around the world may experience a similar ordeal to monarchies after the turn of the 20th century. They run the risk of becoming outdated and a little less relevant unless they upgrade their businesses.

However, as the tech sector begins to encroach on basic banking facilities in India and elsewhere, bank “upgrades” now appear to be more mandatory than binding.

What started out as a handful of fintech startups providing intermediary digital assistance to banks and their clients has now crossed into business sectors and has hosted big players like Google, Facebook, Xiaomi, Flipkart, Amazon, and more. In the digital lending industry, something that has not been their main area of ​​activity.

This makes a lot of sense to the big tech players simply because it’s the underwriting that makes high margin money, not the facilitation of payment transactions.

Recently, Google Pay (or GPay) announced a partnership with Equitas Small Finance Bank to offer customers up to 6.85% interest on one-year funds as part of a “branded commercial experience” on the platform.

What does it mean? Why are other lenders engaging in similar projects with tech companies? And what does this mean for traditional banks?

Digital overload

Let’s start with Google’s digital lending escapades. It started with “Project cachewhich marked the tech giant’s first push into finance. The company began offering checking accounts (a type of deposit account) to Citigroup customers in the United States.

From there, Google started relying on data to give customers better financial information and budgeting tools. He extended the partnerships to more banks – at least 11 as of November 2020. The arrangement was straightforward. Google provides front-end digital banking services to consumers while accounts are held by partner banking institutions.

In India, however, the arrangement is slightly different. Here, GPay, the company’s digital payments arm, is the primary driver of its digital banking push and has entered into collaborations with “loan providers” that include a diverse mix of partner institutions.

Some of them are digital loan startups like ZestMoney and FlexiPrêts that help facilitate access to digital credit for small businesses (in particular) directly through the GPay app. Some are investment platforms like Groww and 5Paisa who have integrated into the GPay platform to offer brokerage services. The others are Indian banks (eg SBI, IndusInd, Federal Bank) for which GPay provides “tokenized offers“- make debit / credit card payments without sharing card details.

Rush to big tech banks

The increased focus on the digital payments market in India instead of generating contactless experiences since the start of the pandemic has only sparked more interest from tech companies to capitalize in the industry.

There has also been an increase in demand for small loans, particularly from middle-income households for transitional spending and young first-time borrowers with little or no credit history. This is where digital loan applications came in to fulfill the roles of traditional lenders.

After entering the digital payments space via WhatsApp Pay, Facebook launched a small business loan program (in partnership with Indifi) with unsecured loan offers in the range of 5 to 50 L (6 828 to 68,286 yen).

Xiaomi intends to partner with some of India’s biggest startups as well as traditional lenders to offer a range of services – loans, credit cards, insurance products, etc.

Flipkart has expanded its growth capital scheme provide vendor partner loans (5L-5cr or $ 6,826-682,864) that are disbursed after 24 hours of application through what the company describes as “technology synergies across the ecosystem.”

Amazon Pay is also ahead in the area of ​​microcredit since the launch of its Pay Later program which operates on the Buy Now Pay Later model and has secured 2 millions customer registrations from July 2021.

Several of these names initially ventured into space as simple loan originators, but are now embracing the art of underwriting more and more quickly. With stacks of data and access to payment and spending models, there is a strong case to be made about the synergies that tech companies can capitalize on.

Businesses Act

The point is that the digital payment space having mutated into a UPI credit channel has opened up immense financial opportunities in India (India’s digital lending market represents $ 1 billion opportunity over the next five years). This essentially makes the market a no man’s land with dozens of players trying to take advantage of it.

But it comes with risks. With a double-digit bad debt ratio, the country is one of the worst performing countries among the major economies and that may be just one cause for concern. But one could imagine that it is technology companies that are perhaps ideally placed to use data analytics to best assess and understand the risk-return trade-off!

Under these conditions, large tech companies have a clear advantage due to the massive scale of their operations, rich cash reserves and brand identities. Without forgetting the intersectoral presence which some of them benefit from (payment, e-commerce, credit, electronics, software, etc.) which strengthens their influence on the sector and gives premium value to their products.

For example, in January of this year, GPay removed 30 loaner apps from the Play Store following RBI’s instructions to monitor fraudulent apps hosted on its platform. In March, GPay introduced a new feature that allows its customers to remove their transaction data from the app.

Okay, initiatives like the ones above could be understood as good governance practices in the interest of preventing loan fraud or helping to secure the client’s right to privacy. However, this does not diminish the fact that such disproportionate capacities of an actor allow it to compromise the outlook (and revenues) of the entire sector in its favor, or in plain words, allow it to commit violations of the rules. antitrust laws and behaving in a non-competitive manner, behaviors that Google and other big tech companies have criticized repeatedly in the past (read when, when, and where).

Lenders Beware ?!

The other effect of the big tech invasion of the digital lending space is the potentially decimated presence of physical banks. In an age when banks are strapped for deposits and face challenges ranging from liquidity to bad assets, the creeping acquisition of the digital lending land by big tech giants only extinguishes the control that banks have. traditional practices in this area.

The world has already witnessed this in China, where domestic tech companies (like Ant Financial and Tencent) have easily dislodged traditional lenders from lending firms with the help of a burgeoning user network and dozens of non-financial customer data obtained from allied applications in the payments and e-commerce sphere.

However, with the Chinese government muzzling the operation of its own tech players, Silicon Valley is all the more eager to rush into the world’s second most populous market with a growing hive of digital startups to bank on.

In any case, at first glance, the decline of deposit-taking institutions with the rise of alternative funding institutions seems imminent. One can only hope that this is a gradual and painless decline as is normally seen when old guards give way to new entrants, like the print media giving way (or more appropriately, emptied by) l publishing and online advertising industry.

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