04 Oct 2016 13:18 IST

All you wanted to know about Fintech

It is an omnibus term for the use of technology to deliver all kinds of financial services

Nandan Nilekani called it the Whatsapp moment for Indian banking. Global venture capital funds are super-bullish on this space and doubled their investments in Fintech startups in it last year. Fintech and the disruption it can cause to old-world banks is now a hot topic of debate in banking conferences.

What is it?

Fintech is an omnibus term for the use of technology to deliver all kinds of financial services. The most common areas is in fund-raising, lending, borrowing and mobile payments.

Thanks to Fintech, crowd-funding platforms today allow artists or fledgling entrepreneurs to crowd-source capital from a large constituency of online donors or investors. Peer to peer (P2P) lending, the high-tech equivalent of borrowing from friends and relatives, allows anyone to raise a loan from an online community at a mutually negotiated interest rate. Digital wallet providers have already enabled people in rural India without bank accounts, to zip money across borders and even overseas using special handheld devices or their own mobile phones. Alternative credit scoring platforms are looking to crunch data feeds from your social media interactions, online transactions and bank account to assess your ability to repay loans, even if you don’t have formal credit score.

The combination of these technologies, which goes under the umbrella term Fintech, is expect to transform the way all of us use banking and financial services.

Why is it important?

India has a large population of non-city folk, many million small enterprises and any number of small borrowers without any credit history, who today cannot knock at the banks’ doors for loans. It is therefore said to be just ripe for a Fintech revolution. To help things along, the Government is expediting this by promoting the JAM trinity (Jan Dhan, Aadhar, Mobile).

The reason why banking bigwigs are watching these developments like hawks is that Fintech has enormous power to disrupt old-world banks. They mostly function as online bazaars that simply put borrowers in touch with lenders or entrepreneurs with investors, while they pocket a fee on each transaction. Yes, a Fintech firm may help participants on its platform by doing background checks on entrepreneurs, borrowers or lenders who hop on to it. But it does not put its own capital at risk. This fee-based approach to financial services (as opposed to funds-based approach of banks), saves the Fintech newbies a lot of costly capital. With no depositors’ money at stake, they may get away with lighter regulations too.

Why should I care?

A recent Credit Suisse report predicted that the Fintech revolution in India may trim transaction costs to near-zero (bye bye ATM charges) and wean away depositors from banks (bye bye 4 per cent). It also predicts that Fintech will be the trigger to a five-fold boom in consumer and SME loans from $600 billion to over $3000 billion in just ten years’ time.

So if you’re an investor, this could create enormous opportunities both for wealth creation and destruction. A host of new Fintech firms may also eventually vie with banks or NBFCs as listed entities.

If you’re a small borrower, Fintech offers you a shot at obtaining it without hassles.

The bottomline

Fintech is a great opportunity if you’re a borrower or entrepreneur. But if you’re a lender or investor, its caveat emptor. Indian regulators haven’t yet figured out how to regulate these firms.

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