“Digital finance” is the latest buzzword making the rounds in the finance community. Digital payment startups and solutions are the latest money-related trend around the world. Unfortunately, many people associate digital finance only with business-to-consumer-focused digital wallets. After all, people usually only see these solutions. They receive extensive media coverage and support from stakeholders like industry and government. But digital finance has so much to offer besides convenient payment tools. It could be the single most important development in the field of lending in history.
Digital lending is a rather undiscovered segment of digital finance. A 2018 report by the Boston Consulting Group estimates it will be worth $1 trillion in the next five years. There’s a huge opportunity here, but for now, only select fintech firms appear to be capitalizing on it.
How does digital lending differ from conventional lending? It digitizes the entire lending process from application to disbursement. This minimizes paperwork, saving time and money. Digital lending tools leverage technology and digital offerings to replace manual processes. This makes the lending process faster, more reliable, and more secure.
Fintech firms have been trailblazers in the sector, offering alternative financing options. The success of these firms has prompted banks to follow suit. Today, digital lending is a major segment of the growing global fintech industry.
Within digital lending, consumer borrowing and MSME (micro-, small-, and medium-enterprise) lending have seen high growth. Fintech firms offer models ranging from peer-to-peer lending to collateral-free finance. However, certain issues still linger. Two broad areas, in particular, need attention — policy and technology.
Bill Gates is said to have stated that banks don’t matter, but banking does. In the past, governments have often created regulations that stifle innovation and growth. Instead, they need to understand the impact of policy decisions on digital finance and encourage the rise of alternative lenders. So far, fintech companies have been the first to offer innovative lending solutions. Policies that allow and promote the growth of the fintech ecosystem are the way forward. Easing regulations on non-bank financial institutions is a good start. This would encourage more companies to offer innovative options to consumers and businesses.
Governments have enabled digital finance via many innovations that leverage core technology architecture to resolve real-world financial issues for consumers. In India, for example, the India Stack project is a mammoth undertaking geared towards digitizing all aspects of the economy. The implementation of Aadhar and eKYC have helped digitize consumer information and make consumer lending smoother and quicker. Additionally, the country’s GST regime captures salient data about each trade transaction undertaken by Indian businesses, which not only helps the government with compliance but is also a treasure trove of data lending businesses can use for understanding and underwriting their consumers better. Similarly, in Mexico, the Servicio de Administración Tributaria (SAT; Tax Administration Service) captures a wealth of fiscal, taxation and customs data digitally that lending businesses can access to offer highly customized and targeted services.
Additionally, distributed ledger technology, often known as blockchain technology, offers a lot of potential. Blockchain can potentially enhance digital lending by enabling faster, simpler digital transactions with extra security. Unfortunately, the technology’s application in cryptocurrency has colored the public’s opinions about it. However, governments and lenders have begun exploring blockchain’s potential applications in digital lending, and I am cautiously optimistic about its future.
The need for awareness should drive conversations about digital literacy among stakeholders. There has been plenty of push for digital literacy for end-users (consumers). But more companies and policymakers also need to undertake awareness-raising about digital finance.
Fintech players are aware of these focus areas and steps and have shown that digital lending works. There is an appetite for its offerings in the business-to-consumer as well as business-to-business spaces. Legacy players must now follow the fintech lead and leverage these opportunities.
Pushkar Mukewar is the co-founder and co-CEO of Drip Capital. At Drip, he is responsible for defining the strategic direction and managing product, business development, and operations of the company. In his 13-year career, he has worked across various geographies and has an in-depth understanding of the global financial services industry. Pushkar realized the huge potential of addressing the working capital gap for small businesses in emerging economies, and this became his inspiration behind starting Drip Capital in 2015. Drip offers a unique trade financing product targeted towards small businesses engaged in cross-border trade by making the underwriting and financing of international B2B transactions seamless.