Finance Industry Transitioning To A New Era Of FinTech – NBFC Collaborations

In the post-pandemic world, there has been a never seen before shift towards technology, with the length and breadth of the country adapting to the new digital landscape. Technology has gripped every sector in the modern world, to make their workings more efficient, and the post-pandemic developments have only speeded this transition. 

The finance industry is the backbone of the economy, strengthening the financial output of the country, of which NBFCs are an integral part. Lending a steady hand with development, these financial institutions are actively playing a role in providing economic assistance to businesses and MSMEs, spread out across every sector. Increasingly adopting the best-in-class offerings in the domain, NBFCs reported a strong growth rate for FY 22, standing at 37.6 percent, with a revenue of 1.24 trillion in Q1 (first quarter) of FY22 compared to Rs 90,615 crore in Q1 of FY21.

The segment is intrinsic to the country’s overall recuperation and recovery, and is swiftly becoming future-ready, by embracing new age technology, through collaborations with the world of ‘FinTech’. The term ‘FinTech’ is a contraction of the words ‘finance’ and ‘technology’ and comprises technological start‑ups that are emerging to challenge traditional banking and financial players. With new age products and services, it offers a broad range of technological innovations to transform financial services.

As the finance segment quickly becomes more and more agile, it is increasingly adopting 21st-century models of growth. This has led India’s fintech ecosystem to grow at a rapid scale. NBFCs have much to gain by integrating themselves with this new pathway and are seeking to increase their knowledge concerning technological innovation, both through partnerships with fintech companies and by investing in or acquiring such companies. 

The fintech domain offers several advantages to NBFCs, to attract customers and ensure operational efficiency. Some of their revolutionary features include peer-to-peer lending, crowd investing, crowd lending, factoring & credit, finance management, robotic/AI investment advice, blockchain base financial innovation, cryptocurrencies, hybrid financial search engines, financial product comparison, etc. They are extremely useful for curating next-generation banking facilities, while also guiding NBFCS to use AI that can power smooth collections of payments and monitoring decisions. They are also far-reaching in terms of cost-effectiveness, prowess in credit quality, and generating a quicker turnaround time than traditional lending. 

In December 2020, India crossed the threshold figure of digital payments worth INR 4 lakh crore for a month. With their new age offerings, fintech collaborations are helping NBFCs to move forward and differentiate themselves from traditional players in the domain as well as banks, while significantly enhancing their customer experience. There are more than 9000 active licensed NBFCs in the country, however, only a handful have a book size of more than 40 crores. Fintech collaborations offer NBFCs a huge chance to deepen market penetration and increase profits, while offering competitive rates for the end users.

Some of the many prominent models for NBFC-Fintech partnerships include the co-lending model, the lead-based model, the FLDG model, workflow of fintech model, workflow of NBFC model, and intermediary legal firm model. 

Under the co-lending model, fintech companies usually work with an escrow account and FLDG (First Loss Default Guarantee) system. Under this, the fintech company supplies the necessary decision-making tools and data to the NBFC for quick processing of loans. With the lead-based model, fintech firms provide NBFCs with leads. In turn, the NBFCs pay commission to FinTech companies in the range of 1 to 3%. Under the FLDG model, the interest of the NBFCs for protection from NPAs is guaranteed by asking collaterals. This model safeguards the NBFC. 

Within the workflow of fintech model, the company provides advanced technical support and funds to the NBFC and is responsible for running marketing campaigns for the affiliated NBFC, to increase business. Alternately, under workflow of the NBFC model, the NBFC is responsible for lending money to the leads generated by FinTech as well as loan processing, sharing profits with the collaborating fintech. Lastly, under the intermediary legal firm model, a consulting legal and financial assistant provider company with CA or a lawyer manages the funds associated with the fintech firm and the NBFC, with a collaboration agreement in place. 

World over, several fruitful collaborations between NBFCs and fintech companies have yielded phenomenon results, leading to rapid business development and symbiotic growth. Some fintech firms are also helping NBFCs connect with loan seekers and are working on developing a non-traditional banking ecosystem. One such example is OppLoans, operating as a platform to help people from a multitude of backgrounds acquire the funding they need to pay off debts and open new businesses.

Transforming the landscape and aiding in the NBFCs’ market preparedness, fintech firms are increasingly helping the world of finance develop alternative credit models while assisting them with important solutions like operational automation and fraud detection. Serving as a golden opportunity for NBFCs to offer their wide range of credit services to multiple sectors, the fintech domain is set to be a powerful ally for the segment in the coming years.