With the increasing digital distribution of financial products and services, the amount of digital customer data that is generated and accessed is also at risk. Even more so with the COVID-19 crisis. The pandemic has increased digital payments as more people are making daily payments as well as financial transactions, digitally. People avoid making transactions in cash and also abstain from using cards. The more we move towards digital transactions, the more we are exposed to innovative fraudsters, says Shilpa Mankar Ahluwalia, Partner, FinTech, Shardul Amarchand Mangaldas, and Co.
In an exclusive interview with Priyadarshini Maji, she explains the key features of digital lending and the challenges and risks associated with it.
What are the reasons for the rise of digital lending and factors contributing to the growth of digital lending in India?
Digital lending has witnessed a tremendous growth spurt in India principally owing to developments in technology, pan-India usage of the smartphone, and the introduction of e-KYC that has allowed lenders to onboard customers remotely and in a completely digital format. Digital lending allows for the delivery of financial credit products in a "contactless" and non-face-to-face format which also solves a key risk that the economy is struggling to manage with COVID-19. This makes digital lending perfectly positioned for its next phase of growth.
What are some of the key features of digital lending?
Digital lending uses technology to create an end to end customer journey that is paperless, user friendly, and completely digital. The 3-phases of a customer journey for a loan product typically include (i) customer onboarding and KYC; (ii) loan processing; and (iii) loan disbursement. The digital lending industry in India comprises not just lenders who disburse the loan to the customer, but also several intermediary and analytics platforms that support lenders to convert each phase into a digital and online format.
What are the technological innovations in the digital lending space for borrowers?
The two key areas where we have seen innovations in technology in the digital lending space are in respect of (i) tools to analyze non-traditional data sets for loan processing; and (ii) customer KYC and on-boarding remotely and in a non-face-to-face format.
Digital lending products rely not only on financial data but also on data sets such as the digital footprint of a customer and online behavioral data. The use of artificial intelligence and newer technology has helped lenders target newer customer bases and effectively assess credit risk.
What are the challenges and risks associated with digital lending?
As the distribution of financial products and services becomes increasingly digital, so does the amount of customer data that is generated and accessed. The risk of data breaches and misuse of customer data also consequently increases. A key aspect of increasing customer trust and confidence in digital financial products is the ability of the eco-system to protect customer data. The Personal Data Protection Bill, 2019 pending final Government approval seeks to set out a comprehensive data protection framework and should ideally be a high priority focus matter for the Government to address this risk.
What are the opportunities presented by digital lending?
In addition to banks developing their own digital lending products, India has seen the growth of several smaller non-bank lending FinTech platforms that use technology and analyze non-traditional data sets to lend small value loans to customers that may not otherwise have been able to borrow from the banking system. Instead of competing with the FinTech lending platforms, banks have focused on a collaborative model where each party focuses on its core strengths: banks contribute the capital and the FinTech platforms use tools such as artificial intelligence and data analytics to develop newer loan products. These partnerships give banks access to newer customer bases that they would not have been able to tap into on their own.
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