World scenario:

Financial Technology (fintech) is relatively new, bringing in disruptive business models

in the financial services domain that are challenging the old order of things, shaking its
very foundation. LendingClub, the first peer-to-peer lending company founded in 2006,
went on to a successful IPO in 2014 and its current valuation stands at 6.5 billion
USD . SoFi, a marketplace lender that focuses on providing student loan refinancing,
founded in 2011, is close to launching its IPO with a 3.5 billion USD valuation .
Globally, fintech investments have grown exponentially in the last year, and the trend
is likely to continue. Fintech is not just a buzz. It is real.
Looking at Fintech from a global social perspective is also very interesting. In
developing countries, the traditional banking infrastructure does not reach a large
percentage of the population. Fintech provides a great set of tools to help such
economies; they dont have the barrier of legacy technologies that can restrict
developed countries, and are focused on providing low-cost mobile payment solutions
to low-income, isolated populations where there is a need for these solutions. Research
from Gartner indicates that Africas transaction value is forecast to reach 160 billion
USD in 2016, with Asia Pacific not lagging far behind. Fintech, therefore, can play an
important role in strengthening relatively weak economies by making financial services
accessible.

India Scenario:FinTech in India has been synonymous with payment-technology, a niche that has
produced Indias only FinTech unicorn One97 (valued at $2 billion). However, from a
global perspective, FinTech is not limited to payments alone. Globally, there are 11 FinTech
lending unicorns such as Affirm, Prospr, LendingClub & Wonga, 11 semi-unicorns (>$500
million valuation) such as Kreditech & Kabbage while the equivalent numbers for paymenttech startups are 11 and 6. The rest of the FinTech unicorns and semi-unicorns are from a
variety of other sub-sectors such as investing, insurance, credit reporting, bitcoin-tech and
others. Therefore, among sub-sectors in FinTech, lending is clearly the elephant in the
room, followed closely by payments.
India is warming up to core-FinTech as investors and entrepreneurs being to realize the
scale and scope of the opportunity in these sub-spaces such as lending and to a much
lesser extent-personal finance. It is not that the scope for payments-tech is saturated, it is
just that there are far too many low-hanging fruits in the lending and personal finance
space to ignore anymore.

There are over 11,582 NBFCs and about hundred commercial banks in India, most
of which make limited use of technology in their lending process. Lending decisions
are made by credit managers, with limited standardization across applications &
varying levels of credit risk management at each institution. $121 billion in
individual credit and several times that number in credit to MSMEs is handled this
way. The results are nothing to cheer about. Going by data published by the
Reserve Bank of India, about 8-9% of the loans made to individuals go bad when

measured in terms of the Impaired Assets Ratio (Gross Non-Performing assets +

Restructured assets / Total Advances). This number worse when it comes to loans
made to Micro and Small enterprises (MSMEs) at 10-14% depending on the stage
in the credit-cycle.
The use of technology is typically confined to the use of a credit-score which is
calculated based on the credit history of a borrower. The effectiveness of credit
score-based lending is seriously undermined by the following:
1.
Close to 80% of India does not have a credit score.
2.
Credit scores are calculated in a semi-linear manner and are only a
rudimentary predictor of the credit risk associated with a borrower.
3.
A large number of potential borrowers have limited credit-history and
therefore, are plagued by what is known as the thin-file problem.
FinTech has been able to solve these problems fairly effectively in developed
markets. It has been proven that machine learning algorithms, when applied to
existing data available with lending institutions have been able to make better
credit decisions than humans and thus improve the profitability of lenders. Cases in
point- Kreditech, Lenddo and Kabbage have extremely low default rates in their
loan portfolios. In fact, our own software at Monsoon FinTech has been able to
improve the on-paper profitability of a large real-world US based loan book by over
58% without any additional information on borrowers by identifying defaulters
before they can default.
Further, there are several alternative data points such as social media footprints,
call-records and shopping histories associated with borrowers that have been
proven to be good predictors of the credit-worthiness of borrowers- a fact widely
acknowledged by the banking community & demonstrated time and again by
studies.