I came across two gems in the last few years, both relevant to digital lending. First was an insight, "when your product is money, uptake is hardly a problem" - of course, you need to discern if someone is buying your product or running away with it, which in the context of lending is the hard part.
The second one was an eye-opener. When asked about monetisation plans for a gaming app, a hopeful entrepreneur replied to the effect, "if nothing works, we can always do digital lending.” Although this is a terrible misconception, the technological bar to enter digital lending is lowering especially with the advent of "plug and play" lending platforms, while the bar for succeeding at it remains ever so high.
Key technological drivers of digital lending have been the high adaptation of smartphones with excellent sensors, secure networks, storage and computing at scale on cloud, algorithmic and machine learning techniques. Newer ML (machine learning) technologies are emerging which help you reason out why a lending decision was taken i.e. why a certain application was accepted or rejected. It is hoped that these technologies will provide oversight for regulating agencies to ensure that credit decisions adhere to certain ethical standards. (For example, credit is not being denied to African Americans etc)
As digital lending continues to expand, here are three points that I believe will precipitate its acceleration and adoption:
#1 Data governance framework
Demonetisation has moved the record of wealth from the hands of people to government-controlled organisations. As rich, diverse and sensitive data of individuals and organisations become available in digital form, few key things need to be in place -- authenticated and unique digital identities, recording and digital signing of contracts between identities and secured and truly distributed records of transactions. A technical and legal framework must be in place to regulate measurement, storage, security, access and consumption of this data by right entities, for right purposes and in a right manner, with the data owner's consent.
#2 Data dissemination platform
This should cover principles, guidelines, regulations and standards for the governance of data of individuals and organisations. India Stack mirrors the implementation aspect of this framework, primarily in the financial domain. It has an identity layer incorporating mechanisms of Aadhar, eKYC and eSign. The payments layer is primarily based on unified payments interface (UPI). A data empowerment layer is evolving in the form of RBI (Reserve Bank of India) led account aggregator (AA or Sahamati) framework. Open credit enablement network (OCEN) is a digital credit enablement platform that leverages these layers and provides a uniform platform to Fintechs and lenders to offer credit efficiently to previously underserved segments of customers.
#3 Data as a competitive driver
Regulated access to rich and diverse financial and related data in an equitable manner will wean away lenders from information asymmetry and encourage them to come out with innovative credit products. Smarter fintech companies will still create newer asymmetries by gaining financial insights from available data perceived as irrelevant by competitors. Government agencies providing accurate and timely digital data about a wide variety of socio-economic and industrial indicators will help digital lenders make smarter credit decisions within a broader context of the economy. Basic financial literacy and inclusion of masses, especially in the digital domain, will truly enable digital lenders to extend credit to the proverbial bottom of the pyramid and also aid in boosting the economy.
To summarise, technological advancements are already in place to enable digital lending at scale. What will unlock its true potential would be a data governance framework, data dissemination platform, a platform that provides a unified digital lending process and a truly deep digital inclusivity.
Shyamgopal Kundapurkar is director - engineering at Capital Float. The views in this article are his own.