Hybrid FinTech – A Promising Model To Meet The Financing Gap Of The Informal Sector

India is home to more than 2,000 Fintech companies. FinTech happens to be one of the most preferred choices for investors in the start-up ecosystem. This sector itself attracted USD 1.6bn from January to June 2020, a 30% y-o-y growth. In this day and age, it is inevitable to talk about finance without technology. It is not only the money which is digitised but also our everyday communications and transactions. Hence, digitization remains an irreversible trend in all walks of life. Lifestyle disruptions like demonetization and pandemic only makes technology a necessity, an everyday experience. There were certain things which were missed out on during demonetization but were addressed during the Covid-19 pandemic. Unified Payments Interface (UPI) with 1.5bn transactions in July 2020 itself led the way, followed by Aadhaar enabled Payments System (AePS) with which smooth disbursements of Direct to Bank Transfers (DBTs) were made to more than 15 crore households. These are the key indicators that FinTech is here to stay and survive even during disruptive times. Merchants' acceptance of digital payments has also dramatically increased in the past few months due to social distancing and fear of virus spread through paper money.

When it comes to credit and P2P lending, credit penetration in India is still below 15%. Only less than 10% of nearly 100 million MSMEs enjoy access to formal finance today. More than 70% of these MSMEs are informal or micro-enterprises and in active need of Microfinance. Banks, both public and private, find it difficult to lend to MSMEs directly due to structural and institutional constraints which FinTechs, through technology, are able to and can overcome by using alternate and transactional data trails. However, most FinTechs deal with customers with a deep digital footprint and leave out informal segments for lack of reliable data and connectivity. This gap needs to be filled and this is where Hybrid FinTechs come in. Hybrid fintech models that complement digital capabilities with feet-on-the-street distribution networks prove more promising to address the financing needs of thin-file and data-poor clients.

Hybrid FinTechs would enable banks to reach the underserved segments by creating a digi- touch bridge. They would act as an extended arm for banks and fill the gap to the last mile in a smart way. Hybrid Fintechs should follow the ABCDEFG framework in the quest for not only including underserved segments into the formal financial system.

● Aadhaar – More than 1.2 billion citizens have Aadhaar. This digital identity solves the most fundamental problem of KYC

● Banking behavior: Thanks to PMJDY, more than 85% adults possess bank accounts today. Analyzing banking transactions, however miniscule, provides some insights on cash flows and financial standing of households and enterprises

● Credit history: All microfinance and bank borrowers have formal credit records, thanks to the strict regulatory regime. This data set acts as an indicator of risk for those who already borrowed previously but need more credit

● Demographics: Basic data such as age, education, family details, place of stay, asset ownership, business vintage, business ownership, relationship with neighbors etc., are important data points to determine credit worthiness. These data points are collected through on-site visits, interviews, and referral checks

● E-payments: Digital payments at merchant locations, propelled further by the current pandemic, offer a reliable source to assess cash flows and payment capacity, to a limited extent now but rapidly growing

● Fotos (Photos): Photographs of business premises, stocks/inventory, machinery, surroundings, customer footfall etc., provide important insights on business condition and related risks

● Geo-stats: By capturing location details of business, additional insights can be derived about the authenticity, business potential etc.

The need is to develop a digital ecosystem to facilitate this framework and enable greater access to finance to informal and new-to-bank segments. Through this ecosystem one can capture data online as well as offline, run analytics using proprietary algorithms and provide recommendations to customers and banks.

For a digital ecosystem like this to sustain, cross-industrial collaboration is required: from digital tools for micro-businesses, such as accounting systems, inventory management, e-commerce platforms, supply chain integrations etc., in order to build a robust customer service ecosystem which also aids in effectively assessing their financial needs. Collaboration also needs to take place with banks, NBFCs, key industry players and insurance providers to bring forth the best product suite and offer a comprehensive set of choices, thus fulfilling different lifecycle financial needs of informal sector customers.

With more than 60% of the population residing in rural areas and with a considerable demographic segment facing the brunt of digital divide, Hybrid FinTechs not only fill the gap by serving the financial needs of the underserved population but also provide them with a digital identity and footprint.