While technology and simple regulations are blurring business boundaries and boosting employment, security concerns related to the use of algorithms need to be addressed through comprehensive legal frameworks.
India’s economic slowdown has been hitting the headlines recently. According to International Monetary Fund (IMF), economic growth was estimated to have declined globally to 3.3 per cent in 2019. Appropriate reforms, if not made, can lead to further decrease this year.
Banking has a vast impact on GDP of a nation. As small and medium businesses (SMBs) have insufficient collateral, their chances of not being able to repay on time are higher. This makes traditional institutions reluctant to lend them money to avoid financial risks.
In countries like China, economists have concluded meagre financing for small and privately-owned businesses as one of the major reasons for slowdown in growth. This is where technology can play a major role. With the rise of fintech companies that aim to use technology to improve financial tasks, customers have access to banking services via phone without the need for physical infrastructure as in traditional methods.
For instance, Alibaba’s financial affiliate, Ant Financial Services Group (earlier Alipay), has been one of the pioneers in using artificial intelligence (AI) and Big Data in this sector. Its subsidiary, MyBank, launched four years ago in China, is a cloud-based online banking unit that uses real-time transaction data after permission from borrowers and a risk-management system that analyses more than 3000 parameters before extending loans.
Due to simple privacy regulations, data for assessing the customer’s ability to repay debt can be taken from sources like the government-administered social credit system. After installing the app on the smartphone and opening a remote account, borrowers can apply for loans directly. Transaction process is instant and loan approval takes about three minutes, unlike traditional banks that can take more than a month.
Without human bankers, operating cost per loan is just three yuan (approximately ₹ 30.17), whereas traditionally it can cost thousands. Besides, penalty rate has been a mere one per cent. With attractive borrowing rates, it has lent two trillion yuan ($290 billion) to nearly sixteen million small companies till now, according to a report from Bloomberg.
Other Chinese companies such as Tencent Holdings Ltd (WeBank) are also ramping up their system to solve the problem of capital funding. State-owned China Construction Bank Corp. has launched its mobile app to provide online banking services for SMEs and other customers.
Outside China, Korea’s messaging app platform Kakao has launched a digital bank in 2017. Companies like Amazon also allowing payments in the form of such services as Amazon Pay and Amazon Cash.
India has several fintech startups situated in metropolitan areas like Bengaluru and Delhi-NCR to make loans accessible to the masses. Programmes by state governments have helped boost their growth prospects. Key players include Paytm, PhonePe, MobiKwik, PayU and Policy Bazaar. Paytm, a mobile wallet business, is Ant Financial’s most important foreign holding at approximately forty per cent. According to a recent report from tech market intelligence platform CB Insights, India became the top market for fintech deals in Asia in the second quarter of 2019.
Many countries like the UK use digital financial advisories, known as robo-advisors. Robo-advisors come with advanced capabilities at lower management costs to cater to specific investor interests. These completely automated algorithm-based platforms deliver customised solutions on demand.
In Bahrain, support for open banking and other such regulations have given a major impetus to the growth of robo-advisors and fintech firms. Advancements through robotic process automation (RPA) and chatbots are further enabling better efficiency and accuracy.
These businesses are thriving due to availability of the Internet and smartphones to the masses. But to be sustainable, offering unique and innovative solutions with a variety of banking options is necessary. There is a need to focus on key sectors and leverage technologies like AI and blockchain. For example, Singapore-based ride-sharing company Grab additionally offers such services as hotel booking and food delivery services on its app.
This also means that traditional banks need to change their business model and use technological solutions to remain relevant and competitive. For instance, Siam Commercial Bank (SCB) has collaborated with Indonesia’s Go-Jek to provide taxi and ride-hailing, food delivery and other such services in Thailand. While technology and simple regulations are blurring business boundaries and boosting employment, security concerns related to the use of algorithms need to be addressed through comprehensive legal frameworks.