The future of Fintech lies in being a solution architect

The rise of Fintech in creating a marketplace that gives a borrower more options to access credit from a wide variety of lenders, including non-traditional lenders, with a quick turnaround time, has been revolutionary. This relatively easy access to credit with a wider option for potential lenders to choose from has played a key role in reducing the credit gap by around 36% from $475 billion in 2020 to around $305 billion in 2022. Despite this achievement, the credit gap . still at an alarming level and accounts for approx. 45% of the total addressable MSME credit demand, resulting in holding back the claimed economic growth.

Therefore, the future of Fintech does not lie in the existing model of a pure marketplace, but in offering alternative investment/financing solutions to address the credit gap. A tipping point has come where the Fintech industry, which created a huge impact in the finance ecosystem, now has to consciously shed the image of an aggregator and move towards being a solution architect with a vision to eradicate the credit gap.

Fintech needs a tectonic shift from marketplace to solution architect
While Fintech – using technology as an enabler – brought borrowers and lenders across the spectrum under one roof, it has been rapidly evolving with an aim to provide not only easy access to funds but also increase the likelihood of credit payouts to borrowers who otherwise would do it. have not been qualified through the traditional lending channels.
What started as a pure aggregator in the early stage of the Fintech revolution, soon witnessed the technological advancements using artificial intelligence and analytical modeling (cognitive) in the next phase to emphasize the predictability of the funding life cycle (from the point of disbursement to full recovery) . and service of the debt) be good with the profile of the borrowers. In other words, technology has been adopted to “green light” transaction negotiations. Let me elaborate on this further with an example below:

Be it personal credit or business credit, the use of cognitive modeling in the world of Fintech helps to assign predictable scores to borrower profiles within the “Probability Matrix” that flags the likelihood (credibility) of the borrowers to fully service the loan without delay and/or default. This matrix is ​​then used by the lenders to pick and choose the borrowers they wish to lend to and then enter into a contract negotiation with such borrowers.

There is also a risk-reward code assigned to the borrower-lender transaction negotiations, which gives lenders the opportunity to take calculated risks and earn more on their portfolio. For example, if a borrower has a relatively lower score within the acceptable limits of the probability matrix, he/she may still be considered eligible for loan disbursal, but the lender will then charge a higher interest rate and processing fee as opposed to those with higher scores. Not only the cost of funds, the term of the loan can also be tightened or relaxed depending on the relative score. Therefore, within the acceptable limits of the probability matrix, a lender may structure a lending portfolio that may include quite a few of the low-risk borrowers, some of the moderate-risk borrowers, and very few of the high-risk borrowers. This will in turn ensure that the portfolio has low to moderate risk (capital protection), higher weighted average earnings (optimal risk-reward ratio) and a relatively higher rotation of the funds based on maturity.

The above are some of the wonders that technology has made possible in the current scenario of the Fintech evolution, which is a win-win situation for those (usually not qualified through the traditional lending channels) who now have access to credit on one side and a higher returns (compared to the traditional lending channels) on the portfolio for the lenders on the other hand – a key catalyst to partially solve the problem of the credit gap.

The next leap in the Fintech evolution must be a “quantum” where it will now be transformed to offer alternative solutions to financing through a digital platform, which are non-traditional with endless possibilities for structuring a financing transaction. Therefore, transformation into a financing solution architect will be the tipping point to eradicate the credit gap.

Fintech as a solution architect can deliver the “unimaginable” value
A long-term vision to eradicate the MSME credit gap, which remains at almost half of credit demand, will be key to the Fintech revolution. I raised the issue of MSME financing in December 2018 after my field visit to the mining and metals belt in the states of Jharkhand and Odisha, where I categorically highlighted that despite project viability, confirmed orders and a robust business plan, the challenges are in MSME. funding is only getting stronger every day, further widening the credit gap. I talked about these challenges in my article “MSME Funding Gap Despite Project Viability: Field Observations” published in December 2018.

Creating out-of-the-box non-traditional financing structures such as Friends & Family (F&F) Fund, Promoters’ Fund, Quasi Equity (mezzanine debt), order book-based financing, project-based financing, cash-flow-based financing, and other structured finance options will not only ensure inclusive stakeholder participation, but will also go a long way in solving the financing issues of good companies that were otherwise ineligible through the traditional lending channels due to a lack of impressive historical results. This in turn will put the economic cycle on a high track for the simple reason that MSME is the backbone of any economy and a growth in this segment will ensure inclusive growth from the bottom up of the economy.

The unlocking of this unimaginable value that comes from being a solution architect will be the key catalyst to almost eradicate the credit gap in MSMEs over the period.

To conclude…
The vision and thought process of the Fintech entrepreneurs should gravitate towards appearing as a “solution architect”. It will make the existing digital marketplace platform more robust, inclusive and disruptive. This Solutions Architecture epicenter will ensure that the time has come for the participants/stakeholders to break the ice and look beyond the rather unsavory traditional history of businesses that now have good fundamentals and strong potential, thus illuminating the opportunities for funding. , which will usher in hope for inclusive economic growth.