Change in borrowers’ preferences may restrict the role of traditional lenders by 2030

India’s FinTech sector, the third-largest globally, is experiencing significant growth by promoting digital adoption across various financial services. This transition demonstrates the country’s commitment to enhancing customer experiences through innovative FinTech solutions. A report by the Centre for Advanced Financial Research and Learning (CAFRAL) predicts fintech lending will surpass traditional banking by 2030.

The report highlights the diverse credit needs of small to mid-income segments, stating that fintech lending can meet these needs sustainably. The report also highlights the significant growth of the fintech industry, with nearly half of the 14,000 start-ups founded between 2016 and 2021 belonging to this sector.

The transformative power of fintech lending

Fintech lending is a technology-driven approach that uses digital platforms and data analytics to streamline and efficiently deliver financial services, including loans, compared to traditional banks. This approach offers advantages over traditional lending, driving a predicted shift in the industry.

Fintech lenders use digital platforms and data analytics to provide swift credit assessments, streamlined loan processing, and rapid fund disbursement, offering advantages over traditional banks. Online loan applications result in swift approval and funding within days or hours, contrasting with the lengthy processes of traditional banks.
Furthermore, fintech lending offers a new way to extend credit access to a wider population by using advanced algorithms and data sources to assess creditworthiness. This approach allows for competitive interest rates and reduced operating costs, challenging traditional banking models. Fintech lenders also use big data and AI to provide personalized loan solutions, enhancing the borrower experience and catering to diverse financial requirements.

Factors driving the growth of fintech lending

Fintech lending platforms offer speed and convenience, with online loan applications and quick approvals, compared to traditional banks’ lengthy processes. They can also provide inclusive access to credit by using alternative data sources and sophisticated algorithms to evaluate creditworthiness of individuals who may be excluded from traditional banking services.

Fintech lenders can offer competitive interest rates due to their streamlined nature, reducing operating costs and ensuring efficient risk assessment. Additionally, they can provide personalized loan solutions using big data and AI, tailoring products to individual needs, resulting in a better borrower experience. Overall, fintech lending platforms offer a more accessible and efficient alternative to traditional banking services.

Challenges with traditional lending

Traditional banks and their lending process face common challenges like outdated processes, limited data utilization, lack of a customer-centric approach, and regulatory adaptation. The CAFRAL report emphasizes the need for streamlined processes and digital transformation to remain competitive.

Traditional banks must embrace data analytics and AI to make informed lending decisions, enhance credit assessments, and reduce default risk. They should also focus on understanding and meeting evolving customer needs, as fintech lenders prioritize customer experience. Regulatory authorities must balance innovation and consumer protection by crafting appropriate rules and guidelines to adapt to the changing landscape.

Going forward

Fintech lending is crucial for small-to-mid income segments, with significant investment in India’s fintech ecosystem transforming traditional lending practices. Fintech leaders anticipate collaboration with traditional banks to drive this change. However, concerns about usurious interest rates, unethical recovery practices, and data privacy remain, along with the lack of awareness among borrowers about borrowing costs and challenges related to fake or illegal lending apps and third-party harassment.

The author CEO & Founder, PayMe. Views are personal.