Breaking new ground: How emerging technologies are helping NBFCs evolve.

  • August 6, 2024

Role of Emerging Technologies and Strategic Partnerships for NBFCs

Non-banking financial companies (NBFCs) have played a pivotal role in meeting the financial needs of individuals and business that have traditionally remained un-served or underserved by banks. But the regulations for NBFCs have become stricter in recent times, the cost of borrowing has increased and NBFCs are focusing on niche markets and personalised products and services. NBFCs are now more focused on developing innovative products and catering to low-income, urban customers in unorganised sectors. In such a scenario, NBFCs are adopting business and operational models powered by technologies that seamlessly facilitate the design, launch, implementation and execution of tailored products and services. Investing in new technologies and strategic partnerships with incumbent financial institutions and FinTechs also allows NBFCs to lower their costs when it comes to increasing their customer base, lowering customer acquisition costs, servicing existing customers or de-risking the portfolio while trying to overcome the increasing formal credit penetration in a growing economy.

New-age NBFCs are using technology more than ever and harnessing partnership ecosystems across the value chain of lead generation, customer onboarding, underwriting, credit/loan disbursement and collection. Artificial intelligence (AI), machine learning (ML) and big data have equipped lenders to measure individual customer insights and build alternative credit scoring models. Mobile and smartphone penetration has enabled NBFCs to connect with customers having low incomes, who can use their mobiles devices throughout the lending cycle of application, engagement, e-KYC and e-signature for disbursements. Robotic process automation (RPA) has enabled streamlining of operational workflows, increasing productivity, accuracy and cost savings. NBFCs are also experimenting and beta testing with distributed ledger technologies for various use cases such as e-KYC, data exchange, loan disbursement and collection and cyber security. And application programming interfaces (APIs) are being built and tested for robust connected ecosystems of various institutions and stakeholders.

Technologies Defining a New Paradigm for FinTechs and NBFC

FinTechs have been creating a strong buzz across value chains in the Indian financial space. They have also become a part of the Indian government’s mission of financial inclusion for the last few years. Because of its vast potential to disrupt the current and traditional banking system, the FinTech space is now gaining traction in the areas of lending, asset management, deposits and credit system. Present-day FinTech companies are efficiently making use of new-age technologies to overcome challenges and build products and services such as last mile reach and delivery, alternative credit models, fraud detection, regulatory compliance, enterprise automation for accounting, treasury and reconciliation for traditional NBFCs.

Strategic Partnership Models between FinTechs and NBFCs

The FinTech sector is working speedily with cutting-edge technologies, to ease borrowing for customers and solve the limitations of the banking and NBFC sectors. Banks and NBFCs are also changing their mode of operations, but at a much slower pace due to their legacy infrastructure, technologies used, frameworks, approval processes and tight-knit integration across business and technological value chains.
This does not mean that banking institutions and NBFCs are not innovating. The challenge for banks and NBFCs is to identify which ideas to actively pursue to embed capital and technology. The complexity, scale and siloed nature of banks restricts them from doing all this effectively.
Given the pace of change and customer expectations, the common trait among NBFCs is that they rightly understand that they have a better chance of succeeding by collaborating and seeking strategic partnerships with new-age FinTechs.
Traditional NBFCs have an inherent advantage which FinTech companies don’t. Similarly, FinTech companies have agility and technology, which acts as a great equaliser. We explore below the strategic partnership and innovation models adopted by banking institutions, NBFCs and FinTechs for going to market.

Future of NBFCs

Adopting technological innovations across value chains will aid optimisation of resources and processes, reduce turnaround time, facilitate intuitive and automated decision making and ensure accessibility of credit/loans for customers at rates tailored to their soci0economic profile. This would give NBFCs a great leverage over traditional banking systems and drive maximum possible growth. The success of NBFCs or FinTech companies is largely dependent on their ability to make the best use of technology, human capital and strategic partnerships. NBFCs have a large base of customers and FinTech companies have the right technological support; together, they can form a mutually beneficial relationship to amplify the processes of helping customers secure credit/loans.

Collaborating with FinTechs would give NBFCs the opportunity to increase revenue and provide more services without necessarily taking on additional risks or staff and while providing a more advanced customer experience. At the same time, FinTechs get access to a loyal customer base and the opportunity to maximise the experience of extensive financial services while navigating the regulatory environment.

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