Banking is one of the oldest commercial and trust-based activities that has existed over the centuries. India has had its form of banking for many centuries, as evidenced from our scriptures. Insurance as a sector has been mentioned in the writings of Manu (Manusmrithi), Yajnavalkya (Dharmasastra) and Kautilya (Arthasastra). The writings describe pooling of resources that could be redistributed in times of calamities such as fire, floods, epidemics and famine. Ancient Indian history has also preserved the concept of insurance in the form of marine trade loans and carriers’ contracts. The Indian financial sector has withstood socio-economic shifts, ideological battles, policy upheavals. Gladly, the need for a safer and prudential financing aspect remains staunch. India at present Just in the past 3 decades, we have seen various forms of tech adoption in the Indian finance sector. Currently, the Indian population comprises the millennial and Gen-Z consumers and irrespective of whether they are in urban centres or semi-urban or rural, their daily lives revolve around their smartphones and devices. As the entire financial services industry (including banking, non-banking financial companies (NBFCs), digital lenders, insurance, asset and wealth management, pension funds, fintechs) are fast evolving with newer offerings to serve this client-base, equally agile and more proactive should be the financial regulators. What could be the year ahead? <ol><li>Financial regulators would push for a stronger balance sheet of entities they oversee. This could mean increased regulatory oversight of weaker entities, increased stress-test dash boarding, nudged mergers and acquisitions (M&amp;A) activities, and need for finance players to raise additional capital. </li><li>Consumer protection is crucial. But the ability to balance that principle, with the speed of digital innovation will need much faster adoption, by financial regulators, of their own digital capabilities and tools. Also, in instances where consumer greed is the issue, blaming the industry players could be avoided. </li><li>Financial regulators will bring in ideas for product communication to be simple. This can reduce the heartburn that comes with financiers showing off their complicated jargons and obscure and repetitive paperwork. </li><li>All the financial regulators using an Unified Data format (say to a standard like XBRL) can enable faster and preventive understanding of systemic issues. If they can trust that the data has not been compromised with, in the journey from transactional system to reporting, they can focus on the data itself, for speedier decisions. </li><li>Regulators have always had to get used to the newer waves of technology shift and to fine-tune their regulations in sync with market mechanisms. Some of our financial regulators are far ahead in understanding digital finance, than their peers. Hopefully, the rest will also catch up the learning curve quickly. </li><li>Our financial services regime is licence-based. Reassessing each of these licences from utility, impact and consumer need perspective this can bury some of the legacy baggage that we carry meaninglessly. </li><li>Lateral hires of private sector talent into regulatory policy development, policy operations and regulatory supervision space could be a new addition to bring in additional knowledge, and increased market engagement. </li><li>Regulators will get tougher on any infringements. After all, financial business is all about consumer trust. </li><li>Cyber and digital related safety aspects will take importance in the regulatory agenda. </li><li>Increased sandbox models, especially around cashless transactions and digital finance will accelerate the need for shaping regulatory narratives. </li><li>Gear up for TechFin as global giants are increasing their hold on the technologies, consumer engagement in the space of payments, lending, banking and insurance. </li><li>Prepare regulations for Web 3.0. That would necessitate financial regulators to build a framework on what it could mean for ‘future of finance’. </li><li>With Indian economic growth, and the importance of it being a large consumer market and investment destination, our regulators will have a say in the global financial arena. In this aspect, hopefully we might see a protectionist effect for domestic players. </li><li>For investors as well as the finance entities, issues around environmental, social and governance (ESG) are having higher attention. The finance regulators will bring detailed scrutiny in this space, as India moves towards its own net zero goals in tune with the United Nations’ sustainable development goals (SDG).</li></ol>The author is a CEO coach and corporate advisor. SEE ALSO <a href="https://www.businessinsider.in/business/corporates/news/mukesh-ambanis-reliance-acquires-uk-battery-tech-company-faradion/articleshow/88606195.cms" data-type="tilCustomLink">Mukesh Ambani’s clean energy vision gets a New Year boost with the acquisition of this UK battery tech company</a> <a href="https://www.businessinsider.in/tech/news/ces-2022-what-to-expect-from-samsung-sony-intel-lg-nvidia/articleshow/88606703.cms" data-type="tilCustomLink">CES 2022 — What to expect from the biggest electronics show</a> <a href="https://www.businessinsider.in/india/news/delhi-resident-doctors-call-off-their-14-day-long-nationwide-strike-over-neet-pg-counselling/articleshow/88612843.cms" data-type="tilCustomLink">Delhi resident doctors call off their 14-day long nationwide strike over NEET-PG counselling</a> <meta content="cms.next" name="cmsei" />

OPINION: As the entire financial services industry is fast evolving, equally agile should be the financial regulators

The world loves jargon. In this case, it’s the latest one and much touted new kid on the block in the lending segment -- ‘Buy Now Pay Later’ (BNPL). It sure is not a coincidence that almost every Indian business media has written about this topic in the past few weeks, accelerated by the PR [public relations] blitzkrieg of the lending players, and some of their (potential) advertising spends being a motivator too. Is BNPL much ado about nothing ? Is this lending practice contemporary or is it just the newly coined terminology ? Isn’t the practice the same as the credit system we saw even as early as a few decades ago; the one that our old-fashioned uneducated mom-n-pop kirana store owner gave us as an option -- to buy through the month, and pay as a lump sum later in the subsequent month? His cost of such funding-the-customer was built into expenses (from his sales margins). He did not have any calculator or computer to store CRM [customer relationship management] or any customer database. The only cloud he knew and that existed then was the one above in the skies. There were not even landlines available (easily), let alone the PoS [point of sale] solutions. And more importantly, his customers rarely defaulted in repayments. So why is this sudden chatter about BNPL now? Why is so much private-capital chasing fintech BNPL players globally? Why are the banks, which loved their own credit cards, suddenly pushing for BNPL products too? Why is merchant acquisition becoming the hottest skill in the financial services sector? For a country with over 1.3 billion population, there are only 30 million unique credit card holders in India (about 3% of total banked population). This huge gap is the actual business opportunity to provide BNPL solutions for various consumer segments. More importantly, the younger consumers seem to prefer BNPL, instead of credit cards (their high interest charges are seen as a deterrent). It’s then no-guess why apart from the purely digitally-led fintech players in India, traditional banks too have entered this vertical. The success of BNPL in the Indian context can be attributed to the fact that it offers formal credit in an easy-to-access way. It is also known as point-of-sale loans. In general, the retailer/merchant pays the BNPL provider a low single-digit percentage of the transaction value. This is equally a product promotion push to increase revenues. The banks and highly-funded fintechs have an advantage with cost of funding, while the banks have that historic funding-cost-advantage, techfins and fintechs (which have large capital to sign off) use the might of their large capital to acquire consumers; and to change consumer behaviour over a long period of time, by using their capital, even if debt markets are as shallow and as conflicted as our market (structurally in absence of deep domestic debt market, banks being a large proportion lender as well as provider of debt to non-banks is the conflict of interest). Hopefully the regulator would indicate their view on this subject, just to align the industry players in terms of regulatory thinking, before this segment grows fast, so that any business model steering could be done by the industry in time, saving precious capital, consumption trends and regulatory worries, if any. Can BNPL be inclusive ? With more keypad literate Indians than literate Indians now, wide availability of mobile services along the length and breadth of the country and lower-priced internet access, digital finance has never looked better before. The pioneering efforts by India with its JAM trinity [JanDhan-Aadhaar-Mobile] to bring banking access with secured identity and digital to every citizen is a global first. The initiatives such as ‘Digital India’, ‘Make in India’, ‘Startup India’ have inspired many youngsters to develop innovative ideas to solve real-life-consumer-issues. The basics of financial inclusion is to make sure that the consumers have access and choice of products that suit their needs. The brick and mortar distribution of conventional finance has not reached the nook and corner of the country. Digital channels have started making access to finance, especially credit, as easy as searching for something on Google and language no bar. The COVID lockdown fast-paced the digital adoption in almost all consumer segments, including those who were not digitally-led before. Online banking, app usage, and online commerce increased at a rapid pace. Many of these consumer behaviour would have become a habit and won’t make consumers go back to non-digital pre-covid behaviour. All these also helped in the BNPL growth in the past few months, spurred by a plethora of merchant offers across product categories. The larger opportunity set could be using BNPL products for livelihood-enhancing business-productivity needs. This could mean looking at business users like the gig economy and small and medium-sized enterprises (SMEs) stakeholders. Will we see lending players offering BNPL to SME / MSME / PSL segments with a win-win proposition ? It is only about “ity”s If extending credit is filtered on the basis of consumption, the risk parameters and its consequent lending would differ. Consumption itself is not a bad aspect. Responsible consumption is an ideal expectation from lenders. But lenders can’t judge consumer behaviour, but can very well decide if they want to lend to such consumers’ consumption patterns. <ul><li>Vanity consumption : Financing done for products bought or services used to give instant gratification. (Eg: Botox facial uplift treatment, bridal makeup. ) The challenge for this category of purchase is that the end-use is for “wants” and not “needs”. Absolute critics would even call it “unwanted wants”! </li><li>Sanity consumption : Financing done for products or service acquisition now, by customers who anyways have that affordability-capability but using it more for cash-flow management. (Eg: Consumer electronics, holidays, etc.) While these purchases using BNPL could be well within the budget of the buyer, studies have shown that the objectivity to stick to a financial wellness goal could be shaken, if the BNPL offers are tempting enough to buy yet another product or service. It would be beneficial for the industry at large to come together to build-in the concept of financial wellness assistance for its users. This would help the users conform to their financial plan and not to have any undue credit exposure that hurts their credit scores. And such hand-holding would go a long way in building consumer trust and to reposition BNPL as a safe practice. </li><li>Reality consumption : Anything that can add value to the real economy borrowers, be it for individuals or businesses, and done with responsible finance framework and responsible-credit behaviour would be long-term positive-trust-accretion to the overall industry. (Eg: business or livelihood enhancement loans) </li></ul>Not eating itself for lunch While BNPL surely is the flavour of the season, rational product development and prudent growth would build consumer trust. Valuations alone can’t drive up consumer trust, while they might drive up short-term public hype. Industry players have to build a profitable business model and sustainable service delivery (expectations), as they launch and/or scale BNPL products. If lending is driven well with adequate technology to understand risks, coupled with relevant merchant-partnerships on-the-ground, this can be a good source of financing for the consumers. Reckless lending through BNPL just to grow the AUM [assets under management] or to showcase the business pass-through that could drive-up potential valuations, will ensure that at some point that music will stop. Then that silence will be eerie. With so many conversations and coverage, hopefully BNPL should not become the next four-letter foul-word in the financial world. The better 4-letter-words that the financial sector does well to remember: “Lend”, “tech”, “risk”, “care”. If the industry does not offer improved socio-economic impact with BNPL, it might as well be called ‘Banal Nouveau Product (for) Lending’. After all, there is no free lunch. Someone has to pay for it! SEE ALSO: <a target="_blank" class="c-link c-message_attachment__title_link" href="https://www.businessinsider.in/business/corporates/news/tech-mahindras-attrition-rate-is-nearly-twice-that-of-tcs/articleshow/87259727.cms">Tech Mahindra's attrition rate is nearly twice that of TCS</a> <a target="_blank" class="c-link c-message_attachment__title_link" href="https://www.businessinsider.in/investment/news/all-bitcoin-price-estimates-for-2021/articleshow/87259108.cms">Bitcoin’s rally is far from over — these analysts are betting on the world’s largest cryptocurrency to more than double in value by the end of year</a><meta content="cms.next" name="cmsei" />

Srinath Sridharan

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