The Fintech industry has come a long way in addressing the credit demand by revolutionizing access to the supply (lenders) side. This has been one of the most critical factors in addressing a part of the credit gap issue, especially for micro and small businesses (MSME) that usually faces the toughest challenge in accessing credit. For ease of explanation to the readers, we are considering the credit gap in the MSME as the nation’s proxy because MSME, alone, accounts for about 90-95% of the overall credit gap.

The emergence of Fintech in creating a marketplace that gives multiple options to a borrower 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 of potential lenders to choose from has played a pivotal role in reducing the credit gap by around 36% from $475 billion in 2020 to about $305 billion in 2022. Despite this achievement, the credit gap is still at an alarming level accounting for about 45% of the overall addressable MSME credit demand, and is resulting in holding back the purported economic growth.

Therefore, the future of Fintech lies not in the existing model of a mere marketplace, but to provide alternative investment / financing solutions to meet the credit gap. An inflection point has come where the Fintech industry, which created a huge impact in the financing ecosystem, has to, now, consciously shed the image of an aggregator and move towards being a solutions architect with a vision to eradicate the credit gap.

Fintech Needs a Tectonic Shift from Marketplace to Solutions Architect

While Fintech – using technology as an enabler – brought the borrowers and lenders across spectrum under one roof, it has been rapidly evolving with an aim to provide not only easy access to funds, but also enhance the probability of credit disbursals to borrowers who otherwise would not have been eligible through the traditional lending channels.

What started as a mere aggregator in the early stage of Fintech revolution, soon witnessed the technological advancements using Artificial Intelligence and Analytical Modeling (Cognitive) in the next stage to underline the predictability of the funding life cycle (from the point of disbursal to full recovery and servicing of the debt) being good with the profile of the borrowers. In other words, technology has been put to use to“Green-light” transaction negotiations. Let me elaborate this further with an example below:

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

There is also a risk-reward tag assigned to the borrower-lender transaction negotiations, which give lenders the opportunity to tread with 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 would then charge a higher interest rate and processing fees as opposed to those who have higher scores. Not just the cost of funds, the tenure of the loan may also be tightened or relaxed depending on the relative scores. Therefore, within the acceptable limits of the probability matrix, a lender can 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, in turn, will 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 the tenure.

The above are some of the wonders that technology has made possible in the present scenario of the Fintech evolution, which is a win-win situation for those (usually ineligible through the traditional lending channels) who are now able to access credit on one hand and a higher return (as compared to the traditional lending channels) on the portfolio for the lenders on the other hand – a key catalyst in partly addressing the credit gap issue.

The next leap in the Fintech evolution has to be a “quantum” where it should now transform in to providing alternative solutions to funding through digital platform, which are non-traditional with infinite possibilities of structuring a funding transaction. Therefore, transforming into a financing solution architect will be the turning point in eradicating the credit gap.

Fintech as a Solutions Architect Can Deliver the “Unimaginable” Value

A longer-term vision of eradicating the credit gap in MSME, which is still at almost one-half of the credit demand, will be the key for the Fintech revolution. I raked up the issue on MSME funding in December 2018 after my field visit in 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 in the MSME funding is only intensifying by the day, and is 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 funding 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 would not only ensure inclusive stakeholders participation, but will also go a long way in addressing the funding issues of good businesses who otherwise were not eligible through the traditional lending channels due to lack of impressive historical track records. This, in turn, will put the economic cycle on an elevated track because of the simple reason that MSME is the backbone of any economy, and a growth in this segment will ensure an inclusive bottom-up growth of the economy.

The unlocking of this unimaginable value emanating from being a solutions architect will be the key catalyst in almost eradicating the credit gap in MSME over the period.

To Conclude…
The vision and thought process of the Fintech Entrepreneurs should gravitate towards emerging as a “Solutions Architect”. That will make the existing digital marketplace platform more robust, inclusive and disruptive. This epicenter of Solutions Architecture will ensure that the time has come for the participants / stakeholders to break the ice and look beyond the, rather, distasteful traditional history of businesses that now has good fundamentals and strong potential, thereby green-lighting the prospects for funding, which will usher in a hope of an inclusive economic growth.

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