The unsecured lending space has seen an explosive array of innovations in recent times across the globe to identify and target lending to hitherto unserved customer segments. This action has been led by new-age FinTech with advances in AI and machine learning and huge amounts of data crunching of various customer touchpoints in the digital world. Banks have tried to evolve alongside by partnering and at times leading the innovations but how ready are the banks’ Billing Systems to tackle the complex revenue models spawned by these innovations and what capabilities are expected from these billing systems to support such a dynamic billing environment. This article delves into some recent innovations and the revenue monetization aspects of the same.
Though we will explore recent developments through the prism of India (which is making rapid strides in digitizing its economy), it is applicable globally, as anything built in India has to scale and be supportive of the very diverse and complex requirements of its population. In this context, it can be applied to any other geography as a microcosm or a variation of the specific implementation.
India, being a vast country with very less penetration of formal banking channels, the current levels of banking reach is insufficient and too slow if India is to cater to the financial needs of its population and growth of its economy. Innovative banking models & partners and financial innovation along with regulatory support are needed to fulfil the need for financial intermediation. This provides a lot of opportunities for innovative FinTech, wealth Techs, LSGs (Lending Service Providers) etc. to satiate the need for credit in various pockets.
In addition, banks also face stress and intense competition and are exploring alternative investment space like funding start-ups and other SME and MSME communities. These groups do not conventionally form a risk-based lending group due to their lack of credit history and also because they are in new sunrise sectors or first-time credit consumers. Nimble banks, however, want to join in the growth by forming partnerships with digitally innovative FinTech for co-lending, thereby, reducing their business risks and limitations imposed by the regulatory bodies in terms of exposure, capital reserves etc. FinTech, on their part, also want to partner with banks because of a readily available large account base, strictness in getting NBFC (Non-Banking Financial Company) license from the Indian regulator and/or availability of lending capital, while they focus on their core strength, a.k.a. identification of creditworthiness of new segments and lending to their target groups.
This also requires an enabling framework from the Financial Sector Regulator to contain risks as well as provide clarity on the exposure norms and treatment of non-performing assets. An enabling framework can significantly enhance credit to different credit starved communities, who may not have a credit history, required by conventional lending practices of REs (regulated entities) as well as improve financial inclusion.
This enables catering to new market segments conventionally considered by REs as risky, who, New Age Fintech may consider as creditworthy (for eg: First time borrowers from IT sector may be considered more creditworthy due to the potential of the sector as well as past experience from lending to the sector OR people with credit score above 750 may be provided with unsecured credit due to past repayment behavior associated with good credit score citizens). Community lending to SHGs run by Women for producing and marketing specific products with potential, who most likely than not, will not be having any prior credit history, is another example.
Towards facilitating financial inclusion and rapid digitization of the economy, India has introduced the so-called India Stack, which is a set of open APIs enabling Digital Validation of individuals and companies (e.g. Aadhaar, GSTN, PAN), Digital Engagement (e.g. UPI (Unified Payment Interface) for immediate 24*7*365 payments between different bank accounts across banks, Beckn protocol for open digital commerce, Digi-sign for e-KYC) and Digital Enablement (e.g.: Digi locker, Account Aggregator), to take banking and payment services to the masses.
While more and more innovative models come into being, a very important requirement is the ability to monetize the financial innovations while at the same time, dovetail it into Financial Institutions’ existing systems without requiring a major surgery, so to say. This requires the billing systems to be nimble and architecturally flexible. A few recent innovations are detailed below, from which generic requirements of billing systems are analyzed.
1. BNPL (Buy Now Pay Later): This product facilitates provision of interest free credit for purchases. This is similar to standing credit facility provided for businesses or similar to credit card spends. Banks could have charges for utilizing this credit, subscribing to this product or discounts for purchases made using this product. Banks may also have late payment charges and/or convenience fees which need to be billed to the customers by their Billing Systems. An integrated relationship view of existing customers and their transactions will enable preferential prices for existing customers for this product.
2. ONDC (Open Network Digital Commerce): This is another innovation to disintermediate singular or monopolistic ownership of e-commerce platforms for aggregating buyers and sellers of goods and services. This service is expanding with rapid addition of buyers and sellers due to its low-cost nature like low platform listing fees. A very innovative case is of a new age FinTech using this network to sell Tomatoes through its platform in collaboration with ONDC and NCCF (National Consumer Cooperative Federation) at subsidized rates in select markets, allowing market intervention policies by the Government. Banks would need to maintain the channel partners and revenue share for different products and services for each merchant partner, white labelling requirements for channel partners or merchant customers of partners, maintenance of product catalogue, discounts offered by merchants for various goods/services offered, convenience fees etc. Billing systems also need to ensure traceability of individual transactions and merchant share to maintain transparency in computations and comfort for partners.
3. FLDG (First Loss Default Guarantee (restricted to 5 % by RBI) by FinTech or LSG (Lending Service Provider): Innovative FinTechs have enabled on-boarding of new segments of customers who were previously defined as “un-credit worthy” by banks, by running different algorithms and AI/ML models through this product. Here the FinTech and/or REs (Regulated Entities) act as LSP channel partners for banks for extending credit and in turn share a % revenue with the banks. The first loss up to a certain % is guaranteed by such LSPs (through Cash deposits or Fixed deposits or Bank Guarantees) to the banks if the customer defaults. RBI (Reserve Bank of India), through its recent notification has limited this to 5% currently, so that banks continue to perform their due diligence for such unsecured loans and ruled that any NPAs (non-performing assets) even though covered and paid for by guarantees, must still be part of their provision requirements. This is a rapidly evolving space, and more changes are likely based on market evolution. Billing needs could include subscription or account origination charges, prepayment charges, late payment charges in case of delayed payments, interest overdue charges and/or loan closure charges.
4. CBDC (Central Bank Digital Currency or e-Rupee – RBI targets 1 Lakh txns by end of 2023 from 10,000 txns currently) : This is a digital wallet launched by RBI to digitize cash (has par value with paper currency and can be directly credited to payee without any banking intermediary) with the key feature of paper currencies like anonymity still maintained and also to bring in a regulated crypto currency equivalent wallet which has Central bank supervision. The key aim of CBDC is more efficient and cheaper cross border transactions as also movement to a less paper intensive economy resulting in lower costs. Another goal is to promote creation of specific wallets like Direct Benefit cash transfers (subsidies given to certain customer segments by Government – e.g. Fertilizers, Domestic Fuel subsidies etc.) or other closed-loop wallets for specific purposes in future). Billing needs could involve differential pricing for e-Rupee payments for domestic transfers as well as cross border transfers (when permitted), wallet loading charges etc.
There are more innovations which are being introduced like UPI-lite (for off-line banking transactions), Aadhar-pay (payment using Aadhaar authenticated bank accounts) etc. for which billing systems need to be nimble and configurable for rapid deployment in the marketplace to ensure competitive differentiation and first mover advantages.
From a billing system perspective, supporting the above products need a combination of below features.
1. Ability to define new innovative products/services and deploy them rapidly.
2. Ability to rapidly deploy new pricing structures like subscription-based pricing, utilization charges, Convenience fees, late payment charges, Charge reversals etc. and linking these to various products. This requires Billing Systems to have a modular structure with product catalogues maintained separately from the pricing algorithms.
3. Onboard channel partners who may also have multiple hierarchical pricing structures across different geographies for pricing. Eg. Partner A may have a global or country level discounted pricing for specific products/services, additional pricing structures or discounts on top of country level pricing for specific geographical zones or urban/rural areas. Further, each store may also be running targeted campaigns on different days or time zones (peak/off-peak) for different products and services.
4. Provision to seamlessly upload product catalogue and pricing for different products and services for different partners/merchants. Web self-service capabilities for merchants and online review and approval would greatly facilitate reduction of manual effort.
5. Ability to define revenue share for different products and services (could be different for different product categories within a partner as well) and also have multi-level approval process for price discounts beyond specific levels. If BNPL is used for such purchases, then there could be other charges associated with the purchase like convenience fees, late payment charges, which need to be billed.
6. Handle multi-level taxation and reporting requirements as required by Government and Regulatory bodies.
7. Seamless personalized User experience to enable support teams to quickly handle and resolve customer queries.
8. Transaction level reconciliation reports and dashboards to facilitate queries and clarifications.
9. Seamless display of merchant transactions and revenue share details in a time bound manner online to partners. This will help quickly resolve any disputes and ensure transparency and proper reconciliation.
These are a minimum requirement for billing systems deployed by banks to facilitate the explosive growth in innovations, especially in the digital lending space, to cater to critical needs of a credit-starved population. The availability of a digital stack which validates the credentials of the consumer without requirements for any manual verification process will greatly facilitate this, whether it is in India or anywhere else in the world. Alongside an enabling financial sector regulator and policies to support such innovations, there is also a critical need to monetize these innovations, which needs a robust billing system.
Infosys Revenue Management Platform is a highly configurable Billing & revenue management system for banks with inbuilt business functions and pre-defined interfaces which recognizes the many challenges faced by banks in a digitally connected world. It enables defining and on-boarding various channel partners and defining varied pricing models and revenue share. It also presents a 360 ° relationship view of their customers to the banks.
