Financial services in India are seeing unprecedented unbundling of products and services. Historically, financial institutions such as banks were in charge of the full lending value chain, including acquisition, appraisal, and capital. Throughout the lifecycle of a loan, borrowing was equated with visiting a branch or dealing with an agent.
This resulted in three major issues:
- Customers’ access was constrained due to a predominantly physical branch-based banking strategy.
- Because most of the data required to determine a borrower’s risk profile was segregated, decision making was either biased or incomplete.
- Borrowers’ access to capital is restricted. Not every financial institution was eager to assist the common man.
Because of the problems above, two-thirds of Indian consumers and a large part of the country were still not getting credit from formal sources. There was still a lot of trust in these formal institutions because that’s where people kept their money. However, new business models that use technology are changing the world quickly.
Today, there are a lot of companies in India that are trying to help customers with digital solutions like marketplaces, trade digitisation, payments, logistics, and so on. These ecosystems are putting a lot of people on the same platform, getting a lot of business and financial data, and building a lot of trust with these people.
On the other hand, there are technology companies that specialise in things like regulatory-tech, credit scoring, multi-bureau integrations, data pipes, and so on. These things help traditional lenders become more tech-savvy.
A Recap – What’s OCEN?
OCEN is a set of APIs built on top of a consent framework between the three most important people in the ecosystem:
- Loan Service Providers (LSPs) – This can be any platform which has users.
- Technology Service Providers (TSPs) – These people help Lenders and LSPs to go live over OCEN by providing tech infrastructure (Pirimid Fintech is a TSP over OCEN).
- Lenders- These are people who provide capital and do lending over OCEN.
This is the best way to split up financial services so that each person does what they do best. LSPs can act as agents for borrowers because borrowers trust them, TSPs can make it easier for anyone to start lending digitally, and lenders can still keep an eye on risk and compliance.
OCEN’s first use case is the Sahay app, which lets small businesses get money for unpaid invoices in real time through an app. At the moment, there are about 6 lenders on the OCEN platform, and many more are coming. In time, this network will grow to include more lenders, LSPs, and TSPs. This will allow for a truly democratic flow of loans for Indian borrowers.
OCEN: Enabling the Power of Embedded Finance
What OCEN genuinely enables is the power of embedded finance, which allows any ecosystem to enable loans for their network by joining the OCEN network as an LSP.
Hundreds of such ecosystems exist in India today, and thousands more will arise over the next decade as a result of the digital drive. Many of these ecosystems will require lending to either monetize or engage their client base via a Value-Added-Service model. In any case, it is certain that most ecosystems will provide financing.
They will be able to do so thanks to OCEN’s assistance, without having to invest millions of dollars in establishing a lending technology stack and raising funding. That will be managed by the TSP and the network’s lenders.
Challenges Ahead for OCEN?
From a conceptual standpoint, OCEN is the ideal method and opportunity. However, there are a few roadblocks to overcome as we travel:
Real-time Decisioning Capability
OCEN is meant to provide borrowers with decisions in a couple of seconds. That implies Lenders must be able to underwrite in real-time and return a decision via an API within seconds. That means there will be no human intervention at all. Because extensive underwriting is not viable, this may limit the types of products and loan ticket sizes available because most real-time decisions are possible for low-risk products like invoice financing or assuming minor exposures via bureau-based scorecards.
In order to monetize their consumer base, several ecosystems today provide lending. Currently, it is unclear how OCEN will enable a LSP to make money without the requirement for a separate commercial deal with each lender. Today, Fintechs have established an OCEN-like network of partners and lenders to facilitate commercial elements and non-standard products/user flows.
Truly Digital Dream
In addition to the traditional loan flow of data -> Underwriting -> Decision -> Disbursement, there are intricacies such as escrow accounts, hypothecation, non-standard agreement provisions, FLDGs, and so on that are not yet available on the existing API stack or through TSPs.
The OCEN stack, like UPI, focuses on building a scalable API infrastructure, after which it is up to the rest of the stakeholders to orchestrate the appropriate user experiences and solutions. There is no doubt that OCEN, like UPI, will pave the way for real-time flow-based lending.
The next massive Fintech opportunity with this open credit network is that lenders are ready to engage with Loan Service Providers on the back of OCEN. As the Indian lending ecosystem continues to evolve with rapid digitization, this protocol is expected to play a crucial role in the decentralization of credit for under-resourced Indian borrowers. Pirimid Fintech has plug and play solutions which helps Lenders and LSPs to go live on OCEN within just a week of time. Its OCEN solutions are highly integrable with any of the systems. Hence, Lenders and LSPs can strategically be part of OCEN with Pirimid’s high end solutions.