OCEN, which has been in the news for a long time, has been called the next big thing in lending. The main goal of OCEN, which is pronounced O-Ken, is to put in place a set of frameworks and rules that can help make credit more available to the people who need it the most. As for small businesses, who will be the most important people, and how will this work?
For years, the most vulnerable parts of our economy, like small businesses, haven’t received formal credit from the government or other sources. Financial institutions have a hard time reaching these large groups of customers, which leads to high distribution costs. They also have specific credit needs, like small loan amounts, short repayment terms, and quick access to funds.
To meet these rules, financial institutions have to focus on big businesses to sell off a lot of credit. Because of this broken system, only about 11% of the 63 million small businesses have access to traditional loans. For people who want to borrow money, proving their creditworthiness is another problem.
These small business customers don’t have enough information for lenders to figure out how they’ll do on loan. To fix this broken system, OCEN is putting together an infrastructure protocol that allows people to access verified information from a variety of public and private data sources only if they give their permission. It also connects borrowers and lenders through an ecosystem that gives them access to affordable credit.
Growth of OCEN in Small Businesses
Credit is most successful when it is provided by businesses close to the customer. With the rise of digitization, we see an increase in the number of small businesses collaborating with marketplaces and e-commerce platforms. These organizations have access to millions of small businesses and proprietary digital data that can be incredibly profitable for underwriting. With the addition of OCEN and the present digital ecosystem layer, these platforms become perfect for channelling credit to the underserved via novel embedded finance solutions.
Access to small businesses and connecting financial institutions with platform intermediaries, on the other hand, only solves half of the problem. A complete solution necessitates an integrated network that allows for the continuous flow of validated data. It requires digital processes to replace physical paperwork. It also requires a method that allows for the immediate and efficient transfer of funds from lenders to borrowers and vice versa.
Thanks to digital initiatives such as Aadhaar-based eKYC, eSign, UPI, and the Account Aggregator framework being implemented and used at scale, we now have the ecosystem to make this a reality. The OCEN framework will leverage these innovations to allow a solid infrastructure through which financial institutions can effectively and economically service the end borrower.
OCEN Key Market Participants
Who are OCEN’s primary market participants, and what does it mean for them all:
Lenders
These are traditional financial institutions such as banks that will benefit from the OCEN protocol’s collective scale and efficient distribution. These financial institutions (lenders) may now design solutions and fulfil the needs of small companies successfully by using existing digital infrastructure and gaining access to verified data from borrowers. Lenders will be able to underwrite loans based on new kinds of data, and most significantly, they will have access to a constant flow of data to monitor credit.
Loan Service Providers (LSPs)
Loan Service Providers are online intermediaries such as marketplaces, e-commerce firms, consumer platforms, and digital businesses that are close to the end customers (LSPs). These LSPs may now incorporate lenders’ credit products into their main offering without having to invest heavily in technology or connect up with several lenders individually. Credit solutions for their customer base, which includes many small businesses, can assist both small businesses and LSPs boost their revenues. and boost their couples’ lifetime value.
Because of the rapidly growing digital infrastructure, these LSPs have the potential to become future lenders as well. They have benefits that traditional financial institutions do not have, such as minimal customer acquisition costs, access to proprietary transaction data, visibility of credit end-use, and control over payments flow on their platform. This would enable platforms to provide extremely specialised tailor-made credit solutions without relying on the financial institution’s product architecture. A daily settlement credit line for a small shop owner selling on an e-commerce platform or a daily repayment sachet loan for a professional working with a services marketplace will become more popular in the near future.
Borrowers
End borrowers are small enterprises who will now be able to see credit choices given by numerous lenders on LSP’s platform. The credit procedure for these borrowers will be totally digital, with quick access to funds, thanks to consent-based data sharing and Aadhar/UPI enabled infrastructure. Financing will increasingly shift away from “one-size-fits-all” credit solutions and toward “customised” loan solutions based mostly on continuous cash flows rather than income and assets. Borrowers should soon notice credit solutions offered by their partner marketplaces and e-commerce platforms.
TSPs and DDPs
TSPs and DDPs are specialised entities delivering innovative technology and data solutions to assist LSPs and Lenders. Borrowers are unlikely to be aware of these entities, but they are playing a crucial role in the overall ecosystem. Existing participants, particularly those in the fintech sector, will see new opportunities develop.
Sahay GST and Sahay GeM are two of OCEN’s earliest pilot programmes. Sahay GST provides invoice discounting solutions based on GST and other publicly verified data, whereas Sahay GeM is a government e-marketplace platform that operates as an LSP and provides credit solutions to small enterprises.
While these are just the beginnings, many more embedded finance solutions will emerge over the next few years. Platforms that offer small-sized sachet loans to their gig workforce, as well as consumer businesses that offer point-of-sale loans to paid millennials, will emerge as more market participants join and become a new cohort of lenders. For the time being, small businesses can look forward to new channels for the supply of personalised and inexpensive credit solutions from their platform, e-commerce, and digital partners.
Bottomline
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.