Frictionless credit refers to financial services that provide easy, instant access to credit with minimal barriers or hassles for the consumer. As digital transformation accelerates across India’s financial sector, frictionless lending is emerging as a major innovation that can greatly impact the economy and day-to-day lives of Indian consumers.
What is Frictionless Credit?
Frictionless credit eliminates the traditional friction points experienced when consumers borrow money, allowing approved applicants to access funds instantly without paperwork or long wait times.
Key features of frictionless credit include:
- Instant onboarding: Consumers can sign up and get approved for credit lines within minutes, often directly from a mobile app or website. No lengthy applications or verification processes.
- Digital disbursement: Funds are immediately credited to the borrower’s account electronically. No need to visit a branch or wait for checks to clear.
- Data-driven approvals: Sophisticated algorithms analyze thousands of datapoints from financial transactions, social media, ecommerce activity and more to instantly evaluate creditworthiness.
- Flexible repayment: Repayment schedules are automated and flexible, often linking directly to the borrower’s bank account. Options like “pay as you earn” allow repayments to scale with income. Also digital payment system due to the rise of UPI will allow lenders to automate repayments.
The Rise of Frictionless Credit in India
Several key factors have driven the rise of frictionless lending in India:
- Financial inclusion: Nearly 190 million Indian adults lack access to formal credit. Frictionless services expand access.
- Tech adoption: With over 600 million internet users and growing smartphone penetration, India has a digitally savvy consumer base ready to adopt new financial products.
- Data revolution: India’s unified payments interface (UPI) and digital locker systems along with ecommerce are generating an explosion of digital data that can enable credit underwriting.
- Supportive regulations: Regulators like RBI have introduced policies like account aggregator frameworks and open banking standards to expand access to digital financial services.
- Market demand: Younger, urban, middle-class consumers want fast, convenient access to credit aligned with digital lifestyles. Frictionless lending delivers speed and flexibility.
Key Players in India’s Frictionless Credit Ecosystem
A range of fintech startups, traditional banks, and shadow banks are rolling out innovative frictionless credit products across India:
RBI
The Reserve Bank of India (RBI) recently announced an ambitious initiative called the Public Tech Platform for Frictionless Credit (PTPFC) under the aegis of RBI Innovation Hub (RBIH). PTPFC aims to develop an open-source, public digital infrastructure to enable seamless flow of credit to various sectors of the economy, especially small businesses and farmers.
Fintech Lenders
- LazyPay: Offers pay-later financing and instant short-term loans. Over 5 million customers.
- KreditBee: Uses ML on thousands of data points for custom credit lines up to ₹2 lakh.
- ZestMoney: Instant credit approval and EMI financing for ecommerce transactions.
Banks
- ICICI Bank: Offers 60-second approval for pre-approved customers up to ₹20 lakh via its internet banking platform.
- HDFC Bank: 10-second personal loans up to ₹15 lakh for salaried customers on its PayZapp mobile wallet.
Shadow Lenders
- BharatPe: Provides merchant cash advances and business loans with fast approvals based on POS transactions.
- LazyPay: Has partnered with RBI-registered NBFCs to offer instant business loans up to ₹5 lakhs.
- Kissht: Uses 10,000+ data points for instant credit lines and BNPL financing up to ₹3 lakhs for consumers.
Benefits of Frictionless Lending
Frictionless credit introduces major benefits for key stakeholders:
Consumers
- Meet emergency needs or seize opportunities without delay
- Avoid stressful application processes and long wait times
- Access tailored credit products aligned with unique needs
- Build digital credit history to qualify for more future credit
Lenders
- Tap into massive underserved market and expand customer base
- Leverage data analytics for faster, low-risk automated underwriting
- Offer on-demand banking aligned with digital lifestyles
- Build brand affinity with seamless user experiences
Economy
- Promote financial inclusion and access to credit
- Empower entrepreneurship and small business growth
- Increase consumer spending and cultivation of credit discipline
- Drive efficiency through digitization and automation
A PWC report estimates frictionless lending can expand credit access to 90 million new consumers, and generate over $1 trillion in loans disbursed by 2023.
Challenges and Risks in Implementing Frictionless Credit System
However, frictionless lending also poses some notable risks and limitations:
- Defaults: Relaxed underwriting can lead to higher defaults if creditworthiness is not accurately evaluated. This can create loan losses for lenders.
- Over-borrowing: The ease of accessing funds may encourage over-borrowing and exacerbate debt burdens for consumers.
- Data & security: Heavy reliance on consumer data raises privacy concerns, and digital systems increase vulnerabilities to cyberattacks.
- Compliance: Fast-evolving digital lending models risk non-compliance with regulations. Conflicts with traditional legal frameworks.
- Digital divide: Access limited for Indians without smartphones or digital finance literacy. Could exclude rural, elderly, and lower-income demographics.
Responsible frictionless lending requires balancing innovation with prudent risk management, security, and ethical use of consumer data to create an inclusive financial system.
The Future of Frictionless Credit
Multiple trends point to frictionless lending seeing massive growth and adoption in coming years:
- New entrants like Google Pay and WhatsApp launching instant lending features leveraging huge user bases
- Traditional banks forming partnerships with fintechs to offer frictionless products and improve UX
- Evolution of credit decisioning from transactions to full behavioral data analysis with AI/ML
- Integration with ecommerce and digital wallets providing real-time financing at checkout
- Growing acceptance especially among millennials and Gen Z as the “new normal” way to access credit
- Regulators introducing frameworks for real-time authentication, secure data sharing and digital KYC
- Increasing use cases beyond consumer credit like frictionless SME lending, microfinance, supply chain finance etc.
Conclusion
Frictionless credit represents a game-changing opportunity to close India’s massive credit gap, accelerate financial inclusion, power entrepreneurship and energize consumer demand. However, responsible innovation is vital to create a truly inclusive system. By harnessing the country’s technology infrastructure and talent pool, frictionless lending can transform credit in a socially responsible way – while managing risks – to unlock economic growth that benefits all Indians. Adoption of ethical, secure and compliant business models will be key to realizing this vision.