Democratizing Credit: ONDC for Financial Services vs OCEN4
A closer look at the emerging ecosystems in India that are aimed at rapid expansion of credit among the underserved communities
If you are like me who is passionate about building systems that help deliver affordable credit for underserved communities in India and have implemented solutions using India Stack in the past decade, you are in for more treat in the coming years.
A few years ago, KYC risk and Cash risk used to be the biggest pain-points for lenders focusing on this segment. Most lenders have sorted them now with the help of KYC validation solutions, Digitally signed agreements and Payment Rails for disbursements & collections.
The architects of India Stack are now gearing to help the lenders in two other important areas - Underwriting and Distribution. They initiated projects such as Account Aggregator (AA), Open Credit Enablement Network (OCEN), Open Network for Digital Commerce (ONDC) in the last few years towards addressing these two problems. These initiatives are ready for prime-time and may hit mainstream in the next 6 to 12 months.
Account Aggregator (AA), in a nutshell, helps an individual gather his financial data such as bank transactions, mutual fund investments etc. all at one-place and share them securely to a lender for the purpose of availing a loan. Until now, the underwriting decisions in this segment were made primarily using credit bureau reports, personal discussions & field visits. With the proliferation of UPI transactions among the underserved communities, the lenders have the opportunity to assess the cashflow & the borrower’s capacity to repay objectively for the very first time.
The newly launched credit distribution ecosystems such as ONDC for Financial Services and OCEN4 seem to hold the promise of democratizing credit in the next few years. While both of them leverage the same building blocks for KYC validation, Digital Documents, Digital Payments & Underwriting there are differences in the way they are approaching the credit expansion challenge.
ONDC for Financial Services is based on Beckn Protocol. Beckn Protocol offers a simple buyer app & seller app construct for information exchange between two organizations. The Seller app, in the case of ONDC Credit Ecosystem, should be a regulated lender (NBFC / Bank) and the buyer app can be a marketplace app / any other app operated under Indian laws. The buyer app will pass the customer loan application data to the seller apps (lenders) and facilitate the AA consent for the lenders to pull the customer transactions from Account Aggregator. The seller apps (lenders) will do credit bureau soft-pull and return loan offers to buyer app for the customer. Once the customer accepts an offer on the buyer app, the seller app will manage the loan origination process - KYC Validation, Underwriting, Document signing, Collection (eNACH setup) & Disbursement. While the loan origination process is underway, the Buyer app will be able to retrieve the status of the loan processing from Seller App and pass it to the customer. Once the loan is successfully processed, the buyer app will also be able to facilitate loan prepayment. The ONDC credit ecosystem is now live with Unsecured Personal Loans and GST Invoice based financing. They will add more products in the coming months.
The OCEN team, after a few years of research & pilot, have come to the conclusion that the short tenure, small ticket size loans are the need of the hour for the underserved and the unserved population. Their premise is that if the collection can be controlled (via escrow account) and purpose can also be controlled, then it is possible to have a very low collection cost keeping the delinquency under check. Loan origination can be facilitated with the help of local Borrower Agents (BA) who gets fees from the customers (and not lenders). Besides the Borrower Agents and Lenders, OCEN4 brings other stakeholders such as Derived Data Partners, Collection Partners and KYC Partners. From a technology integration standpoint, the OCEN team has created well defined API constructs. Sandbox will be available for the Network Participants to test the solution in the coming months.
A few thoughts on the two networks and the road ahead.
ONDC Credit ecosystem is focused on ‘Selection’ at-the-moment while letting the lenders manage the core operations such as underwriting & collections
OCEN, on the other hand, appears to have a ‘Collections First’ thinking from the beginning with deeper MSME focus supporting assisted journeys
It looks like both the networks will broadcast the borrower application to all lenders in the network which may result in unnecessary marketing calls to the customer. This can be avoided.
Lending business is a ‘Trust’ business. One of the reasons why Microfinance is so successful in this segment is because of their physical branches and officers showing up at customer’s doorstep month on month. Both networks need to come up with a digital equivalent, such as sound rating system, that establishes trust.
Meanwhile several NBFCs serving the last mile are also transforming themselves to offer products digitally using their ‘phygital’ approach. Also several fintechs, who went with a tech-first approach are aligning themselves to market realities.
Today, in the credit space, many operators spend a lot of time & resources in creating custom technology integrations with partners. Once these standardized rails emerge, the operators do not have to reinvent the wheel every time.
Overall, it will be very exciting to see how all these efforts come together in the next few years. There will be mistakes like the recent BNPL spurts resulting in high NPA. But I’m very hopeful that we will reach a equilibrium where we can collectively deliver affordable credit for the underserved at optimal costs for the operators in this decade.