Embedded finance is fast growing as a game-changing opportunity for established FinTechs and up-and-coming startups alike. It is estimated to offer a market opportunity of over $7 trillion by 2030.
Historically, lending has been far from the leading segment of embedded finance because of its complexity. Establishing creditworthiness during the loan application process can be difficult on digital platforms. However, emerging new digital business models that use plug-and-play tech enable businesses to easily manage and sell even highly regulated and relatively complex services such as lending as an embedded service.
New digital models are set to optimize the Indian digital lending market with innovative products and services, increasing credit access to scores of new people and providing a boost to small businesses.
The digital lending market in India is expected to grow to $100 billion by 2023. A contributing factor is the untapped customer base of over 300 million Indians who have remained outside the formal credit market, resulting in a credit gap of $250B. Current rails for the flow of capital into this untapped market are broken. Recently digitized users such as small shop owners, farmers, traders, entrepreneurs of MSMEs, rural self-help groups, and gig economy workers are increasingly generating a digital transaction history that could be used to inform and build trust with financial institutions. However, the availability of appropriately sized, priced, and timed credit products is still not optimized.
IndiaStack brought the first paradigm shift in India’s FinTech market. Its disruptive innovation offers open APIs as public digital infrastructure such as UPI, BharatPay, BBPS, Aadhar, AEPS, eKYC, eSign, DigiLocker, FASTag, and GSTN platform. Open Credit Enablement Network (OCEN) is the next chapter in the IndiaStack story. It is an initiative to unbundle lending and enable the creation of specialized entities, each specialized at one part of the job.
The Open Credit Enablement Network (OCEN) is a framework of APIs for interaction between lenders, loan service providers (LSPs), and account aggregators.
The Open Credit Enablement Network (OCEN) was launched in July 2020 as an open protocol infrastructure that will mediate interactions between LSPs such as FinTechs and e-commerce players and mainstream lenders such as banks and NBFCs. OCEN provides a standard set of tools representing the various components of a typical lending value chain, allowing apps, marketplaces, and aggregators, among others, to ‘plug in’ lending into their current operations.
Under the new credit rails, OCEN will act as a common language connecting lenders and marketplaces to use and create innovative financial credit products at scale.
Currently, the Open Credit Enablement Network (OCEN) is running pilot projects across the country. Lending partners such as State Bank of India, HDFC Bank, ICICI Bank, IDFC FIRST Bank, Axis Bank, and Bajaj Finserv are onboard for this new credit rail. JustPay and OkCredit are among the FinTechs that are part of the pilot projects.
Embedded finance is expected to increase per-customer revenue by 2–5 times for companies. OCEN clears the path for embedded lending.
Once the Open Credit Enablement Network (OCEN) is completely launched, it is expected to ease MSME credit. However, the infrastructure has the potential for innovative retail micro-lending products and services as well. BNPL FinTech partnerships with BigTechs and e-commerce retailers demonstrate the success and reach of such a model.
RBI guidelines allow any approved entity to disburse loans up to INR 60,000 in a year to a person registered through Aadhaar OTP-based KYC process. Organization-centric data-sharing systems will also become individual-centric, an approach to promote user control on data sharing. Simple access or the control of user data will no longer be a source of competitive advantage. Institutions will have to create value through better analysis and more sophisticated predictions based on data and improve accessibility for users.
The Open Credit Enablement Network (OCEN) founding team shares the vision of making a billion people participate in the credit market. India has adopted a unique approach to economic development over the past decade by building public digital infrastructure, such as UPI and, now, OCEN, as a route to financial inclusion.
Governments offer digital infrastructure as a public good, which private players innovate to offer better services. Since the standards underpinning OCEN are open, the architecture can be applied to other countries—an institutional framework can be designed to globalize these standards and apply them to other markets facing similar challenges.
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