In episode 4 of Fintech-X podcast, Madhuri Arora is in conversation with Dr Nitish Jain and Dr Alex Yang, associate professors at London Business School specialising in supply chain issues and are discussing what is FinTech and what is its potential, what are the challenges it is facing, and its role in increasing the efficiency of supply chain finance.
Madhuri- Welcome back to another episode of FinTech X and today we are in conversation with two very special guests, Mr Nitish Jain and Mr Alex Yang, associate professors at London Business School.
India is a country with more than 1.3 billion people, is making a move towards a radical and disruptive tech finance Alliance. The alliance between technology and finance is upgrading all the while enhancing operations. Primarily FinTech is the combination of technology with finance, offering effective financial solutions than traditional institutions.
Thank you Alex and Nitish for taking out the time to do this podcast with us. If you could tell our listeners a little more about yourself.
Nitish- Sure. I’m Nitish, I’m a faculty member at London Business School in operations area. I have been here for the last five years. And before that, I had a mix of industry experience and an MBA from Indian School of Business. I primarily do research and supply chain issues. And Alex to you.
Alex- 1:03 Sure, Thank you for arranging this. And I’m Alex Yang. So I’m the Nitish’s colleague at the London Business School. I’ve been at London Business School for nine years already. And this year, I’m actually taking a leave from the school visiting Hong Kong. My main research area is in finance, and FinTech. So Nitish and I we have been in collaboration on a couple of papers on related topics.
Madhuri- 1:40 Thank you so much, Alex, for taking the time from a time off, actually. Thanks for doing this podcast with us so we will start with the questions.
Madhuri- FinTech has witnessed a remarkable growth in the market. What are your views on that?
NItish- Sure, yes, indeed, what we’re seeing is that FinTech is taking a remarkable uptake in the last few years, and if you see, last year globally almost 40 billion being funded, invested in FinTech startups, which is almost a 100% uptake compared to 2017. And what is heartening to see is that it’s not just the conventional strong areas of US and Europe. A lot of investment is also being done in China, India, South Africa, and so on. What is also interesting to see is that funding is now being concentrated on mature forms. That means investors have realised that certain business models when it comes to FinTech adding value to the business to the economy, and we see a decline in early stage funding. So the area is overall seems to be maturing. And I hope to see much more investments going forward in India.
Alex- 3:22 Yeah, I think as nitish was saying, I also see I actually I see huge potential in this area. And actually in all kinds of sectors within the financial service industry, from lending to payment, actually to insurance and investment management. So yeah, I think there are apps in we’ve seen a very balanced growth over different areas.
Madhuri- 3:56 So these days, as in I was reading a couple of months back, a lot of towns and cities are coming up, just solely focused on FinTech and blockchain technology. So what I am saying this is because I read somewhere that Barcelona was also focusing on creating this kind of city that it will be a very blockchain oriented and technologically oriented city.
Alex- 4:27: Blockchain is an interesting issue. Yeah, of course it comes with controversy. Yeah, we do a little bit of research on blockchain. I think it depends on the technology I don’t want to go to to sort of detail.
Nitish- Overall what you said, like each city is trying to build an ecosystem of technology and financial firms, right? And I think what everybody is recognised that FinTech can actually help lot of inclusion of players were not able to access conventional banking or financing solutions. And with that focus, I think we are seeing various cities, various countries taking the lead in that. Right. And I think, Alex, in China, also, you see that there’s a huge support for this.
Alex- A huge support for financial ecosystem. Absolutely. For blockchain, I think the view is a little bit sort of bifurcating itself. companies, in general support. This what we call a provision blockchain which is basically several companies support my consorting to sort on them. But for open blockchain like Bitcoin, I think, overall, the view is a little bit belak as far as I know, I think the Indian central bank is having some views on the Facebook Libra. Right? Right, right. So I can see that I think that that can be a little bit radical.
Madhuri- So if you could trace the groundbreaking moment of FinTech all over the world. Alex we will start with you, and then the Nitish you can follow?
Alex- That’s actually a good question. I think there are if we look at FinTech in the moment is dying in the modern time, I think we’ve had almost traced as fact, as to the 60s, where Visa, basically becoming has made transaction more electronic. And if we look at, for example, the application of advanced analytics, which we use more these days, that made me think for Capital One, you know, the American banks heavily use very scientific information based method to acquire customer, more like what we do today for the internet economy. And then of course, you have PayPal, a lot of people say is the first true FinTech company that actually enable online purchase. Absolutely take our online behavior.
Nitish- I’ll be complementing Alex’s view, what I think in the last decade, what has also accelerated the growth of FinTech startups is probably the, the accessibility of technology development. If you see cloud technology, for the last four or five years, the development cost for small teams have gone drastically down the now people can really not just focus on the hurdles of making a product. But what that product will serve to people are now focusing more on innovating, how to solve the problems of forms of individuals and so on. So that probably is one groundbreaking moment here. And I also believe in that line, the latest launch by Microsoft’s Azure in blockchain development that will again, take the intricacies use of blockchain and as a technology and challenges there like a black box, and people can just focus on how to use blockchain as a concept to start making more creative.
Madhuri- FinTech has its very own ecosystem, there are a lot of components. So when we say FinTech, when we say talk about FinTech, a lot of components that come within FinTech itself. So just give us you can shed some light on each component, and in classifying FinTech person to total comparison and then give us some brief information about each.
Nitish- Okay, like, how I see the ecosystem of FinTech is basically that there are three main players that need to they are their own active role. One is the regulator side, it’s a very important part of FinTech ecosystem. And the second is where the funds coming from, and they are still the major role is being played by financial institutes, or even the banks who are willing to share their funds so that the beneficiaries of FinTech ecosystem can gain access to these funds. And then the third is the platform and the providers, right, startups, as a main technology providers, who are connecting different stakeholders, by their product, via three main components that I believe are going to make this thing FinTech ecosystem stick and sustained, going forward. And each has their very important role. Just to talk briefly, We see, the regulators are still exploring what to do in this space, how to balance this innovation that is coming from these new startups, but also manage the exposure that may come with such innovative solutions. And the banking and financial institutions are still figuring out how to look to these FinTech startups and are these collaborators or in some sense also competitors, because we are kind of fighting for the same space or the same set of needs of the firms or individuals, right? So this is a very interesting, right now growth phase for this ecosystem. And I believe in the next five years, we will get to see how they shape up very well.
Madhuri- We can already see a major shift towards FinTech as in the amount of trust that people had in FinTech, what it was like five years before, or it is already shifted, like it’s already changed, the trust level is increased. And with more technology, better security, in terms of better programming and all that it’s just making a major shift towards FinTech. Alex, what would you say about the components of FinTech ecosystem?
Alex- That’s a good question. So just to expand, I think what Nitish was saying, regulatory master and the business themselves. So, if I may extend to the business part a little bit, I think, from the from the venture’s perspective, if you think about it, they thought they pretty much do three types of functions has two functions. One type of intake, they are basically, their role is to make traditional financial service more efficient. For example, traditionally, risk management has has to have a lot of human involvement, manual processing. Now, you can use the advanced analytics, that allows us to automate it, and we’re talking about maybe chatbots, compliment or even replay as part of your human customer represent service representative. So that’s the first role. And the second one is I think it basically you have a lot of companies that focus on enabling or craving, developing new products, or process KredX, for example, I think that’s based on technology that they have more flexibility so that they can develop new products to the bank, normally, it will be too costly for the bank. And the final thing, of course, is to better connect customers to different products, services, whether it’s existing service or new service you’re talking about. From a website that compares people mortgage rate, you say even people in finance, it allows investors to have access to opportunities, which they wouldn’t have before. I think older, this 3 areas are actually quite exciting.
Madhuri- What has been FinTech impact on the global market? As in not just to a specific area, but overall, globally? What has been kind of how is it having an advantage? How is it increasing the efficiency for other sectors as well?
Alex- I think in terms of FinTech’s impact, of course, the meaning of financial services to enable value creation, other effects, right, the idea is to lower the cost on the financial stage, such that more value can be created on the other side. From what we do, Tech and finance, we actually see huge value creating this type of impact road. I’m sure KredX has a lot of the examples on their hand, on their side. For our part, actually, this year I’m visiting Hong Kong, and I have quite some research collaboration is Chinese companies. They offer products that are similar, or I’ll say,with a similar theme of what KredX is offering. And in that, in that case, I would say a lot of example where Supply Chain Finance type of product enable companies to prepare inventory prepare a more substantial amount of inventory in order to meet demand. Especially when it happens. During this episode, situations where you have received the note. My example I could give you, I don’t know if you’re aware of this. So in China, the major online shopping day is a single day is a November 11 which is all single number. And during that day, the total transaction volume Chinese spent online is many times more than Black Friday in United States. So to prepare for that major event, all the small business needs to stock up. Traditionally, they wouldn’t be able to do that because of the financial constraints. And in China, in companies like Alibaba and finance or DD, they actually offer specialised programs rights before this type of events such that they enable this this type of operational improvements. So I think Yeah, there have been a lot of these types of instances it has been very useful.
Madhuri- So Nitish from Indian market point of view, what are your views on that as and how it is impacting the Indian?
Nitish- Well, I think that the advantages FinTech is offering a worldwide I think India remains a market which we can take advantage of that. What I’m seeing, interestingly is that we are kind of at the same pace, compete with global market in certain products. When it comes to FinTech, for example, lending or supply chain financing. But then there are other products which are enabled by either technology advancement or favorable regulations that you see in Europe, for example, FinTech solutions for savings, FinTech solutions for investment, which in India, there are not many such startups in this space, right? Or FinTech Solution for insurance products. These are all areas in us. Thanks to the complication of the healthcare delivery there. Again, people can see how FinTech funds are coming that are merging, insurance, payment, and the needs of a particular patient and making interesting products around that. And India to I think, there’s scope of merging FinTech and healthcare solutions, these are the products where India market is right, no lagging. But I’m pretty sure that in coming years, we will get catchup.
Madhuri- What challenges FinTech is solving in terms of Supply Chain Finance? How is it making supply chain demand a much easier process and how is FinTech contributing in that?
Nitish- So I think, in my view of if you look into the conventional options of raising capital, right by firms a supplier, usually banks, due to their cost of processing, high cost of processing will like to go and engage with the suppliers large scale, do bulk processing for them batch processing for them. What FinTech is enabled for suppliers is that even if I need a small cash right now, I can just discount one particular invoice. So they are splitting the bad processing the requirement of conventional financing system to more granular options available now. Right. That is the one big thing which is changing. And the second is, it is enabling transactions from both sides. Equally possible. The buyers can initiate funding of suppliers, suppliers can initiate funding requirement for themselves. So much more easier, convenient and accessible. That is what is the key distinction. I know there are a lot of bankers in my network. And then they see they basically comment, when we were in banks and evaluating companies for their credit score and so on, we had a strict standard process that will take a month or so. And we had a stringent requirement from the regulation point of view where we can put your money. And then FinTech is enabling innovative ways of evaluating credit risk. And simplifying the process of application and getting access to the cash. That is the main difference that I see, and the contribution.
Alex- I think what we Nitish said is absolutely true is one big part is FinTech has added a lot of flexibility in terms of product offering related to Supply Chain Finance. In the old days, when they actually work for a company need to implement factoring, for example, they are actually a lot of them require additional specialised people in their treasure department to actually do that. So it’s a huge transaction or Fixed Cost. Right now without technology was, for example, technology enabled reverse factoring, it has significantly lowered the barrier for them to do that. The other thing I think that is specific to Supply Chain Finance is actually because Supply Chain Finance is a very thorough physical process. And I think in the future, there are a lot of already some technology used then there. But I think the Internet of Things (IoT), this type of technology that better links the the online world, the online technology world with the physical world, or links the physical flow with the information flow. I see peak potentials there in term related to Supply Chain Finance as well.
Madhuri- So over the years, a lot of FinTech startups have emerged. So how are these startups impacting the growth of other startups and from other sectors also and how they are affecting other sectors was not just just within FinTech, a lot of startups have emerged. And they are kind of aiding other startups to come up. Right. So for example, for KredX only, we are kind of assisting other startups. And helping them with their working capital issues so they can you know, expand more. So what are your views on that?
Alex- I think this from my perspective, this is a little bit like the example I was I was getting earlier, right. So IT and Finance, of course, the FinTech companies again help a lot of startups at the early phase to buy their, basically, a more to their cash cycle on convert their cash a lot faster. That’s one factor. The other factor, I think, that was also interesting, because FinTech company, a lot of them are driven by a specific type of financial service products or solution that also enables a sort of technology that wallops related technology product, they’re not necessarily a FinTech company, but they are technologies. I think those are the two sort of the true definition. Right?
Madhuri- So Nitish, first, we are talking about how FinTech right now is impacting Supply Chain Finance. So I would like to ask you, what more scope does it mean to you know, optimize the supply chain process? Or, you know, make it better? Make it more efficient? Is there any more scope of FinTechs to make it better, or you can just, you know, work on what they’re currently working on.
Nitish- So I think the Scope is humongous. If you look at the number of trade finance worldwide,
right? It’s in trillions. There was an estimate, like four years back, it was a $2 trillion trade finance need worldwide. And even the, the conventional banks only touching part of it, not, we’re not able to serve the major need. And FinTech starters, we’re only doing 15 to 20%. And what is interesting to see is that, you know, although the banks in this entire system, were trying to cater to companies that are more reliable, which can be called like, investment great customers, right. And FinTechs, also, because right now, at this stage, they also don’t kind of cater to the same firms. If you say, you still want preferably an IBM at the other end, so that that retail investor or whoever is funding your platform or not like how much funding those invoices or knows that the other party will not default. Right. So everybody’s catering to the same set of big reliable firms. What about the midsize buyers and mid size suppliers that is not been catered? Can you find innovative solutions, because that is wise, then you can bring a lot of, you know, inefficiency, right now, because nobody’s willing to fund them nowhere, and for that they’re not able to grow. So, if we are able to find a product that can also cater to these mid sized firms mid sized buyers, mid sized suppliers, then we can enable them to grow faster, and that will be an engine for the economy.
Madhuri- Speaking on these lines only, penetration of FinTech is just not within the metropolitan cities but tier two tier three cities as well. What do you think in how many years down the lane will this be achieved?
Nitish- Well that will be a broad get guest, but I think what what what will allow that to happen that I can conjecture is probably you will need a better mechanism to collect more extensive data for these firms, which will enable a more better credit assessment or risk assessment or even a different approach of looking into these firms or the portfolio forms where you can try to bring down the risk exposure of these mid sized firms, there will be some product innovation. And there will be some technology penetration. Even an adaptation of technologies by these phones, because if you imagine this midsize SMEs, they don’t record their transactions digitally, right? Or a platform like KredX to go and convince them to start recording because that is a gold mine information. Right? I know your actions. I know your reliability. Now, there are as Alex said there are other technology firms not FinTech, like supply chain technology firms who are making products for these SMEs. But it’s a you know, it’s a it’s an ecosystem that is going to evolve over and those are the elements that are required, which will enable firms like KredX to cater to them. There’s a need, there’s a humongous need. And if you are able to somehow cater to them, it will be very much beneficial for Indian market.
Madhuri- As much as I can understand from this entire conversation that we are having right now is that FinTech essentially requires trust, especially for the MSME sector and the scope for MSMEs and the amount of MSMEs all over the world is huge. That is a sector that I think is quite untouched even today. So how essentially, FinTech gain the trust? How do I mean what should be the process?
Nitish- When you say trust of MSMEs on FinTech or you’re saying trust of investors who come to FinTech platform.
Madhuri- I think it is both ways because first taking the example of India, people are not very comfortable with technology, especially tier two tier three cities, right. So first getting them to adopt the technology, and then putting that trust to put money, which is a big, big thing. You know, rather than physical money, putting it online is something that people MSMEs, especially in India are fighting for it, I mean, if you have to change their mindsets completely. So this process, how is it? How will it happen? I think It’s just not in India, I think it’s everywhere, right Alex? It’s something that’s going everywhere?
Alex- Yeah, I think the interesting point, I’m actually amazed of how fast that people in China has adopted FinTech, per se, a payment for example, about 10 years ago, it’s very difficult for me to do online, any sort of online transaction, I credit card is not taken. Last year, I was basically I forgot I didn’t have any cash or credit cards. I survive for two weeks with only electronic payment. And even as you’re saying the Lower tier cities. I think China and India probably comparable, very peaceful area right? Here, even a lot of mom and pop shops, grocery shop, they accept electronic payments, it’s actually a lot easier for them to that they only require a QR code payment. I think that’s a if we’re talking about full financial inclusion, basically, you involve or you include most people who never have financial service. There are think payment is very important to go with the payment system allows you to acquire very valuable information. Which is further used for deposit enactment purposes. So I think people will move back. Admire as soon as they see more advantage I think people they will actually move back.
Nitish- Although I think complimenting to Alex’s point, I think what we will require is probably intermediate hand holding. So if you imagine in India, we have done innovation of cash on delivery, right? There was never been done in western ecommerce, yet, but we recognise that in India, even if you have access to plastic money, people were not willing to use that because of either a lack of trust in technological issues and so on. So then, we innovated with cash on delivery. And then people saw the value of it, probably not just because they’re willing to participate with classic money also, right?
So likewise here, I think, even if, let’s say, SMEs, I’m not the kind of right now really open to give access to their internal systems to our platform, can we find an intermediate step where there is you know, we are collecting information from them and the way they’re comfortable, but then feeding into the platform, right? That will be a little higher acquisition cost, a high operational cost, but the moment they will see the value of connecting to the platform, right? Ultimately, you’re going to give access to the working capital, you will solve the working capital problem. And they will be more willing to trust and join the platform. And I think again there are certain things that happen in parallel, hopefully the GST introduction, which is forcing these SMEs to be part of the digital age, they have to file continuously there. Again, I think change. But I think there are certain cultural issues that will require innovations. And that’s why probably India and China got cash on delivery, which was done by the western part, right.
Madhuri- In India, not just the companies, but the government is also working towards financial inclusion and Digital India right now. So if you could just briefly define the challenges that Fintech are facing these days, I mean trust of course we just talked about but apart from that.
Nitish- So I think in my view, the biggest challenge that FinTech system is going to see in coming years is how the regulators decide at what level they want to monitor. And where is exactly the role they see, as I said earlier, FinTech startups have a very important role of innovation, and breaking the legacy issues of conventional financial Institute banking, which was dropping a lot of people to participate, which was stopping a lot of inefficiencies to go away, right. But there is always a balance that needs to be made between how much freedom you want to give, you might have heard about the company Robinhood in US, who actually wanted to innovate a credit and savings product, but they were a little too eager. And the regulators had to come hard on them, and stop that extra friendly approach to customers, right. So that is one thing because even if if you see that a lot in India itself, you see that a lot all of startups coming and trying to take advantage of lending products, right? example moneytap, you have the salary coming in, I’m willing to pay money to you, right, that brings a different kind of risk in the system, which we are not able to quantify. Right? None of us know, how will that unfold? Right? So, and that was one of the, you know, origin point of even 2008 crisis, people went real aggressive on credit products this is a big challenge. And that regional growth group, they’re doing bits and pieces here. But nobody has taken a lead and clearly defining so there’s no template that we can one can follow.
Alex- Yeah, I think my concern is actually a little bit related to what Nitish was saying. Overall the financial industry, I’m a little bit concerned about the resilience of this Fintech Startups. Afterall I think most technology Fintech firms, they’re like technology firms they have, in general, there is a very sort of volume treatment sort of way to to think about how these kinds of market but for financials service, is you have to go through the cycles to actually see, but I think it is a talent, but it’s actually also opportunity for the big firms who are more resilient, actually if they can survive financial circle economic circles.
Madhuri- Nitish so recently, if you would have read, so IL&FS fiasco happened. affected a lot of I mean, the trust factor for Fintech’s itself, and people putting their money on that was affected a lot. So I mean, how is it going to be because still something after the other is coming up? Right?
Nitish- I think that’s why what Alex was saying is very relevant for FinTech firms. At the end of the day, these the FinTech forms see themselves as a technology provider technologies enable solutions. Finance has been, then there’s a very important need to balance the risk side when you offering financial services. And some companies do much credible job of that being careful. But you don’t know what is that? For me, when I look into the different, let’s say lending startups in India, right? Crazy bee, moneytap. These are black boxes to me, they do provide me some assurity that they’re using machine learning and advanced algorithms for this. But do I really want to participate? Because they are a platform, they are lending to you, but they need some money. Right? On with exposure I’m taking? It’s not very clear. And that is something as Alex said we have to see a cycle I think some somebody may fail, they will be an event. And then people will see okay, at what level we need to balance the equilibrium need to come. Right now it is becoming too aggressive on one side.
Madhuri- So coming to the last question. What could be in store for Fintech? What Hope does it hold? Apart from that? What steps should be taken to overcome the hurdles that FinTech is currently facing? What more could be done?
Alex- Well, for me, I think this is one word is financial inclusion. Yeah, technology should enable lowering the final transaction cost. And It should most benefit to the what we call the long tail, right? Whether you can look at Supply Chain finance so those are traditionally reverse factoring the smart companies are only willing to include those their large strategic suppliers. When we look at a dynamic discounting, which is more technology driven, that enables them to include a long tail of their suppliers. When we are talking about the consumer side, in rural areas of people could definitely benefit from mobile payments from more technology digital bank?
Nitish- I think adding to the Alex point of inclusion is one definitely objective that FinTech firms will try to meet. The other thing is what I see again, from the Indian point of view, I’m curious to see when something called Super app will come and emerge in India, if you see those other successful models in other regions. Last year, if you follow the South Korea market the Toss in Fintech has become a Super app from payments to savings product to insurance products to Trading kind of thing, right. So in India, we have seen PAYTM as of payments option but how will it grow and start offering more and more products, but then there’s an advantage of scale. And then there’s also advantage of trust, you know, once when I trust one brand, then I can trust other products also, and that will also drive inclusion in various aspects of offerings that FinTech can offer, right? Yeah. Somebody becoming Tata of FinTech, right. Now, TATA’s a brand that you can become two-things we need to find a Tata for Fintech. And probably, that will also Yeah, that is a few choice at least I see in the Indian market.
Madhuri- Thank you Alex and Nitish for giving your time. So you just want to like conclude something or say just, you know, you want to add something that I might have missed to ask a question or something that people should know?
Alex- Yeah, to summarize, I think FinTech is absolutely an area that I’m very passionate about. And especially for the emerging market. I see huge potential for business for individual customers. So yeah, really excited by what is in store.
Nitish- I think I’m very excited about how the FinTech will evolve in Indian market, and how the different how the Indian government, which I’m very hopeful, We will take a call on it, they are there’s a strong leadership there. And they can set the example of how they should be looked into, they can unlock the value. And, I believe whatever I’ve seen and interacted with the leadership, it at KredX. I’m very pleased by the balanced approach they have taken or they take in defining their products to balance the needs of all stakeholders and balance that exposure they’re giving to their investors.