"Lending is a feature. Not a product. Almost all and
any distribution platforms with unique and rich datasets can unlock
lending and win big."
Kunal Shah, on Twitter
A fintech entrepreneur walks into a bar. "Hey, what can I get you today?" asks the bartender. The entrepreneur smiles, "I'll have my usual – a Dataquiri."
Data, as Kunal Shah notes, is the fuel that allows any platform (with distribution) to switch on lending as a feature. Without it, fintechs can't expand credit access or optimize customer experience. Which leaves us with cookie cutter financial products that exclude many, function for some and delight no one.
India's data protection bill is snailing through the Parliament. But the RBI is already stepping in. Bit by bit, it's regulating fintech's use and access to data. Like the new card directions that prohibit co-branding partners from accessing transaction data (more on this in our main course story on the new restrictions). We hope the RBI strikes the right balance. Otherwise, lending may not be a feature that any data rich platform can unlock. And the Indian fintech industry may miss out on its data with destiny.
Now that we've got the bar jokes and customary 'data' puns out of the way, let's start with our FinTales menu.
Appetizers: snackable updates about recent fintech
Main-course: a meaty story about data sharing under RBI's new card guidelines. And our conversation with Nitin Gupta, Founder and CEO, Uni about building new-age credit products.
Palate cleanser: a star-gazing break.
Dessert: sweet news about dynamic NFTs which evolve over time.
🏦 Aye for banks to go digital, but nay to digital banks
RBI's reportedly not keen to issue full-stack digital banking licenses (to fintechs). It'd rather have existing banks go digital. This may be one of the reasons that prompted the RBI to propose the digital banking units framework. Industry bodies like NASSCOM are also in favour of this approach. Reasons: lacklustre performance of small finance banks, BharatPe debacle raising governance concerns with fintechs, fear of licensing process turning into an exit vehicle for investors, and keeping the entry barriers for banks higher.
📚 CERT-IN-ly going after crypto
CERT-IN has directed virtual asset service providers, virtual asset exchange providers and custodian wallet providers, to compulsorily maintain all information obtained as part of KYC, and transaction data for five years. This is a curious development. One (even though the notification says so), the Ministry of Finance is yet to define who virtual asset service providers are. So, it's (at this moment) unclear to which entities the direction applies. But it's likely to cover entities like crypto-exchanges, crypto-brokers, and crypto-wallet providers. Two, it's ambiguously worded. Its KYC mandate may arguably apply only to those businesses which conduct KYC. Consider that, currently, virtual asset service providers are under no obligation to do so. Of course, the Government's recent posturing on crypto suggests that virtual asset businesses may find it worthwhile to proactively (or reactively) comply with the directive. Add to this the murmurs about how the directions generally are excessive in scope, and inviting tech industry pushback. All eyes appear set on the Indian crypto-verse, as our next story shows.
🔍 The taxman isn't done with crypto-traders, yet
If you thought advanced DeFi products could escape the taxman's gaze, think again. The Central Board of Direct Taxes (CBDT) is reportedly considering a 20% TDS and 5% equalization levy on crypto-transactions where both parties aren't confirmed Indian residents. If the proposal is implemented, Indians who invest in DeFi protocols may have to pay this additional tax on their interest earnings. With regulatory clarity nowhere in sight and choking taxes galore, crypto-investors in India increasingly find themselves in a tight spot.
💳 So long, and thanks for all the data
Last month, RBI notified the directions on Credit and Debit Cards. In these directions, it asked co-branding partners to keep their hands off card transaction data. The RBI has, this time, gone straight for the fintech jugular – access to data.
A patchwork of regulations govern the fintech space. For example, no single direction governs digital payments or lending. Instead, multiple regulations – issued at different points in time – govern these products. Some regulations read in harmony, others don't. And the recent card directions (which bar co-branding partners from accessing the transaction data) is an example of the latter. Here's why.
These are umbrella directions that govern regulated entities (like banks, NBFCs, non-bank PPI issuers, etc.). Each time these entities outsource any of their functions, they must abide by these directions. For example, a bank that outsources its customer support functions. Or, a more recent market practice, where a regulated entity partners with a tech company to build an app, acquire customers or market its products. Like MakeMyTrip ICICI Bank Credit Cards. Each of these service providers perform a function for the regulated entity – which the regulated entity doesn't want to (or can't do) on its own. The regulated entity can't however outsource its core functions – like making the decision on whether a borrower is creditworthy. RBI doesn't want an entity which it doesn't regulate taking these critical calls.
New card directions which bar access to card transaction data
These rules apply to a sub-set of outsourced service providers – a card issuer's co-branding partner. Like MakeMyTrip (in the earlier example) – which co-brands the credit card that ICICI Bank issues.
A co-branding partner needs access to customer data to perform its functions. Both, the outsourcing directions and new card directions regulate this access. The new card directions prohibit a co-branding partner from accessing customer transaction data. But the outsourcing directions don't. They allow the co-branding partner to access this data on a 'need-to-know' basis. This is where the card directions and outsourcing directions are not harmonized.
The new card directions are also not attuned to market reality. The outsourced service providers are becoming more interwoven in the fabric of the payments value chain. Let's take the example of technology service providers like M2M, Zeta and Setu. They design the tech-stack for the card issuers. And assist in transaction processing. These tech players need access to card transaction data to provide services. In most cases, their logo appears on the cards. So, they also act as co-branding partners. Now whether these players can access card transaction data is open to differing interpretations.
But an even bigger concern is the RBI's intent to put an embargo on outsourced service providers from accessing transaction data. It's likely triggered from events like misuse of data and identity theft on the Dhani App. RBI wants to prevent misuse of card transaction data. But blanket prohibition of the kind will inhibit fintech innovations. As RBI has itself stated on multiple occasions, fintechs are responsible for many data-fuelled innovations. Transaction data gives important insights to fintechs on strengths and pitfalls of the tech-infrastructure. It aids in detection of frauds, and better creditworthiness assessment. Regulated entities often rely on their service provider for these tech-enabled functions.
RBI must consolidate and modernise the regulatory patchwork which governs tech-outsourcing arrangements. It has already proposed to issue new Master Directions on IT Outsourcing. The new master directions can prescribe activity-based regulations for different outsourced functions like software-based services and customer-facing services. The directions can be graded according to the criticality of the function outsourced. A fintech which designs and manages chatbots for customer services can be subject to light-touch regulations. On the other hand, a fintech, which designs and manages software for payment processing can be subject to stricter regulatory standards. For example, RBI can ask fintechs like Zeta, M2M and Setu to adopt higher data security and confidentiality measures. This will prevent data misuse, without hampering innovation.
🧩 Uni-que fintech solutions
Over the last decade, Nitin Gupta, Founder and CEO of Uni, has had a front row seat to the evolution of the Indian fintech industry. After being a Co-Founder at PayU and heading Ola Financial Services as its CEO, he launched Uni to disrupt the massive credit card market in India. We recently spoke to him about his entrepreneurial journey, product philosophy and market views. Read on for highlights from our conversation.
The origin story
Nitin developed the idea for Uni when he saw that many high-income professionals also face a liquidity crunch a few times a year. The reasons for this could be umpteen – medical emergencies, house renovation, weddings, school fees and so on. But since these are short-term expenses which aren't high in value, people rarely take a personal loan for them. "When people have unexpected expenses, they borrow from friends and family or pay 40% interest to delay credit card payments" he elaborates. He believes that 1/3 cards like the Uni card can solve these immediate liquidity problems in a more convenient and affordable manner. It's commonly believed that fintech start-ups target sub-prime customers who can't get loans from banks, but Uni is following a different strategy. Its 1/3 card is solving for the cash-flow problems faced by well-off, high credit score customers who don't have the right products.
The case for 1/3 cards
This is Nitin's fourth time building a product for the credit card market. When asked why he didn't choose any other product category, he responds that the real question is why other players aren't going after the credit card market. He's bullish on this segment because of its sheer size. "We're trying to tap the same market as credit cards. The TAM is huge. There are 70 million credit cards in India. 1 million credit cards are valued at $1 billion. So, it's a $ 70-billion market. And this market will triple in size in the coming years. I've never seen a TAM this large" he suggests.
Nitin's clear that BNPL products like 1/3 cards are loans. "It's a loan disbursed into a prepaid card. We've made loans work over the Visa network" he adds. But he clarifies that BNPL products address customer needs which aren't being met by traditional credit products. That's why a large number of customers opt for the Uni card despite having a credit card. For instance, the Uni card lets customers split their expenses in three monthly installments at no extra cost. And customers can also receive cashbacks and rewards for timely payment. According to Nitin, the interchange fee earned on transactions made through a 1/3 card helps cover the cost of providing interest free EMIs to customers for three months. He also mentions that Uni sends timely reminders to customers to ensure they don't lose out on benefits or incur late payment fees. He characterizes promoting healthy financial habits through effective nudges as an essential part of being a fintech business. Technology, he notes, exists to help users become better versions of themselves.
No one-size fits all
During his early days in fintech, Nitin believed that it was possible to build a single product to capture market share. But his biggest learning has been that there's no single product which can solve all problems for all customers because customers have diverse needs. Instead, fintech entrepreneurs must find micro-problems afflicting different customer segments and create relevant products to solve them.
Uni is best known for its 1/3 card. But Nitin emphasizes that the 1/3 card is part of a larger vision. "The 1/3 card is our first product and we have a dozen more in the pipeline. Different customers have different needs: cash flow, affordability, social signaling or rewards. We want to build products that are relevant for each segment" he explains. He cites forex mark-up rates as an example of a feature which isn't relevant for most cardholders but critical for a small segment – frequent international travelers.
The start-up edge
While working at a large company with an established product has its benefits, it can also be a drawback. During his time at Ola, Nitin realized that there are limits to how much you can rely on the distribution channel for an existing product. "I built several products at Ola like wallets, BNPL, co-branded cards and insurance. I found that if you offer a contextual financial product which is linked to the main product, the adoption rate is very high. But for unrelated financial products, the existing distribution channel is of limited use" he remarks. With these limitations, he felt that starting from scratch as a nimble start-up would be better. Achieving scale, he insists, can also affect service quality. He argues that disruptors eventually become incumbents and create opportunities for new start-ups to capture market share by providing better services.
We certainly hope that Uni as a young disruptive start-up proves Nitin's thesis by becoming a market leader. And lives up to its namesake by building unique products for unique customers.
Palate Cleanser 🍧
After exploring the fintech universe, try the real one. Take a tour of 100,000 neighboring stars with this Chrome experiment.
🎨 Dynamic NFTs redefining
On 1 May 2007, Michael Joseph Winkelmann created a piece of digital art. And he continued doing that every day. Even on the challenging days, like his wedding day or the day of his children's birth. 14 years on, he decided to create (as ironic as it sounds) a one-of-a-kind NFT: a collage of his first 5000 pieces of digital art. You'd probably know Winkelmann by his professional, more familiar name – 'Beeple', and his NFT– 'Everydays: The First 5000 Days', wasauctioned by the legacy auction house – Christie's, for a whopping $69 Million in 2021. Critics soon pointed out how NFTs were a fad. And why physical artwork was obviously better than owning a piece of code on a distributed ledger.
Later that year, Christie auctioned Beeple's 'Human One' – the first portrait of a human born in the metaverse. This was a different kind of NFT. Unlike Beeple's previous work, which was static, Human One was dynamic. What does that mean? That Beeple has remote access to Human One and creative control of its content. And with that, the ability to update it, and evolve its message and meaning over time.
A dynamic NFT, which offers the ability to change it over time, may be significantly more valuable than static artwork. And it might demonstrate the true, real potential of NFTs as art. While 'Everydays: The First 5000 Days' willlook and remain identical, whatever the circumstance, 'Human One' will not. For now, Human One uses the colors of the Ukrainian flag. But the artist's ability to change it over time adds meaning and depth. In a recent interview to Decrypt, Beeple summarized this beautifully, when he said, "This work [Human One] feels like more of an ongoing conversation than a statement."
Add to that another interesting development coming out of the UK. In a first, a UK Court has considered NFTs as legal property, which may allow victims of NFT thefts to confidently apply for injunctions to recover their property – Er... NFT!
P.S. We are thinking of creating and auctioning a dynamic NFT – to perhaps reflect Indian policymakers' sentiments towards blockchains and cryptocurrencies – any takers?
That's it from us.
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See you in June.
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