Fintech, the inseparable atom of the digital space, rages across the banking and financial services industry – loans, investments, insurance and, above all, payments, providing enormous convenience to users but still leaving a trail of warnings.
As finance becomes increasingly digitalized, the emergence of smart technologies such as artificial intelligence has accelerated complex processes and brought customers closer to new services. These have indeed spawned a whole generation of instant products: the three-minute loan or the free mutual fund or their equivalent in other spheres have democratized financial services.
It has also resulted in what strikes me as some mistaken beliefs and incorrect ideas; Increasingly, the market has looked into the theory that fintech providers are ‘Too Connected To Fail’, which is perhaps a derivative of the slightly outdated notion that permeates the BFSI industry – ‘Too Big To Fail ”.
The fact that digital applications bring issues such as cybersecurity to the fore is not on the agenda of our discussion. I can only point out that many reviews have already been done on this front and consumers are increasingly aware of phenomena such as spam and phishing. Criminal intent is a hot button that generates debate everywhere, especially in emerging markets like India where victims of cybercrime are often too vulnerable.
I want to change the course of our narrative today by referring to other aspects of fintech that users need to be aware of – costs, for example. Fintech, as we will no doubt appreciate, cuts distances and expenses significantly as the issue of physical installation and layering is dealt with effectively. Having said that, I will draw your attention to the costs associated with technology services like payments and loans. These are generally the responsibility of the customer.
Consider a situation where a FinTech-focused loan (yes, the type of three-minute loan I alluded to earlier) is easier to obtain than a loan offered by a conventional bank. No paperwork, no processing fees, etc. Suppose this makes the deal cheaper by a few basis points in comparison. For the affected client, the facility will make sense if the interest payable is also lower on a lasting basis (i.e. throughout the term of the loan until repayment).
The matter can end there, leaving no room for further debate, especially if the loan is a one-off event. In real life, fintech companies also deal with low cost exposures. One loan can lead to the next, and rollovers can occur quite frequently.
There have been many instances in the past where a repeat customer section has gone too far. In a situation where access to services remains relatively easy, excessive borrowing (and overspending, if you allow it) is also quite common. One loan after another can have an aggravating effect on costs.
You will agree that such a phenomenon may occur more frequently on the lending front and be relatively rare in areas like stock brokerage or investment advice, where fintech also has its positive applications. Loans can indeed create quite a fuss as it actually did a few months ago in India, resulting in regulatory censorship. I am of course referring to the many loan apps that people (mainly the young and the reckless) had downloaded as a result of Covid-19.
The famous “payday loans” are an example elsewhere in the world. Technically speaking, these are small loans (often given at high interest rates) that are supposed to be repaid when borrowers receive their next installments (read: wages). They appear almost like cash advances given for very short periods of time, usually based on income levels.
An informal search of the World Wide Web will lead you to a vortex of information and various companies offering such short term facilities. Away from the Indian coast, for example, is an entity called CashUSA, which clearly has a network of lenders offering rates ranging from 5.99% to 35.99% for loan terms ranging from 90 days to 72 months. . I admit, however, that this is not a local player and that the name has been mentioned here only as an example.
However, the moot point is that such a company can facilitate a loan quite quickly. And, on the due date, it “can just electronically withdraw money from the same account they originally deposited your funds into.” Period.
Here is a list for fintech users
- It’s important to understand that all kinds of fintech players are not for you. To simply jump on the bandwagon, to unwisely sign up for loans and other services, takes more than courage – sometimes it means a lack of discretion.
- Take a close look at the costs, especially if loans are your primary focus. What types of interest will be charged? What penalties can be imposed in the event of default or even early exit? Is there a rollover service charge? These are crucial questions that await answers.
- Using fintech apps to invest in next-generation assets like cryptocurrencies should be done after resolving any compliance issues. A clear understanding of the risks is more than necessary.
- The same logic applies to buying and selling traditional assets like stocks. If you are using the services of a fintech player who offers securities brokerage services, please ensure that they have fulfilled all the conditions set by the market regulator.
- Strictly follow all security protocols; the idea is to protect yourself against online fraud. Of course, the use of secure networks and personal devices is recommended. “A victim of her own impetuosity” is an eloquent description – even in the digital world, uncomfortable is the head that wears such a crown!
The writer is director of Wishlist Capital Advisors