Home >Money >Personal-finance >3 major setbacks for fintech industry

Not everything went as per planned for the fintech industry. Sectors including lending, payments and financial services had some setbacks in 2018. Whether it is the Supreme Court verdict on use of Aadhaar for authentication or the liquidity crunch in the system, all was not good for the industry.

Here are three major setbacks the industry saw this year:

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In September, the Supreme Court (SC) delivered a judgement about the constitutionality of Aadhaar. While Aadhaar was formally recognised, section 57 of the Aadhaar Act was struck off. The judgement has serious implications on financial services industry. Now, consumers cannot be asked Aadhaar for verification by private entities.

The whole premise of providing digital and seamless service by fintech companies, telcos and banks through frictionless on-boarding of consumers without meeting them in person for verification couldn’t work anymore. Imagine, whether Reliance Jio could have on-boarded 150 million consumers in six months without the use of Aadhaar? The judgement impacted delivery of financial services across verticals including bank account opening, loans, mutual funds and insurance. Though the judgement allows voluntary use of Aadhaar by consumers, there are multiple interpretations of it and the Unique Identification Authority of India (UIDAI) has resorted to safer approaches to avoid any more legal battles and stopped services to private entities altogether.

Liquidity crunch

Another key setback to the financial services industry was the IL&FS crisis. It defaulted on inter-corporate deposits and commercial papers (CPs) or borrowings. Rating agencies downgraded ratings of CPs issued by IL&FS. However, it was considered an isolated event and business of other NBFCs and fintech continued as usual. But was it really isolated event? In September, shares of Dewan Housing Finance (DHFL) crashed on concerns that it could default on outstanding bond re-payments, with many in the equity markets believing that exposure to the troubled IL&FS could further stretch the finances at the mortgage lender.

One thing led to another. Investors in equity markets and bond markets preferred to wait before subscribing to rollover of CPs of NBFC. CPs are an important funding source for all NBFCs in India.

This whole issue highlighted the asset liability mismatch in NBFC industry. It directly impacted all fintech companies involved in lending businesses as NBFCs were a major funding source for all lending fintech companies. Till date, lending fintech industry is crippling with liquidity issue and everyone is trying to recover.

e-NACH comes to standstill

The third key setback is the most recent and after-effect of the apex court judgement. e-NACH, which was the primary mode of debit for lending companies, mutual funds and insurance for pulling money from customer’s account has been stopped.

This has led to complete chaos in financial services industry. Now, service providers need to get customer’s wet signature on a debit mandate form, send it to the bank for verification and then wait for status of mandate verification.

This process takes 10-15 days as opposed to the earlier process which was completed within seconds. Digital lending industry is moving in reverse gear.

Jitendra Gupta is managing director, PayU, a payment company.

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