Open Credit Enablement Network (OCEN), in the news for the past few weeks, has been heralded as the next big disruption in lending. The core idea of OCEN (pronounced as O-Ken) is to put in place a set of frameworks and protocols that can enable the democratization of credit for segments that need it the most. But what will it do for small businesses, who will be the key stakeholders, and how will it work?
Formal credit flow to the most vulnerable segment of our economy, especially small businesses, has been broken for decades. Financial institutions find it difficult to reach these large segments of customers, leading to high distribution costs. Their credit needs are also very specific, usually smaller loan amounts, shorter repayment timelines, and quick access to funds. These requirements constrain financial institutions, prompting them to instead focus on big businesses to offload large amounts of credit. A consequence of this broken system is a severely underpenetrated credit delivery with only about 11% of the 63 million MSMEs having access to formal credit. For borrowers, on the other hand, proving their creditworthiness becomes another challenge. There isn’t enough data for lenders to evaluate these small business customers. To solve this broken system, OCEN is putting together an infrastructure protocol that enables consent-based access to verified information from multiple public and private data sources and connects borrowers with lenders through an ecosystem that offers access to affordable credit.
Credit is most effective when it’s delivered by entities that are close to customers. With growing digitization, we are witnessing an increasing trend of small businesses partnering with marketplaces and e-commerce platforms. These entities collectively have access to millions of small businesses and possess proprietary digital data that can be extremely valuable in underwriting. Adding OCEN and the current digital ecosystem layer on top, these platforms become ideal for channeling credit to the underserved through innovative embedded finance solutions.
However, having access to small businesses and connecting financial institutions with platform intermediaries solves only half the problem. A complete solution needs an integrated network that enables seamless flow of verified data. It needs digital processes to substitute for physical paperwork. It also needs a mechanism that enables instant and efficient flow of money from lenders to borrowers and vice versa. With digital initiatives like Aadhaar-based eKYC, eSign, UPI, and Account Aggregator framework being implemented and used at scale, we now have the ecosystem to make this a reality. The OCEN framework will leverage all these innovations to enable a robust infrastructure where financial institutions can effectively and profitably serve the end borrower.
Who are OCEN’s key market participants and what’s in it for all of them:
Lenders – These are traditional financial institutions like banks that will now see the collective scale and streamlined distribution as a result of the OCEN protocol. By leveraging the existing digital infrastructure and getting access to verified data from borrowers, these financial institutions (lenders) can now create products and address the needs of small businesses profitably. Lenders will be able to underwrite loans based on new sets of information, and most importantly have access to continuous flow of data to monitor credit.
Loan Service Providers (LSPs) – Online intermediaries like marketplaces, e-commerce entities, consumer platforms and digital businesses who are close to the end customers are categorized as Loan Service Providers (LSPs). These LSPs can now embed lender’s credit products as part of their core offering without having to significantly invest in technology nor having to individually tie-up with multiple lenders. Providing credit solutions to their customer base, which collectively includes many small businesses, can help both small businesses and LSPs grow their revenues. and increase the lifetime value of their partners.
Because of the fast-evolving digital infrastructure, these LSPs can also become future lenders themselves. They possess a set of advantages that isn’t available to traditional financial institutions – low cost of customer acquisition, access to proprietary transaction data, visibility of credit end-use, and control of payments flow on their platform. This will allow platforms to additionally offer very specific tailor-made credit solutions without having to rely on the financial institution’s product framework. A daily settlement credit line for a small shop owner selling through an e-commerce platform or a daily repayment sachet loan for a professional working with a services marketplace will soon become common.
Borrowers – Small businesses constitute the end borrowers who will now be able to see credit options offered by multiple lenders on LSP’s platform. Through consent-based data sharing and Aadhar/UPI enabled infrastructure, the credit process for these borrowers will be completely digital and enable quick access to funds. Financing will gradually move from ‘one size fits all’ to ‘customized’ credit solutions, evaluated primarily on continuous cash flows rather than income and assets. Borrowers should soon start seeing their partner marketplaces and e-commerce platforms offering credit solutions.
Technology service providers (TSPs) and Derived data providers (DDPs) – TSPs and DDPs will be specialized entities offering innovative technology and data solutions to help the LSPs and Lenders. Borrowers will most likely be unaware of these entities but they will form an important part of the entire ecosystem. A new set of opportunities will emerge for existing players, especially within the fintech segment.
OCEN’s initial pilot projects include Sahay GST and Sahay GeM. Sahay GST facilitates invoice discounting solutions based on GST and other publicly verified data, while under Sahay GeM, the government e-marketplace platform will act as an LSP and facilitate credit solutions for small businesses. While these are initial pilots, many other embedded finance solutions will develop over the next few years. Platforms providing small-sized sachet loans to their gig workforce and consumer businesses providing point-of-sale loans to salaried millennials will also emerge as more market participants come on board and turn into a new cohort of lenders. But for now, small businesses can look forward to their platform, e-commerce, and digital partners as new channels for the delivery of customized and affordable credit solutions.
(By Pradeep Rathnam, Co-founder & CEO, TERA Finlab)