Rise of Digital Lending: Balancing Convenience with Data Security in the Era of Digital Finance

Navin Raju Roselin

It’s safe to say that India is becoming a critical battlefield for financial inclusion. Today, the country’s digital lending industry continues to augment its products to include last-mile customers in the digital economy. For instance, in rural markets, where bank branches and ATMs are not operationally profitable—digital payments and FinTech lending solutions have managed to maintain a strong foothold and reach greater heights in terms of penetration and scale through mobile wallets, UPI, and MSME-focused loan origination and management platforms.

Take, for instance:

  • The digital payments transactions have reached 13,462 crore in FY 2022–23 at a CAGR of 45 per cent
  • Digital loan disbursement volumes have doubled, with FinTech lending volumes and value rising by over 130 per cent

The digital financial services in the country have rapidly expanded in the last few years—largely driven by FinTechs and further accelerated by technological innovation, government initiatives, and changing consumer behaviour.

The lending industry takes on a more digitally-focused approach through diverse FinTech platforms

Digital lending has traversed a remarkable journey in the last 8 to 10 years. Within India’s FinTech landscape, digital lending has surged to the forefront, driving significant growth through embedded lending, data-centric loan targeting, and pioneering business models. Clocking in a 59 per cent growth in Q1 2024, FinTechs in the country have played a monumental role in addressing the credit gap, reducing geographical disparities in credit supply, and making India more credit-inclusive.

FinTech-led digital lending has empowered millions of Indians, from urban hubs to rural areas, by granting them secure, convenient, and quick access to credit solutions.

Leveraging Artificial Intelligence (AI) and advanced data analytics, FinTechs are streamlining the lending process, eliminating inaccuracies, and ensuring that lenders effectively match the best- suited loan products to eligible borrowers.

Moreover, introducing innovative payment mechanisms and expanding the digital infrastructure have catalysed the growth of digital lending in India.

Security Vs. convenience: Striking the right balance
While the transition towards digital lending has undoubtedly introduced newfound convenience in accessing credit, it also presents challenges. Chief among these is the potential risk digital lending poses to data security, raising concerns about its implications for the stability and trustworthiness of credit markets.

Considering how digital lending platforms handle a massive amount of sensitive borrower information—data leaks, identity theft, and cyberattacks are constant threats that can undermine the trust borrowers place in these platforms.

Also Read | The Digital Lending Revolution: How Fintech Innovations Are Changing the Game

Most players in the digital lending space are ensuring an end-to-end digital journey from origination to servicing. While that is important to build consumer trust and confidence in the lending journey, safeguarding sensitive information and customer data privacy have become paramount concerns.

A renewed focus on fraud prevention

The need of the hour is to have a comprehensive strategy in place and a series of measures that enable banks and other non-banking lending companies to optimise data security and identity protection.

As technology evolves, the landscape of potential fraud becomes increasingly unpredictable. However, while we may not anticipate every form of fraud, proactive measures can be taken to mitigate risks. Such measures involve implementing end-to-end encryption and using strong authentication methods such as Multi-Factor Authentication (MFA). By adopting this approach, these platforms can safeguard sensitive data against unauthorised access, whether it’s in transit or stored within databases.

Fraud-prevention solutions must be scalable and include dynamic rules. It’s important to look beyond legacy rule-based systems for anomaly detection and leverage User and Entity Behaviour Analytics-driven solutions as well.

Machine learning methodologies offer immense potential for identifying fraudulent activities. Unsupervised Machine Learning (UML) emerges as a particularly promising avenue, streamlining verification processes and autonomously adapting to detect fraud in real- time. By harnessing these advanced techniques to analyse contextual data, digital lending platforms can gain a competitive edge in uncovering unknown and fast-advancing fraudulent behaviours.

While too much security can lead to a decrease in convenience, offering highly secure digital lending platforms by leveraging industry-standard security practices, including the zero trust security model, defence in-depth practices, streamlined incident management through security information and event management services, and security operations integrated in a seamless manner—will provide a secure and user-friendly experience.

Along with this, regular monitoring of user behaviour to ensure security measures are being used correctly can help identify areas for improving convenience.

Also, taking feedback from users on the security measures in place can help improve the overall experience.

The future of digital lending in India holds great promise

Digital lending has fundamentally reshaped how individuals and businesses, primarily MSMEs, manage their finances, conduct transactions, and interact with financial institutions.

Backed by the RBI’s digital lending guidelines, FinTech lenders are using data- backed underwriting tools and cash flow-based assessments to offer BNPL solutions and sachet- sized loans to meet MSMEs’ demand for short- term capital.

Digital lending platforms are creating a niche market for “value-based credit,” prioritising security, convenience, and exceptional customer service. They’ve transformed the lending process, offering quick access to credit with shorter decision times and faster disbursals. While we see more big techs step into the digital lending space, open data is expected to create a level playing field for innovative FinTech lenders.

Also Read | Fintech NBFCs bridging the gap through digital lending

One thing is certain—the rise of secure and convenient access to credit will be pivotal in broadening and deepening the financial services ecosystem, in turn strengthening the foundation for long-term economic development.

Views expressed by Navin Raju Roselin, Chief Information and Security Officer, CredAble.

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