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India’s Unified Payments Interface (UPI) has pioneered the country’s transition to non-cash payments. The UPI adoption rate in the country is expected to rise to 75% in the next five years. Since its launch, UPI monthly transactions have soared, reaching approximately $135 billion in June 2022, nearly nine times the value of credit cards.

As a result of UPI’s monumental success, the Reserve Bank of India has expanded the scope of UPI by enabling the operation of pre-sanctioned credit lines from banks within the UPI ecosystem. While credit on UPI introduces unmatched convenience, especially for Micro, Small, and Medium Enterprises (MSMEs)—there are concerns about the security of data and the risks of fraud, not to mention the risks involved in default and creditworthiness assessment.

In this article, we will look at how fintech companies are tackling these challenges while ushering in innovative financial products that will not only lower credit acquisition costs but also enable banks to extend their reach.

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Credit on UPI: Revolutionising lending for the digital age

With the rapid influx of new technology-led players—MSME digital lending has reached an inflexion point, with projections showcasing a potential 10-15X growth in annual disbursements in the coming years.

The implementation of pre-approved credit lines via UPI is a step in the right direction aimed at furthering the RBI’s ‘Payments Vision 2025’. UPI has captured the biggest share of digital payments, outperforming other forms of transactions owing to its ease of fund transfer across bank accounts.

RBI’s recent decision to allow the linkage of credit lines with a UPI account brings in further convenience, as now users can access funds anytime, anywhere. Further, this removes the hassle of switching between multiple lending or banking platforms and enduring lengthy loan approval processes.

This is a game-changing move as it expands the scope of digital payments in India and offers the convenience of using mobile phones for making payments on credit. In light of this, fintechs are coming forward to ensure enhanced credit risk management and the security of online transactions by leveraging advanced machine learning algorithms and analytics.

Role of fintechs in ensuring risk-free, secure transactions

The integration of credit lines within UPI is creating new lending opportunities for banks and Non-Banking Financial Companies (NBFCs) in the country. As a result, financial institutions across the country are accelerating their efforts to deliver hyper-relevant lending experiences, and fintech firms are taking on the role of trusted partners in enabling them to rethink credit-based products.

Risk mitigation strategies

Fintechs are presenting banks with technological infrastructure and advanced underwriting models to seamlessly embed credit products in the UPI journey and enhance access to formal credit among small business borrowers.

Additionally, fintechs have unified data platforms that triangulate data from multiple sources. They leverage alternative sources of data and carry out robust credit assessments by utilising transaction data from external databases and ecosystem partners. This approach ensures that the most credit-needy customers can secure loans while keeping fraudulent applicants at bay.

By leveraging big data and Artificial Intelligence (AI), fintechs have the technology prowess to assess the working capital needs of MSMEs in real-time and enhance the credit decision-making process.

Moreover, as MSMEs are rapidly adopting digital solutions, they are leaving behind a traceable trail of financial transactions. By tapping into UPI data, fintechs are developing robust underwriting models based on transaction parameters and, in turn, enhancing borrower creditworthiness evaluation.

Fraud prevention mechanisms

According to reports, fraud detection systems leveraging analytics and machine learning algorithms minimise fraud investigation time by 70% and improve detection accuracy by 90%. Utilising AI algorithms, fintechs are now training technologies on the users’ historical data and classifying customer profiles from low to high-risk levels.

With AI technologies offering quick insights, fintechs are enabling banks to cut through all the clamour of everyday alarms and develop significant diagnostic capabilities that analyse massive quantities of information, highlight hidden patterns and anomalies, and strengthen the resilience of credit on UPI services.

The dawn of a new era in lending

Apart from innovative credit on UPI services, digital loan origination systems, real-time visibility into loan tracking and credit processing, as well as optimised data-driven insights are enabling a paradigm shift in the lending landscape.

We’ve stepped into a new era of quality lending where we will see fintechs play an instrumental role in enabling banks to capture a larger market share and drive financial inclusion by embedding credit lines at the points of interaction.

(Ashutosh Tapria is Chief Operating Officer and Global MD for Enterprise Coverage and Trade at CredAble, a fintech company.)