The Fintech Entrepreneur’s Guide: Create Successful Tech Startups with a Robust Tech Stack, Security, Scalability Plan, and Convincing Investment Pitch (English Edition)

By Ashok Mittal

For anyone interested in learning more about the Fintech business in general and the Lending space in particular, this book is an excellent resource because it is based primarily on the author's practical experience rather than on theoretical frameworks.

This book provides insights into how to construct the technological platform and craft a vision document, thus making it valuable for aspiring entrepreneurs who wish to launch careers in Fintech, whether in lending or otherwise. That way, they'll understand how to present their proposal to potential investors in a better way.

New grads looking to break into the Fintech business can also benefit from this guide, as it will help them understand the sector and prepare them for the rigors of the hiring process. Leaders at the highest level of an organization can also learn from this book, as it contains numerous examples of actual problems and solutions that have been tried and tested in the real world. Ultimately, this book is for anyone with any connection to the Fintech industry.

• Language: English
• Publisher: BPB Online LLP
• Release date: Nov 11, 2022
• ISBN: 9789355512345

Book preview

CHAPTER 1

Introduction to Fintech

Introduction

This chapter includes a description of the term Fintech. We have tried explaining Fintech and various terms and processes related to it. We have also added and described the core technical terminology related to the fintech industry.

Structure

In this chapter, we shall cover the following topics:

Introduction to Fintech

Definitions related to Fintech

Technologies in Fintech

Objectives

After reading this chapter, we will be able to increase the reader’s understanding of the term "Financial Technology." There are various terms used for describing a fintech setup that is not so easy to understand. This chapter would also simplify the same for our readers.

Introduction to Fintech

The term ‘Fintech,’ the short form of the phrase "Financial Technology," denotes the industry that comprises companies that use technology for the efficient delivery of financial services. It is an emerging service in the 21st century and has gained momentum in the last 7-10 years. It also shows huge potential for the next 2-3 decades. The new start-up companies (Fintechs) are trying to replace the traditional transaction system with new, effective methods by applying technology in financial sectors for banking, mobile payments or payment gateways system, credit cards, all kinds of loans, money transfers, insurance, wealth management, and also for asset management. Each of these activities are very exhaustive and detailed. In this book, the focus will be on lending (loans).

Fintech can be defined in several ways. The Bali FinTech Agenda, FSB, and others broadly define fintech as "advances in technology that have the potential to transform the provision of financial services, spurring the development of new business models, applications, processes, and products." Some more examples of technology applied to financial transactions are peer-to-peer lending, peer-to-peer payment technology, digital wallets, Blockchain, mobile banking, cryptocurrencies, and so on. Refer to Figure 1.1 for this:

Figure 1.1: Digital Wallets, Blockchain, and cryptocurrency

These aim to bring further benefits and achieve high efficiency for financial transactions. Generally, the objective of Fintech is to improve efficiency in processes for better customer experience and customer service without compromising on regulatory compliance. Another aim of fintech is to reduce costs incurred for all activities and pass on the cost-benefit to the customers.

Before we go deeper into other chapters and understand how to build a strong, viable, feasible, and profitable fintech, it is important to understand the technical aspects of the fintech industry. This will help:

Processes, functions, and technology are used to fill the current academic literature gap regarding financial technology (Fintech) companies.

To provide a conceptual overview of the Fintechs and adoption of Fintech among digitally active consumers by the start-ups. Digitally active consumers are the people who have access to the internet and use various platforms, websites, and mobile applications for doing multiple transactions. This will also help financial services professionals who are unaware of the terms being used in building technology platforms.

To identify professionals who motivate and support the adoption of financial technologies and find barriers and challenges for adopting financial technologies in various fields.

These are some of the common terms used and are not exhaustive or complete. Further, the meanings mentioned here are not legal terms. They are discussed here for general understanding, which will be helpful when you enter into an agreement with the vendors, and service providers or hear from various people related to the industry. Fintech is an ever-evolving sector. New terms are being discovered on a regular basis; hence you need to keep yourself updated.

Definitions related to Fintech

These are specific definitions related to Fintech that you need to keep in mind:

Application: Application means a software that receives, uses, displays, and manages Customer Data, the information supplied via the API Service or otherwise. The Application may be a ‘web’ application, a ‘mobile’ application, or ‘both.’ The application may be built or developed in-house or externally through service provider vendors. The application is also called an ‘Enterprise’ version which resides on the local system of the company.

SaaS: Software as a Service; companies that provide a ready-to-use Application known as Software as a Service (SaaS). In such cases, the Application is not owned by the company, and it only has the right to use the software developed by a third party.

API: Application Programming Interface (API) is a kind of bridge that enables two different software applications to communicate with each other easily. In other words, it can be said that APIs are a set of protocols that allows the creation of multiple applications that access information, data, and features of additional applications or systems in a limited way. This happens to the extent it is permitted, in a secure manner, keeping the security of the other software application. It is used to fetch data or information from one Application to another. The APIs can be used by way of pulling the data or pushing the data. The most commonly used word is also ‘calling’ the APIs. This is how APIs look:

POST/restApi/login: API to login

GET/restApi/forgotPassword: Call it when the user forgets their password

GET/api/guest/restPublic/checkUniqueEmail: API to check username’s uniqueness

POST/api/v1/verify/sendOtp: API to send OTP

POST/api/v1/verify/phone: API to verify number via OTP

POST/borrower/borrowerDetail: Get borrower details

POST/loanApplication/details: API to get loan details

POST/accept/termsAndConditions: API to accept terms and condition

POST/admin/showHolidays: API to get all holidays

POST/admin/borrowerList: API to fetch borrower list

POST/admin/transactions: API to fetch transactions of a user

Perhaps more than 100 APIs are being created in each Application to make it convenient to connect and communicate with various other Applications.

KYC: KYC is an acronym for Know your client/customer. It is the proof required for identifying and verifying the clients. Generally, KYC includes Proof of Identity and Proof of address through legally acceptable documents. In India, the commonly accepted documents are PAN issued by the Income tax department, Aadhar issued by UIDAI, driving license, Voter ID card, and so on. The KYC is required to check persons’ physical availability and for Anti-Money Laundering (AML) purposes. All the regulators insist on proper KYC for all kinds of financial transactions. Various vendors (tech entities) offer online verification of KYC documents. Some KYC documents are shown in Figure 1.2:

Figure 1.2: Know Your Customer (KYC) documents

Algorithms: Algorithms are a combination of multiple instructions for solving a problem, setting up a rule, arriving at a complex calculation, or accomplishing a task in a particular manner. All computerized devices use various kinds of algorithms to perform their functions. Algorithms are created to set various rules and calculations in predefined formulae. The purpose of preparing and having Algorithms is to reduce the time a particular task takes to do it manually compared to doing it on computers.

In lending, a few examples are setting up rules for approval of loans based on pre-set criteria such as:

minimum credit bureau score,

minimum and maximum age limit of the borrower,

Loan amounts are based on transactions in the bank statement, and so on; it could also be a combination.

Artificial intelligence: A most commonly used term in the Fintech world, AI generally refers to the stimulation of human knowledge, experience, and intelligence in computer software systems which includes objectives such as learning, remembering from past experience, logical reasoning, and user perception. It is similar to remembering certain things from the past and using them in the future by a rule.

Angel Investor: Generally a private investor, who can be an individual, a group of people, an entity created by like-minded people, or a small size fund that want to provide financial support to small start-ups or entrepreneurs in exchange for ownership in the form of equity holding in the company. Some Angel Investment platforms also offer investing services.

InsureTech: Inspired by the term fintech, which covers all the financial services, the insurance sector start-ups or companies using extensive technology to modernize and improve the insurance business have started using this term. Similarly, other companies use the word ‘tech’ succeeding to their respective sector to reflect the use of technology in their business.

ICO: Initial Coin Offering or a token sale. It is the process or event in which funds are raised for a new cryptocurrency venture, and contributors receive tokens in return.

Bank account statement: It refers to the original document issued by the applicant’s bank. Generally, the statement downloaded from the bank’s website in PDF format is preferred. The statement is sought for a specific period showing all the debit and credit entries. An account statement can be seen in Figure 1.3:

Figure 1.3: Account statement

Big data: As the name suggests, it means a very large quantum of data that organizations deal with on a daily basis. These data may be related to customers, their financial or non-financial behavior, and so on. While there is no specification given to the quantum of data, the format of data, or the quality of data, it can be analyzed to help businesses with insights about their business in a structured manner by organizing the data, which allows the organizations in the decision-making process related to planning and strategy. The data may often come from multiple sources, different formats, and mostly in raw format or unstructured manner. Big data can be structured easily when it is in numeric format. It is quantifiable in a style that can be easily formatted and stored by changing it from an unstructured to a structured format.

Machine Learning (ML): ML is very similar to an area of Artificial Intelligence (AI) with a philosophy and concept that a computer software program can learn, accept and adapt to new information and data, and analyze it very fast without any intervention from a human. Machine Learning can be adopted and applied in various areas like travel services, insurance, lending, e-commerce, investing, fraud detection, advertising, medical services, and many more products. Companies use various tools of ML to improve the customer experience and business efficiency.

Biometrics: It is a method of using digital security systems that works on biological or physiological attributes like thumb impression, facial recognition, eye retina, body gestures, voice pattern, and so on, that are physically unique to an individual. Biometrics can prove their identity to prevent data breaches such as hacking of credit and debit cards or unauthorized log-ins to any system, unauthorized entry in buildings, attendance marking, and so on. This also reduces dependence on traditional methods like passwords or PIN codes that are more prone to hacking or may be stolen.

Cyber security: One of the most common and important terms used by all Fintech players, regulators, and users. It refers to the protection or safety of internet-connected systems, including software, hardware, sensitive information, and data, from hacking and cyberattacks. Some key measures to keep systems secured are password protection, disk encryption, two-factor (2F) authentication, and so on. There are various tools used by Fintech companies to ensure cyber security.

Delivery date: This means the date on which the Application or the API Service is enabled by the vendor or service provider in accordance with published specifications in its stage environment. It is important to have not only the ‘delivery date’ in the agreement but also the penalty clauses in the case of delay in the delivery date.

Electronic signature: An e-sign or digital signature system is used to execute or sign documents or agreements. It saves time to physically sign the documents, especially when multiple parties are required to sign. Various agencies offer e-sign facility either by OTP (one-time password) on mobile or email or both; e-sign capturing pictures, location through access or UIDAI Aadhar linked mobile phone and so on. A digital signature process and functioning can be seen in Figure 1.4.

Figure 1.4: Digital Signature - Process and functioning

Encryption: A method that secures information or data using a complex algorithm, password, or a token or key. It translates data or information using an algorithm that turns plain text unreadable. When authorized users need to read the data, they may decrypt it using a binary key. Encryption is useful for individuals and companies to protect sensitive information from hacking. For example, websites that transmit credit card and bank account numbers should always encrypt this information to prevent the hacking of private information. There are terms like 64-bit, 128-bit, and 256-bit encryption, which refer to concealing plain text data using an AES key length of 64 or 128, or 256 bits. 128-bit AES encryption uses 10 transformation rounds to convert plain text into cipher text. The higher the bits, the more complicated and safer it is. AES 256 encryption is the strongest and most robust encryption standard that is commercially available today. While we can confidently say that AES 256-bit encryption is harder to crack than AES 128-bit encryption, it is believed that AES 128-bit encryption has never been reported to be broken till now. So as a practice, most Fintech companies use 128-bit encryption, while small start-ups even use 64-bit encryption.

AES: The Advanced Encryption Standard (AES) was initially known as Rijndael. Worldwide it is one of the most secure and popular encryption algorithms available. The symmetric-key block algorithm is the Fintech industry standard to encrypt and decrypt important, sensitive, or classified information and data.

Feedback data means the data relating to the performance of Fintech’s customers assessed using services. In the case of a lending business, it may broadly consist of the following:

User ID, loan amount, tenure, decision (application approved/rejected), and date of the decision

Default eligible flag, default flag

Types of default: DPD on each of 1st to the last payment

Anonymized credit bureau scrub of the customer

Integrated service: This means the service provided through the integration of the API service and the application pursuant to the production schedule.

Integrated service pages: This means all pages on which the Integrated Service is displayed or made available for use by customers.

Mobile wallet: This virtual wallet stores the payment card information on a mobile device. It is an easy and convenient method for the user to make in-store payments. The wallet can also be used by merchants listed with the mobile wallet service provider for convenience. Some of the Mobile Wallet examples are Paytm, GPay, Amazon Pay, BharatPe, RuPay, PhonePe and so on. Many companies have their in-built mobile wallets, like OLA Money.

P2P Lending: Peer to Peer (P2P) lending mechanism is a process that helps individuals obtain loans or financial assistance directly from other individuals who want to invest money in lending without the need for a financial institution like Bank or NBFC. It is also known as crowd-lending. In India, P2P lending companies are called ‘NBFC - P2P’. They are regulated by the Reserve Bank of India (RBI) and are subjected to certain regulations in terms of loan ticket size, loan tenure, maximum lending limit, maximum borrowing limit and so on. Refer to Figure 1.5 to see a few P2P lending partners:

Figure 1.5: P2P Lending Partners

Robo advice: Financial advice given through the use of computer algorithms. Robo-advisors, also known as online investment managers, typically invest. Wealth management firms use this technology, experience, and analysis to develop forecasting tools. It helps in creating algorithms for auto investment rules based on investor clients’ risk profiles.

Venture capital: It is the Financial support or investment that investors provide to start-up companies and small firms that have moved past the stage of angel investment and are thought to be in a development phase with promising prospects for the foreseeable future. It generally comes from family offices, Senior level CXOs, High Net worth Investors (HNIs), investment banks, and other financial institutions or companies that find synergy with their business. Generally, the venture capital investment comes after the Angel investment round when the company would have started operations.

3D secure: 3D secure is a process with three domain (3D) structures connecting the merchant page with the issuer and the acquirer. The purpose of a 3D secure network is to prevent fraudulent or fake transactions, mainly on e-commerce websites. 3D is a security system created for payments to be done by the customers where they enter the OTP received through the merchant in a secure page to validate their identity and complete the transaction.

Account Information Service Provider(AISP): A popular term in Fintech and Open Banking industry; AISP means providing customer account information and data, with the customer’s consent, to a third-party software system. AISPs help customers reduce manual work by pre-filling information for easy and faster access to their financial data and information for speedy approval of loans and other