India’s Open Credit Enablement Network (OCEN)

Embedded finance is fast growing as a game-changing opportunity for incumbents and new FinTechs alike. It is estimated to offer a market opportunity of over $7 trillion by 2030. Lending has not been the leading segment in embedded finance because of its complexity. However, emerging new digital business models that use plug-and-play tech enable businesses to easily manage and sell even highly regulated and relatively complex services such as lending as an embedded service.

New digital models set to optimize the Indian digital lending market with innovative products and services.

The digital lending market in India is expected to grow to $100 billion by 2023. A contributing factor is the untapped customer base of over 300 million Indians who have remained outside the formal credit market. Current rails for the flow of capital into this untapped market are broken. Recently digitized users such as small shop owners, farmers, traders, entrepreneurs of MSMEs, rural self-help groups, and gig economy workers are increasingly generating a digital transaction history that could be used to inform and build trust with financial institutions. However, the availability of appropriately sized, priced, and timed credit products is still not optimized.

Open Credit Enablement Network (OCEN) – A New Paradigm To Facilitate Credit Flow

IndiaStack brought the first paradigm shift in India’s FinTech market. Its disruptive innovation offers open APIs as public digital infrastructure such as UPI, BharatPay, BBPS, Aadhar, AEPS, eKYC, eSign, DigiLocker, FASTag, and GSTN platform. Open Credit Enablement Network (OCEN) is the next chapter in the IndiaStack story. It is an initiative to unbundle lending and enable the creation of specialized entities, each specialized at one part of the job.

OCEN is a framework of APIs for interaction between lenders, loan service providers (LSPs), and account aggregators.

OCEN was launched in July 2020 as an open protocol infrastructure that will mediate interactions between LSPs such as FinTechs and e-commerce players and mainstream lenders such as banks and NBFCs. OCEN provides a standard set of tools representing the various components of a typical lending value chain, allowing apps, marketplaces, and aggregators, among others, to ‘plug in’ lending into their current operations.

Under the new credit rails, OCEN will act as a common language connecting lenders and marketplaces to use and create innovative financial credit products at scale.

Here are the pain points addressed by OCEN:

  • Identification of creditworthy borrowers
  • High cost of borrower acquisition
  • Costly and time-consuming custom integrations and manual processes to connect customers with lenders, especially for marketplaces
  • High turnaround time to get loans deposited into customers’ accounts
  • Implementation challenges that restrict launch of custom financial products
  • Limited reach of credit to MSMEs in India. Only 11% of the 63 million MSMEs have access to formal credit.
  • Need for complete lending value chain skills under one entity. Here are some examples:
    • Sourcing
    • Identity verification
    • Underwriting
    • Capital arrangement
    • Disbursement
    • Dispute management
    • Payments
    • Recollection

New Roles Emerging in an Open Credit Ecosystem for India

Account Aggregators – The Reserve Bank of India published Account Aggregator or AA technical standards in November 2019 to facilitate flow-based lending. 7 AAs received in-principle approval, and ten major banks and NBFCs are in different stages of integration, working toward the public launch. The AA framework is expected to transform access to working capital credit for micro-enterprises, particularly when bundled with OCEN APIs for lending.

Sahamati – A non-profit collective of AAs created to operate the AA model in the country. Sahamati will help FinTechs and entrepreneurs adopt public APIs and become financial information providers and users.

CredAll – A non-profit collective that enables cash-flow based lending. Its responsibility is to ensure the implementation of OCEN and give access to the new protocol to industry participants. It is responsible for stakeholder education, publishing guidelines and principles, connecting TSPs with lenders and LSPs, helping LSPs create business cases, and empaneling certification agencies.

LSP – A Lending Service Provider can act as an ‘agent of a borrower,’ ensuring transparency and safeguarding the borrower’s interest. It is a departure from a direct sourcing agent (DSA). An LSP helps borrowers get access to formal, affordable credit at low-interest rates and collaborates with lenders to create more tailored offerings for borrowers.

Sahay – Sahay is OCEN’s first rendition. Sahay app is ready to implement the invoice-discounting use case, where a merchant can receive loans against outstanding invoices. Merchants can sign up and get instant loans from lenders by providing their GST identification numbers and bank details. Just as BHIM was the first reference implementation for UPI, the first reference apps for OCEN will be Sahay GST and Sahay GeM (government e-marketplace) apps.

DEPA – Data Empowerment and Protection Architecture (DEPA) is a secure, consent-based data-sharing framework to accelerate financial inclusion. DEPA plays a crucial role in establishing AA data-sharing protocols. DEPA aims to empower individuals to seamlessly and securely access their data and share it with third-party institutions.

Derived Data Providers and Underwriting Modelers – These players can map their on-ground learnings with OCEN-extracted LSP data and provide relevant insights on the underwriting process. They can even provide their analysis and credit scores.

OCEN Leapfrogs To Democratize Credit

Currently, OCEN is running pilot projects across the country. Lending partners such as State Bank of India, HDFC Bank, ICICI Bank, IDFC FIRST Bank, Axis Bank, and Bajaj Finserv are onboard for this new credit rail. JustPay and OkCredit are among the FinTechs that are part of the pilot projects.

  • Cash flow loan to MSMEs in five minutes from an app or even WhatsApp
  • Bundling of AA framework with OCEN APIs
  • Future state to enable intra-day micro-loans for small merchants and even street vendors
  • Consent-based access to verified information from multiple public and private data sources
  • OCEN has acceptance across stakeholders. TSPs such as Setu and Apollo Finvest have already published APIs to integrate with OCEN
  • Over 30 consumer-facing companies to become LSPs and adopt OCEN, including tax and legal filing apps, neobanks, kirana tech apps, khata apps, payment gateways, and AgriTech companies.

OCEN Is Predicted To Be the Next Big Disruption in Lending

Embedded finance is expected to increase per customer revenue by 2–5 times for companies. OCEN clears the path for embedded lending.

Once OCEN is completely launched, it is expected to ease MSME credit. However, the infrastructure has the potential for innovative retail micro-lending products and services as well. BNPL FinTech partnerships with BigTechs and e-commerce retailers demonstrate the success and reach of such a model.

RBI guidelines allow any approved entity to disburse loans up to INR 60,000 in a year to a person registered through Aadhaar OTP-based KYC process. Organization-centric data-sharing systems will also become individual-centric, an approach to promote user control on data sharing. Simple access or the control of user data will no longer be a source of competitive advantage. Institutions will have to create value through better analysis and more sophisticated predictions based on data and improve accessibility for users.

The OCEN founding team shares the vision of making a billion people participate in the credit market. India has adopted a unique approach to economic development over the past decade by building public digital infrastructure, such as UPI and, now, OCEN, as a route to financial inclusion.

Governments offer digital infrastructure as a public good, which private players innovate to offer better services. Since the standards underpinning OCEN are open, the architecture can be applied to other countries—an institutional framework can be designed to globalize these standards and apply them to other markets facing similar challenges.