Functional Service Providers (FSP) : Enabling Financial Inclusion through Technology

With technological advancements happening at a rapid pace, the way financial services are delivered is undergoing massive transformation. Functional Service Providers (FSPs) have become an integral part of this digital transformation by leveraging new age technologies to enable accessibility, affordability and convenience.

FSPs are non-banking entities that provide back-end support and infrastructure to financial institutions through application programming interfaces (APIs). They specialize in discrete back-office functions like payments, verification, lending decisions etc. and allow banks and other financial service providers to integrate these functions through standardized, pre-built software interfaces.

By unbundling financial services and allowing modularization of functions, FSPs are enabling companies without banking licenses to offer financial products. This is enhancing competition and fostering innovation in the industry. New players are entering the market and coming up with unique business models tailored for underserved customer segments.

Expanding financial inclusion through collaboration

One of the key advantages of FSP model is that it promotes collaboration between different stakeholders instead of competition. Banks and fintech companies are joining hands to mutual benefit by leveraging each other’s core competencies.

For example, a bank’s vast customer base and trusted brand can be combined with a fintech’s superior technology capabilities and innovative products. The bank gains access to newer customer segments through digital channels while the fintech is able to expand reach by piggybacking on the bank’s trust and credibility. This win-win collaboration is playing a major role in inclusive growth.

FSPs are helping to penetrate Functional Service Providers (FSP) deeper into remote geographies and reach customer segments that were previously unbanked or underbanked due to physical branch constraints. Their digital approach minimizes on-boarding costs and allows delivering hyper-localized financial solutions customized for the needs of varied customer cohorts across urban, semi-urban and rural areas.

Key services offered by FSPs

With their back-end processing infrastructure and plug-and-play model, FSPs offer a wide array of services to financial institutions:

Digital Payments - FSPs take care of the technology backend required to facilitate payments through various channels like UPI, wallets, cards etc. This allows fintech and banks to launch payment products without building complex payment stacks from scratch.

Lending as a Service - FSPs provide the core lending infrastructure including loan origination, underwriting, disbursal and collection services. Their data analytics capabilities help analyze huge customer datasets and enable instant credit decisions.

Regulatory Technology - FSPs utilize technologies like AI, ML and big data to help financial firms automate compliance operations, implement robust KYC/AML checks and maintain auditable transaction records as per regulatory mandates.

Verification Services - Identity, bank account and document verification through offline and online channels allow seamless onboarding of customers. This reduces fraud and enhances trust.

Benefits of FSP led collaboration
The FSP collaborative model is delivering substantial benefits across the financial ecosystem:

It has accelerated the pace of innovation with startups introducing niche financial solutions for different customer personas. Partnerships allow startups to test ideas rapidly.

Regional banks and cooperatives are leveraging the scalability of FSP infrastructure to expand their reach digitally into newer areas. This fosters greater financial inclusion.

Customers gain from a wider range of customizable options, improved access, enhanced convenience and competitive pricing of financial services tailored to their life stage needs.

With streamlined processes and automated compliance, costs are optimized which benefits customers in the form of lower borrowing costs and fees.

For regulators, the FSP approach brings more entities under monitoring and makes the system more robust, transparent and traceable in the long run.

The emergence of FSPs thus reflects the success of India's innovative financial inclusion agenda that promotes interoperability, collaboration and leverages technological progress for public benefit. It is a continuous work in progress and policymakers will need to keep pace with evolving market dynamics to sustain this momentum.

Through functional disintegration of banking services and institution-less models, FSPs have been instrumental in transforming the landscape of financial services delivery. By enabling the unbundling of processes, standardization and efficient re-bundling of modularized functions, the FSP collaborative framework is fostering broader access, affordability and consumer empowerment. It holds immense promise to promote deeper financial inclusion on a larger scale.