Fintech vs. NBFC

Fintech and NBFCs are covered under favorable government policies and regulations allowing them to expand their services to various market segments. NBFCs aims to provide better finance to customers in various sectors, whereas Fintech works towards developing innovative technology and enhancing its products and services.

This article focuses on providing the variance between NBFC and Fintech companies.

NBFC Explained:

The company registered under the Companies Act is a Non-Banking Financial Company (NBFC). The primary business activities of an NBFC include providing loans/advances, hire-purchase, insurance business, chit business, acquisition of securities, etc.

But it excludes an institution engaged in agriculture/ industrial activity, sale/purchase/construction of the immovable property, or purchase/sale of any goods (does not securities).

NBFCs are categorized as:

Asset Finance Company
Investment Company
Loan Company
Infrastructure Finance Company
Systemically Important Core Investment Company
Infrastructure Debt Fund NBFC
Micro Finance Institution
NBFC Factors
Mortgage Guarantee Companies
Non-Operative Financial Holding Company (NOFHC)

Conditions to be fulfilled by NBFC:

To become an NBFC, the company must follow the 50-50 criteria for income and assets. Where total assets of the company must have 50% financial assets and gross income must have 50% income earned from financial assets.

NBFC must also be registered under the Companies Act and shall maintain a minimum amount of NoF as per RBI guidelines.

Fintech Explained:

Fintech is a combination of two words, “Financial and Technology”. As described by the Financial Stability Board (FSB), Fintech is an innovation of technology used in financial services to open new horizons for products, services, business models affecting the financial service sector. In other words, Fintech is reliance on information technology by the financial services sector

Fintech innovations grouped as per activities of financial markets:

Activities in the Financial Sector

Fintech Models that can be applied in accordance of activities:

For Payments and Settlement

Mobile/web-based payment system
Digital Currency System
Distributed ledger system

For Deposits, Lending & raising funds

Crowd-funding system
Peer to peer lending system
Digital Currency System
Distributed Ledger system

For Market provisioning

Smart Contracting System
Cloud Computing System
E-Agregators

For Investment management

Robo Advice System
Smart Contracting System
e-Trading system

For Data Analytics & Risk Management

Big data AI & Robotics system

Changes brought by Fintech:

Fintech innovations have delivered a wide range of benefits to the financial sector as:

More efficiency in operational structure
Reduction of risk
Reduction of cost
Enhanced customer relationship
Increased access to financial services
Improved operational control

Fintech Downside:

Fintech is a prominent solution for developing the financial system in the country, but it has some drawbacks to be considered.

It is a difficult task to regulate the continuously advancing technological systems in widespread areas.
Monitoring of activities can be difficult beyond the areas covered under the regulation.
The constantly evolving technological system can also bring more automation risk, which is not easily identifiable
Require better control mechanism by the regulator

Some general differences between NBFC and Fintech are that in NBFC the requirement of documents is generally high, whereas in Fintech companies’ documents requirement is low. Also, the processing mechanism in NBFC is manual, but in Fintech it is completely mechanized.

With more liberal governmental policies, both Fintech and NBFCs are paving the way towards growth and increased customer reach. These companies are redefining the financial services sector through improved technology and more innovative products.