Most Indian banks still use legacy systems which are unscalable and lack operational efficiency when it comes to distributing new-age digital financial products and services
Buildd’s robust middleware covering banks, NBFCs and FIs helps businesses develop product/service sachets on top of the legacy infra for smooth functioning and wider reach
Buildd has also developed while-label credit solutions in the consumer loan and microfinancing space, including MSME loans
From surging digital payments to fintech’s sweeping popularity, it is evident that a less-cash economy has received the average Indian’s stamp of approval. But in spite of the large-scale digital transformation that the country has undergone in the past decade, the lack of financial inclusion continues to plague the BFSI sector. According to a Findex report by the World Bank, around 22% of Indians had no access to financial services in 2021.
The country’s fintech players, especially the fintech startups, are working relentlessly to cater to this sizable chunk of underserved Indians and bring to them essential financial services like banking, payments and lending. Think how ledingtech firms leverage AI to fast-track the underwriting process, assess customers’ credit scores and disburse loans within minutes.
Legacy players, too, are part of this transformation.
Most traditional banks and financial institutions (FIs) are eager to deepen their reach by leveraging modern tech. But the implementation can be challenging as their core backend systems are outdated by now. In fact, most U.S. banks still use systems designed nearly four decades ago, says the American Bankers Association.
The scenario is no different in India. Most legacy players still use tech platforms which are unscalable and lack operational efficiency. However, replacing these systems can incur high costs and result in compliance issues.
Launched in November 2021 by banker-turned-entrepreneur Sachin Gaikwad, Pune-based Buildd is a banking-as-a-service (BaaS) and embedded finance platform that aims to solve this many-pronged issue. Its core offering is an API-driven middleware for banks, NBFCs, fintech firms and other stakeholders to provide distributed and seamless operations leading to enhanced customer experience. It also provides white-label products in the consumer loans and microfinancing space, including MSME loans (more on that later).
For context, middleware is a ‘middle layer’ that enables service providers to unify or integrate the backend with customer-facing systems without replacing the core. This has twofold benefits. Thanks to middleware, traditional FIs can easily distribute their products/services through fintech and non-fintech businesses to reach end consumers without hassles. On the other hand, businesses can develop product/service sachets on top of the legacy infra without building the financial tools from scratch.
To date, Buildd has tied up with 35 partners, including Yes Bank, ICICI Bank, Federal Bank, Muthoot Finance and Mitr Sewa, among others, to grow its business, and clocked $500K in revenue in FY22. It eyes $2 Mn in the current financial year, a 4x year-over-year revenue growth.
In May 2022, the BaaS startup raised $2 Mn in a pre-seed round led by Germany-based VC firm Picus Capital and the Mankekar Family Office.
Why Buildd Focusses On Middleware To Drive Growth
Interestingly, Buildd is not Gaiwad’s first fintech venture. After a 12-year stint as a senior banker, he turned to entrepreneurship with Financial Quotient in 2012, a hedging services platform that was acquired by a major bank in 2013. In 2014, He became part of the founding team at Walnut, a personal finance management platform, that was acquired later by lendingtech platform Capital Float (rebranded as axio in 2022) for $30 Mn.
With nearly two decades of combined experience in banking and fintech, Gaikwad said that he understood the scope and opportunity of the overall financial services market and its major challenges.
“Banks and FIs deal with a lot of sensitive customer data. If this data is not stored in a secure environment, fraudsters can use different types of malware to gain unauthorised access and misuse the data,” he said, emphasising why banks have zero tolerance for data breaches.
Of course, there is a growing need to develop and distribute new offerings across popular areas like payment, credit, cards, savings accounts and more if legacy players want to grow product portfolios and revenue channels. However, there will be critical issues if they try to integrate their core infra minus the middleware.
To begin with, new-age fintechs (and most other companies, for that matter) are cloud-natives and have dynamic mobile app or web interfaces where the customers can expect quick & relevant responses. Second, their modern APIs are often at loggerheads with the legacy tech infrastructure. Finally, many fintechs still struggle to sync with complex (and evolving) regulatory and compliance issues.
In brief, gaps in compatibility and compliance often pull legacy FIs and fintechs apart instead of syncing and pushing them towards a common goal – earning higher revenue through greater reach and seamless offerings.
Therefore, Gaikwad wanted to build end-to-end, encrypted middleware for legacy institutions. He spoke to several banks to understand how their in-house servers worked and gathered insights from many cybersecurity firms to design the middleware which would be secure and scalable. The outcome was Buildd, a BaaS startup with robust middleware as its core.
To achieve security Buildd API stack has an SSL (Secure Sockets Layer) Certificate that verifies the website’s identity and establishes an encrypted connection. In addition to SSL, Buildd uses other security measures, such as firewalls, intrusion detection and prevention systems, along with multi-factor authentication to protect systems and data from cyber threats. It further holds frequent monitoring, testing, and updating of security measures and complies with SOC, PCI, VPAT audit requirements.
Narrating a middleware use case, Gaikwad has detailed how things work. “There are several steps in lendingtech, starting from KYC compliance to showing loan schemes, taking consent for the loan agreement, disbursing and instructions on repayment. Our API-led middleware helps banks, fintechs and FIs carry out the entire process with ease – right from onboarding, to underwriting and complete lending flow.”
A Deep Dive Into Buildd’s White-Label Credit Products
Although Buildd’s core platform is the API-driven middleware, it has launched two white-label products, including checkout finance (consumer loans) and microfinancing, in 2023. These have been developed in tune with the BaaS 2.0 model to widen financial inclusivity. Moreover, its sandbox helps companies design and test their products in a plug-and-play setting and go live in 48 hours.
Buildd generates 55% of its revenue from its white-label products, while 45% comes from its standalone middleware service. Gaikwad added that Buildd has a revenue sharing agreement with its partners.
Here is a look at how Buildd products work:
Checkout Finance: An embedded finance (EmFi) solution enabling small-ticket consumer loans at physical stores or online stores at checkout, similar to popular lendingtech platforms like Amazon Pay Later and LazyPay. Buildd aims to help retailers create the best user experience possible. But unlike the big players, which focus on ecommerce, it primarily targets offline stores and SMBs.
“Although we keep seeing ecommerce everywhere, the ‘real’ retail still happens offline,” said Gaikwad. “Most people go to the market to buy clothes, shoes, jewellery or medicine. Buildd is providing offline merchants with an opportunity to capture the lendingtech space.”
He explained the mechanism further, saying that the customer just scans the QR code and can start his/her purchase transaction. The transaction is authorised by giving an OTP (one time password) to the person at the billing counter.
To enable this offline checkout solution, Buildd has partnered with Muthoot Finance, a Kerala-based NBFC. Through this collaboration, the fintech startup can cater to 50 Lakh customers with pre-approved loans to its merchant partners. The digital interface allows quick and convenient checkout finance without the need for a physical point-of-sale (POS) machine or a mobile application.
The checkout finance solution even works as a WhatsApp link. By clicking the link, the shopper can provide all required information, including bank details and avail consumer loan with a single click.
WhatsApp-Based Microfinancing: Buildd also offers a core banking system (BCS) for microfinancing and serving the unbanked and underbanked, including small business owners, low-income groups and self-employed individuals. This is crucial as small businesses and low-income individuals struggle to access financing from legacy FIs due to a lack of credit history, documents, collateral or regular cash flow. However, microfinancing as an EmFi solution has become a game changer as it is fast, flexible and accessible.
The startup has already partnered with five platforms for its WhatsApp-based lending solution. Among these are Chennai-based NGO Buzz Women, which caters to rural and semi-rural women entrepreneurs, Telangana-based financial services platform Sub K, Lucknow-based Mitr-Sewa and Mysore-based Udyami.
From setting up an account for a loan application to loan scheme agreement, assessing credit bureau score and repayment, the entire process is stitched on WhatsApp’s UI and available in various Indian languages (Hindi, Marathi, Kannada and more) for wider reach. DeciSys, Buildd’s automated underwriting process also reduces the need for extensive documentation, enables faster approval and lowers default risks.
Incidentally, Buzz Women plans to leverage this solution to disburse loans to more than four lakh micro-entrepreneurs.
According to Gaikwad, the country’s microfinance loan market stood at INR 30 Lakh Cr at end-September 2022, serving 6.2 Cr unique borrowers with 12 Cr loan accounts. “This segment is growing at 12% YoY and the potential for growth is huge since a large segment of India’s population is still starved for credit,” said Gaikwad.
Buildd is targeting to create a standardised microfin layer to serve FIs in this segment and claims that it has already on- boarded member banks for this product.
The Road Ahead
According to Gaikwad, the BaaS startup plans to launch more products in the coming months, and it is already in talks with many players for partnership opportunities.
Gaikwad said that Buildd would soon onboard popular Indian travel portal MakeMyTrip and a digital bank based in the Philippines for its white-label services.
By 2024, the startup plans to take its partnership tally from 35 to 50 and focus on scaling its tech and product stack.
“Given our domain expertise and fintech experience, we envision taking our new-age digital financial products and services to more banks and FIs in the ecosystem. We are confident about capturing a large market share,” the founder said.
In recent years, the BaaS segment has grown significantly due to the country’s rapid digital transformation and gained interest from stakeholders and investors alike. Legacy banks, FIs and NBFCs are eager to get beyond their rigid structures and grow their businesses by bringing millions of Indians to the financial services fold. Even major private banks such as HDFC Bank, ICICI Bank and Kotak Mahindra Bank are already offering APIs and have set a strong foothold in the BaaS segment.
In India, the BaaS market size is projected to hit $20.8 Bn in 2027, growing at a CAGR of 13.2% from $8.7 Bn in 2020.
The fast emergence of disruptive players like Zeta, Setu and Buildd and the rising investor interest will also add to the growth momentum of this segment.
Despite these growth triggers, there are challenges galore. One of the biggest issues in this space is the need for clear regulations around open banking and data privacy. India needs to set up a PSD2-like directive adhered to throughout the European Union. If an ‘open banking’ directive and related data laws come in too late, startups in this space may have to undergo massive pivots to ensure compliance. This won’t be a one-off either, as BNPL or crypto startups have already borne the regulatory brunt.
Gaiwad, however, hailed all corrective measures and future regulations which could be coming up to ensure a smooth future for BaaS players. “We have always welcomed the RBI’s guidelines. Fintechs need to adhere to prudential norms in both letter and spirit. Buildd has been working with banks and regulated entities, and we always follow the regulatory guidelines,” he added.
For now, the biggest advantage for the likes of Buildd (and the legacy banks) is that no cut-and-dried regulatory norms are out yet. Whoever works proactively in this space will stay ahead of the curve and likely see a healthy demand. Joining the race early and keeping tabs on a fast-evolving fintech industry will be the way to get ahead if legacy banking wants to join hands with tech providers to bring about a huge change.