Friction is a poorly understood word in finance. It has been cast as the villain in an industry obsessed with speed, convenience and instant gratification.
Fintech leaders and BFSI regulators alike are infatuated with the idea of a frictionless world, where transactions glide seamlessly and consumers never have to stop and think.
Fintech leaders and BFSI regulators alike are infatuated with the idea of a frictionless world, where transactions glide seamlessly and consumers never have to stop and think.
Frictionless finance is the new bestseller in the fiction section. It is being sold as a utopia where credit flows effortlessly, payments are instantaneous, and financial decisions are made in the blink of an eye. The problem? The story is deeply flawed.
Take the case of an Indian millennial, let's call him Rahul. In under five minutes, he buys a new smartphone on a Buy Now, Pay Later scheme, books an expensive vacation with a personal loan from a digital lending app, and invests in a high-risk cryptocurrency — all through different platforms.
It feels seamless. No paperwork, no calls, no second thoughts. But then, the EMI notifications start arriving. A missed BNPL repayment triggers hefty penalties. The personal loan has an interest rate he didn't fully register. And the crypto market crashes. What felt empowering at the moment turns into financial quicksand.
There is nothing particularly new about the idea of frictionless finance. It has been attempted before, often with disastrous consequences. The 2008 financial crisis was a masterclass in what happens when friction is removed from lending. Subprime borrowers were handed loans with minimal checks, mortgage approvals were expedited, and financial products became so complex that even regulators lost track. The result? A global meltdown.
Closer to home, India's microfinance sector in the early 2010s saw a similar issue. Lenders, in the name of financial inclusion, gave out loans with minimal friction. Borrowers, especially in rural India, took multiple loans without fully understanding repayment obligations. The unchecked, high-speed lending led to mass defaults, borrower distress and regulatory interventions. Friction was removed, but financial discipline vanished with it.
Friction exists for a reason. It is not an outdated inconvenience; it is a safeguard. In finance, friction is the pause before action, the checkpoint that demands attention before commitment. Without it, the world of money risks becoming dangerously impulsive. Consumers might sign up for loans they cannot afford, trade stocks without understanding the risks or get trapped in an endless cycle of digital borrowing. The very essence of responsible finance — accountability, prudence, and informed choice — stems from the pause that friction provides.
The Indian financial system itself offers an ironic contradiction. Regulators actively push for frictionless finance, yet they also impose cooling-off periods for high-risk transactions — like mandatory waiting periods before cancelling insurance policies, placing restrictions on mutual fund SIP cancellations or imposing caps on IPO investments. Why? Because even the regulators recognise that without friction, financial decisions can become reckless.
Consider UPI, India's shining example of seamless digital payments. It has revolutionised transactions, making them nearly frictionless. But it has also led to a surge in fraud. The Reserve Bank of India had to introduce additional verification layers like device binding, transaction limits and AI-based fraud detection to curb misuse. The lesson? Friction is not a flaw; it is a necessity for trust and security.
The rise of BNPL schemes is another example of how frictionless finance can be deceptive. Consumers are nudged into credit at checkout, with no immediate pain of payment. What they rarely realise is how easily small debts snowball into financial distress. Many users assume BNPL is "free money" until late fees and compounding interest hit them. A moment of friction — a reminder of repayment terms, an affordability check — could prevent future regret.
Even in stock markets, frictionless trading has its perils. Algorithmic trading, hailed as a breakthrough in market efficiency, has also caused extreme volatility. The 2010 "Flash Crash" in the US and similar market swings in India show what happens when speed overtakes stability. If friction is completely stripped away, markets become hypersensitive, and a single automated miscalculation can wipe out billions.
Today's financial ecosystem is increasingly driven by AI and machine learning, promising a seamless, friction-free experience. AI analyses creditworthiness in seconds, approves loans instantly and executes trades at lightning speed.
But the problem with AI-driven finance is its fundamental lack of human judgment. Algorithms are built on historical data, but finance is about the future, not the past. AI cannot predict an economic downturn, a black swan event, or an individual's financial crisis. It may approve a personal loan for a gig worker based on past earnings, only for the borrower to lose income when the platform changes its policies.
The real risk is that AI and automation make finance so effortless that consumers stop paying attention. If a machine tells you that you are eligible for a loan, why question it? If an app offers a high-return investment at the click of a button, why pause? Friction, in such cases, acts as a necessary roadblock — a moment where human intuition and financial literacy can still play a role.
The RBI has been actively working to make credit more seamless, with its 2023 pilot project on a Public Tech Platform for frictionless credit. The initiative aims to reduce delays in loan approvals by integrating digital verification processes such as Aadhaar e-KYC, PAN validation, and account aggregation. Initially targeting Kisan Credit Card loans, dairy loans, MSME loans, and small-ticket personal and home loans, the platform seeks to make credit accessible within minutes.
While this is positioned as a step towards financial inclusion, the risk lies in whether reducing friction too much might lead to unintended consequences — where borrowers access credit without fully understanding repayment obligations, or banks extend loans with minimal due diligence. The balance between efficiency and responsibility will determine whether this frictionless push strengthens the financial system or introduces fresh vulnerabilities.
Providing frictionless credit has long been a policy goal, but what does it really solve? In any lending transaction, there is inherent information asymmetry — the lender never fully knows the borrower's creditworthiness. Friction, in the form of due diligence, verification and approval processes, exists to correct this gap. Strip it away and financial institutions are left making blind bets. If history has taught us anything, it is that unguarded, fast-flowing credit leads to crises, not inclusion.
Financial regulators love to speak about "enhancing customer convenience", but they rarely discuss what happens when convenience overtakes caution. Should a bank be allowed to approve a Rs 10 lakh personal loan in under a minute? Should customers be able to open trading accounts without any deliberation? Should first-time investors be nudged into complex derivative products with no waiting period? Convenience, without accountability, turns into confusion.
Friction, then, is not an enemy of innovation. It is an ally of intelligent finance. The goal should not be to eliminate friction but to place it where it matters most. Customers should be able to swipe for ease but stop when a decision requires attention. A world without friction is not a world without problems; it is a world where problems move too fast to be caught in time.
In an era where automation is worshipped and decision-making is being outsourced to algorithms, the need for friction has never been greater. The pause before confirmation, the extra layer of verification, the deliberate speed bump in a high-stakes transaction — these are not relics of inefficiency. They are the last line of defence in an industry where mistakes can be costly, irreversible and systemic.
The pursuit of frictionless finance is, at best, a misguided fantasy and, at worst, an invitation to disaster. In financial services, friction is the price of trust. Frictionless finance sounds great — until you realise that cars without brakes are also frictionless. And we all know how that ends.
Srinath Sridharan is a corporate adviser and independent director on Corporate Boards. Author of 'Family and Dhanda'.
Disclaimer: The views expressed here are those of the author and do not necessarily represent the views of NDTV Profit or its editorial team.
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