Fintech Sector in India – Way Forward
The ongoing large-scale digitalisation of the financial services sector has opened up an immense opportunity for companies around the world to augment and adapt their financial system to allow for more inclusivity and efficiency as well as equitable development in the post-pandemic world. The term FinTech describes technologies that are delivering financial services tailored for the specific needs of underserved customer segments, through digital modes and channels, utilising technologies, and strategies such as advanced analytics, AI and ML, API-based solutions, and more recently, Web3.0 concepts, AR/VR and blockchain. In the Indian context, the fintech space is just about a decade old but has been on a record-breaking spree in the past few years owing to a multitude of factors.
The global digital boom of the early 21st century along with rapid economic growth and a superior position in IT services meant that India was among the handful of early adopters of technology in financial services and at an unprecedented scale at that. The recent coronavirus pandemic while accelerating this trend majorly, was also an important use case study of how technological prowess served people’s financial needs at such vast scales in times of blanket physical distancing restrictions. The Indian government, for instance, relies heavily on direct monetary transfers of cash to bank accounts of its mostly rural and poor welfare beneficiaries be it for social security or for agricultural subsidies and the like. This has been made possible to a large extent by a favourable regulatory environment for this promising sector as well as a wide range of government and institutional policies designed to deepen financial reach and inclusion in a country historically marked by low financial literacy and inequitable access.
The fintech sector has the ability to not only streamline the working of the existing traditional financial sector but also aid in improving efficiency, lowering costs, and expanding access to financial services to more consumers than the traditional brick and mortar stores were capable of. The fintech sector has been identified to play a more transformational or evolutionary role than a disruptive one. Rather than replacing or competing with pre-existing organisations, numerous bank-fintech partnerships have emerged that leverage the technology to improve the working of the banking sectors.
Drivers of the Fintech sector in India
- Steady economic growth which is expected to increasingly drive household consumption and income levels, coupled with low penetration of certain financial services in tier 2 and 3 cities.
- Increasing development of digital infrastructure in and outside of urban and metro cities both in terms of internet connectivity and availability of smart devices.
- The large chunk of young individuals in the economy are also the major drivers of growth and consumption. The prevalence of digital network usage among this age group is contributing to an increase in the adoption of digital channels for making queries, initiating product searches, and making payments through digital channels.
- The ubiquitous mobile connectivity in accounts for the increasing demand and supply of devices and communication networks as well as the low-cost computing and data has been another major driver of growth of the fintech industry over the past years.
Future of Fintech
- Digital and Neo Banks
Digitisation lowers operational costs and gives customers greater access to a wide array of aggregated services on demand. While RBI doesn’t yet grant banking licenses to fully digital banks, the desire for cashless transactions in the economy has led to the rise of digital-first banks or “Neo banks” with almost all major banks now providing some form of mobile banking. Digital payments across the country registered a growth of nearly 29 per cent in a year.
- Open Banking
Open and embeddable banking leverages payment gateway, card networks, application programming interface (API)/White label solutions, as well as payment security to keep the financial services landscape more competitive. The consumer-centric services offered include third-party application providers (TPAP), prepaid card/Wallet, bill payment, QR code payment, payment aggregator, and point of sale (POS), whereas business-centric services include corporate cards, B2B payments, and invoice payments. Aadhaar, the state-built national identity database, brings down the costs and risks of sharing customer information (assuming customers give their consent and understand what they’re agreeing to). Its affiliate, United Payments Interface (UPI), enables common standards for digital payments. Aadhaar also provides a sandbox in which banks and fintech can experiment with collaborative models. The data allows fintech to offer better-designed, more personalised services, while embedded banking enables the creation of platforms that are tuned to specific niches, e.g., an HR portal that simplifies the creation of employee bank accounts. Paperless, quick, and secure are prime features of these services.
Unlike traditional banks, fintech companies require minimal paperwork to lend. This makes borrowing from them much simpler and faster. Fintech companies also use AI for risk assessment of customers with limited to no credit histories; assessments based on indicators like income and spending patterns. The consumer-centric services offered in this segment include buy now pay later (BNPL), personal loan, salary loan, gold loan, auto loan, education loan, and P2P lending while the business-centric services include corporate cards, fixed term finance, as well as trade finance. Fintech services employed in this segment include collections management, credit bureau, alternate credit scoring, lending as a service, and loan origination system (LOS) and loan management system (LMS).
Fintech is also paving its way into the wealth management sector to give consumers, businesses, banks, and other organisations a better knowledge of investment and purchasing risks earlier in the process. AI and Machine Learning are used to process huge amounts of data using algorithms designed to detect trends and risks.
Fintech firms are now partnering with traditional insurers to help automate operations and increase coverage. The scope of services offered includes insurance comparison platforms, claims management, sales platform, underwriting risk management, insurance infrastructure API, insurance product configurator, and policy admin system. The industry is facing a lot of innovation, from mobile car insurance to wearables for health insurance, digital insurers, electronic insurance, employee insurance, etc. Fintech in this sector will also have to work on creating trust and consumer engagement as more consumers join the digital board. Giving customers regular updates, presenting clear information about policy changes, and providing polite customer care are all examples of communication.
This article has been authored by Karishma Sharma and Cherishi Maheshwari.
- Deloitte: FinTech in India Ready for breakout July 2017 IMF Policy Paper: FINTECH: THE EXPERIENCE SO FAR