A recent report titled ‘India FinTech: A USD 100 Billion Opportunity’ by the Boston Consulting Group (BCG) and Ficci stated that the Indian fintech sector will realize a valuation of USD 150-160 billion by 2025. The report further stated that the Indian fintech sector has been successfully able to raise USD 10 billion from global investors, while its total valuation stands at an estimated USD 50-60 billion.
Having emerged as one of the fastest-growing fintech hubs in the world, India stands at the altar of a possible fintech revolution with concepts like mobile banking, paperless transactions, mobile wallets, and secure payment gateways have become a part of our daily lives. The remarkable growth trajectory of fintech in India is conspicuous in the 87% adoption rate– the highest amongst all the emerging markets in the world. The huge customer demand is fuelled by the well-versed reciprocity of the Indian fintech firms in understanding the pain points and specific preferences while focusing on seamless customer experience.
Besides huge customer demand, the fintech sector is being aided by varied capital flows, the immense talent pool in the country, accompanied by the government’s enthused drive towards digitization. Some of the major initiatives include Direct Benefit Transfer Scheme, Start-up India, Digital India, Jan Dhan Yojna, and others.
Along with these factors, the pandemic further accelerated the pace of fintech adoption in the country. It is noteworthy that UPI payments grew by 3x of their pre-pandemic value between March 2020 and January 2021. Such growth was also witnessed in online broking where the share of active clients with fintech discount brokers increased from a pre-pandemic 43% to 57% during the same time period. Also, three new fintech unicorns, namely, Pine Labs, Razorpay, and Digit Insurance have come into existence since January 2020.
The rising trend in fintech is not only being seen in payments and e-commerce services but also in other allied services such as data analytics, digital marketing, and digital transformation. Fintech startups have also been trying their hands in other domains such as insurance and wealth management.
The Future of Fintech in India: Opportunities and Challenges
The astronomical growth that the Indian fintech sector is observing currently posits its own set of opportunities and challenges that might affect its future run and growth prospects. Let’s discuss.
Access to Technology
The number of Indians that have adopted payment apps and UPI as an alternative mode of payment in recent years, owing to the easy access to technology via mobile phones, has positively impacted the digital shift to fintech. This positive impact is not only being seen in direct payment apps but also in mutual funds, insurance, online loans, and other such fintech offerings.
A report from Accenture suggests that even though the adoption rate of digital technologies has substantially risen over the years, continued lack of technical expertise and digital fluency persists even in top banks across the globe, and India falls under no exception. This lack of efficiency with handling tech gets reflected in customer dealings and stakeholder relations. Accenture recommends 25% of the members in a particular board of directors be technologically experienced and upgraded to pace up digital adoption.
Several banks have partnered with fintech firms to upgrade their existing systems and enable smoother operations for a better customer experience. Reciprocally, fintech startups have used data analytics to their advantage to encourage collaborations between banks and other financial service providers to help them deliver products via an open architecture, say, a website letting customers choose insurance policies as per their requirements and customize their plans accordingly. A Credit Suisse report upticks this marriage between banks and fintech firms as a boon for 60-70% of new retail customers and 50-60% of new MSME and home loans for leading banks.
Sanjay Doshi, Partner and Head of Financial Services Advisory, KPMG, reaffirms, “They (Banks) are really looking at tech and fintech companies that can help them move their digital activities forward, either investing in them directly or using them as service providers. That is going to be a big growth area for investment here in India — banking-as-a-service platforms.”
Increased Global Interest
The very successful Unified Payments Interface(UPI) and the 2019 ecosystem-level Sandbox initiative proposed by the government as financial inclusion measures has the global audience viewing India with interest. For several decades, India has been the hub for IT services and very recently, has become a home for one of the largest numbers of startups in the world. The huge talent pool, given the scope and width of fintech possibilities in India, can find opportunities for growth and development both at home and abroad to help build global digital financial services.
Momentum via Supply Chain Digitization
Since the onset of the Covid-19 outbreak, things have changed drastically when it comes to customer preferences, safety protocols, and other such challenges for businesses. The rapid digitization of supply chains, especially in the case of SMEs and MSMEs, and the dramatic rise in significance of e-commerce in our lives have become a ubiquitous phenomenon. Owing to safety concerns and lockdown for months in the country, more and more merchants had to extend their operations online to engage their existing customers and expand into new zones. As such, besides digital payments, we saw the rise of fintech startups concerning inventory management and record-keeping and other such digitals tools for improving the management of business operations.
Government agencies also collaborated with many fintech firms to handle Covid-19 related data and manage operations such as vaccination drives, information regarding the provision of medical facilities in times of need, among others. Infosys joined hands with the government to develop a blockchain-based app, M-Setu, that would handle Covid-19 records and data.
The Problem of Unaddressed Opportunity
Despite the government having launched a plethora of initiatives and promotional policies to promote digitization, the extent to which the customers have engaged with the formal financial sector remains low. Sadly, 14% of the Jan Dhan accounts launched to bank the unbanked sections of the society remain dormant. The penetration of other financial products remains way below the global standards, for instance, less than 2% of Indians invest in mutual funds, and the amount of funds invested in insurance policies is 4% of GDP.
Talking about MSMEs, only 1/6th of the millions of MSMEs in India rely on formal sources of finance and credit which alone represents a USD 340-billion opportunity that remains unaddressed.
Despite several challenges, fintech in India would continue to chart a rising graph. As technology becomes more accessible and fintech services more affordable, fintech services will reach a greater number of people, both geographically and demographically. While new technologies concerning fintech tools to save, invest and trade money will continue to emerge giving people new paradigms of financial independence and awareness. In order to achieve both horizontal and vertical growth, the fintech firms would need to define appropriate strategic plans to enhance user experience while embracing innovation to build deep tech capabilities.