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Fintech, a wintech in India?

  • How the fintech ecosystem emerged in India
  • GOI’s initiatives to boost fintech growth 
  • The future of fintech in India

 

Fintech is transforming the traditional financial services globally through better solutions involving technology and innovation. This was also stated through Televisory’s earlier blog on the subject. Moreover, investments in fintech companies’ world over are expected to grow at a CAGR of 7.1% and is estimated to reach USD 45 billion by 2020 (Source: KPMG-Fintech in India, 2016; Business Standard 2016).

India is no exception to this boom with USD 3.01 billion of funding in the fintech space and 111 deals taking place last year (Source: inc42.com, Indian tech startup funding 2017).

 

The total fintech (both software and services) market in India is worth USD 8 billion and is pegged to grow USD 13.6 billion by 2020 (Source: NASSCOM-Indian fintech product report, 2016). The Indian fintech software market is also projected to touch a revenue of USD 2.4 billion (2020) according to NASSCOM. Hence, with a CAGR of 22%, the transaction value for Indian fintech sector is forecasted to reach USD 73 billion (2020) from USD 33 billion in 2016 (Source: NASSCOM). This growth is driving by both the consumer fintech product as well as enterprise fintech product demand. Additionally, with more than 360 fintech startups (Source: Zinnov Research and Analysis-Indian startup ecosystem, 2017), the cash driven Indian economy has responded well for the global fintech opportunity. Further, a large portion of unbanked and underbanked population, an increasing internet and smartphone penetration and a surge in e-commerce provide startups with a huge potential to launch competitive products or services. 

Indian fintech ecosystem is supporting growth

Internationally, India is ranked second in the fintech adoption rate according to the EY Fintech Adoption Index 2017 with a 52% adoption rate, this is much higher than the average 33%. Fintech companies in India bridged the gap between traditional financial institutions and consumers by providing better and faster services or products at low prices. A strong policy level support from the government and initiatives such as ‘Digital India’, ‘Pradhan Mantri Jan-Dhan Yojna’, ‘Aadhaar Card’ identification and ‘Unified Payments Interface (UPI)’ will boost the financial inclusion and promote a cashless economy. Demonetization created conducive prospects for fintech companies in India, where these can achieve a massive first mover advantage.

  • Government support
  • In order to support the emergence of cashless digital economy with a strong fintech ecosystem in India, the Government of India (GOI) is pushing for aggressive strategy, both at the policy and the funding level. The major steps taken by the GOI along with other regulatory bodies like RBI (Reserve Bank of India) and SEBI (Securities and Exchange Board of India) are mentioned below:

  • Pradhan Mantri Jan-Dhan Yojna (PMJDY)

  •  

    PMJDY gave a big push to financial inclusion from supply-side. In addition, since its inception more than 300 million bank accounts were opened under the scheme (Source: RBI, 2017). There has also been an increase in the average balances in these accounts following demonetization.

    Fintech startups with low cost budgets are able to provide easy to use and efficient transaction services across financial sector.

    India Stack

    Additionally, through IndiaStack, an open-source set of APIs (Application Programming Interface) were provided by the Unique Identification Authority of India (UIDAI), the government supported technological framework for both the government and businesses to build innovative tech products for banking services, especially payments.

    Aadhaar

  • The Indian government’s initiative to create unique identification for all citizens. Aadhaar, which was launched in 2009, presently cover over 1.19 billion Indians (Source: UDAI, November 2017). This central identification database help in eKYC (electronic Know Your Customer) and financial benefit transfer schemes. 

    Startup India

    The scheme was launched by the central government in January 2016 and induced USD 1.5 billion fund for startups (Source: KPMG-Fintech in India). This was done to encourage startups with novel ideas. Startup India included simplified regulatory process, patent reforms, tax exemptions and increased government funding. Few of the startups are 100% tax exempt for 3 out of the first 5 years of operation, there is an 80% rebate on the patent cost, tax rebate or VAT (Value-Added Tax) reduction to merchants allowing more than half transactions digitally.

    Unified Payments Interface (UPI)

  •  

    The National Payment Council of India (NPCI) was introduced in August 2016, Unified Payments Interface (UPI) currently has 50 banks live on the platform with 9.2 million transactions in May 2017 from 92,000 transactions in the month of its launch. UPI, a payment system and as a part of ‘IndiaStack’, facilitates simplified instant fund transfer via mobiles in a secure environment and thus, reduce the cost structure for fintech companies. NPCI also introduced RuPay cards which enable immediate money transfer.

    Payment banks, P2P transaction and crowdfunding

    Payment banks and small finance bank offer a wide range of banking services for unbanked population. The RBI issued licenses to 11 payment banks and 10 small finance banks. It also issued consultation paper in April 2016 for P2P (peer-to-peer) lending market and P2P was categorized as a non-banking financial company.

    Investors

    The investment in Indian fintech is rising with more than USD 3 billion of funding in 2017. According to a report issued by The City of London Corporation (2018), the annual returns on fintech investment in India were the highest at 29% compared to the Asian average of 25% and the global standard of 20%. Furthermore, around 95% of the financial services incumbents in India seek to explore fintech partnership (Source: PwC-Fintech Trends Report, 2017). Bengaluru, Mumbai and Delhi-NCR are the major fintech hubs in India with over 80% of the fintech companies (Source: track.in, 2015-16).

    • Users
    •   
    •  

    The adoption of fintech is relatively fast in India both in terms of enterprises and consumers with 52% adoption rate.  This is due to the emergence of a young, wealthy and digital-savvy generation and expanding internet and mobile penetration, which is contributing to the growth of the fintech. Hence, there is a shift towards cashless transactions and mobile banking.

      

    India is a country with a one-third urban population and approx.  27-year median age. This means most of the people are income generators and adopt technology at a brisk pace. Consequently, mobile phones, smartphones and internet penetration has further added to the growth. Thus, with a billion mobile phones, the smartphone penetration is ~27% with over 269 million smartphone owners (2016), this is expected to reach more than 550 million smartphone users by 2020. According to the Counterpoint Research, India has become the second largest market for smartphones and outpaced the USA. Internet penetration is also forecasted to reach ~59% with over 800 million active internet users (2020) from 447 million (2016).  The nation saw 75% of new internet users’ growth from rural areas and 70% of e-commerce transactions via mobile phones (Source: NASSCOM). This shows that there is still ample room for fintechs to grow.

    Fintech sectors in India

    India’s fintech growth was largely driven by the payment and lending sector and was further boosted by demonetization and Digital India scheme. The following fintech sectors are growing and evolving in the nation. 

    Payments

    In India, 46% of the companies focus on payment processing and trading solutions (Source: NASSCOM, Deloitte Analysis). Financial payment is the most potential and competitive sector, with 80% of economic transactions in cash as compared to 21% for developed nations (Source: PwC-Fintech in India).

    The digital wallets companies such as Paytm and FreeCharge that enable payments using smartphones reflected a strong growth. Currently, their wallets are mainly used for bill payments, online purchases and phone recharges. These wallet companies have gained popularity as they reach the unbanked population through innovative solutions such as MobiKwik cash pick up service and Paytm tie-up with ICICI Bank for cash loading.

    The RBI also issued 46 PPI (Prepaid Payment Instrument) licenses in 2016. The pre-paid cards also assisted consumers, which were not digitally savvy with remittances, online buying, etc.

    A rapid growth in mobile banking and mobile wallet transactions transformed the traditional cash based economy to cashless economy. According to the Boston Consulting Group, the cashless transaction will overtake cash transaction in the next 5 years.

    Digital lending

    Likewise, according to the Credit Suisse, there is a USD 600 billion opportunity in the lending space. Alternatively, lending is the fastest growing fintech followed by the payments in India. These are regulated by the RBI as NBFCs (non-banking financial company), digital lending firms like LendingKart, Capital Float, SME corner, etc. utilise technology and algorithms to design lending models and target un-banked market of MSMEs (Micro, Small and Medium Enterprises) and middle classes, these enable smooth and fast delivery of loans at lower costs than traditional financing institutions. The unmet loan demand of MSMEs is the major reason for the growth of the lending fintech sector, where roughly USD 200 billion gap exists in the credit supply (Source: PwC-Fintech in India). In the recent years, P2P (peer-to-peer) and segment-based lending have been gaining prominence, where P2P lending platform act as aggregators between lenders and borrowers and segment-based lending focus on young working population for the issuance of loans.

    Banking tech

    The banking tech includes risk management, core banking solutions, regulatory compliances and other solutions for bank or financial institutions. Fintech has enabled secure real time system for the entire banking processes by providing new technology. This include, support for customer interface, next-generation chatbots adopted by several major banks in India such as HDFC, ICICI, YES Bank, etc. Open banking, machine learning enables banks to predict customer needs and meet these in a customized manner.

    Wealth tech and robo-advisory

  •  

    India is underpenetrated in the mutual fund industry, here only asset under management is 8% of the GDP, this is way below the 87% of the USA and Europe (Source: SEBI MF opportunity report) and suggests a significant growth opportunity. Hence, with low interest rates, introduction to new products, growing retail participation and digitisation, the mutual fund industry is expected to double its AUM (assets under management) to Rs. 35 lakh crore over the next 5 years as per the Business Standard, January 2017. Robo-advisory like Scripbox, ArthaYantra and Online investment channels such as Zerodha, Money View and Intelligent portfolio management companies like Goalwise and Vanguard have emerged in this segment.

    Insurance

    Fintech has empowered insurance sector through innovative products that aggregate insurance provider data digitally and simplify application processes to provide better customer engagement and transform the overall customer experience. PolicyBazaar and Coverfox are few companies in this area. The internet of things enabled solutions like health and wellness data can help companies to better predict a customer behaviour and thus, offer better pricing options. Marketplaces also offer transparency to understand products.

    Future of fintech in India

    Internationally, the fintech segment is rapidly growing and India has already adopted the financial technology with 52% adoption rate as per the EY Fintech Adoption Index, 2017. An increasing penetration of smartphones and the internet provide a significant boost for the technology. The support from the government in form of policy initiatives, financial inclusion and digitisation has opened a massive window for fintech. The digital payments, which is the most prominent sub-sector recorded a market size of USD 3.6 trillion in terms of global transactions (2016-17) with a 20% YOY growth (Source: Let’s Talk Payments-Fintech Outlook, 2018), the outlook for payments in India is also very promising. The digital payments are expected to grow to 15% (2020) of the GDP from the current 5% (Source: Boston Consulting Group, 2016) with 72% adoption rate in India (Source: EY Fintech Adoption Index, 2017). Thus, as stated earlier, the total fintech market in India is projected to grow by ~1.7x to USD 13.6 billion (2020), the nation will witness lucrative opportunities in the fintech space.

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