Just a few years ago, India’s nascent fintech sector would seem incongruous with the country’s cash-dominant economy and digitally excluded public. Today, driven by policy changes and smartphone penetration, the scenario has entirely metamorphosed. People are comfortable using fintech-driven systems to access a wide variety of disparate products and services, from paying their grocery bills, using digital wallets, to getting a loan off an online platform. This transformation has enabled the sector to make major inroads into people’s lives, being an integral part of daily payments and major financial transactions.
The demonetisation drive in late 2016 became the tipping-point, as the consistent efforts of fintech players to drive India’s ascent finally bore fruit. 2017, therefore, has been a tremendous year for this space, and can teach us a lot about the business landscape at present. Between demonetisation, today, and the year to come, let’s see what the key takeaways are.
Major fintech developments in and around 2017:
2017 came with its own unique twists and turns. The year started off in the aftermath of demonetisation when the entire Indian market was still short of liquidity after the rigorous note-ban exercise. Small businesses, which are largely dependent on cash both directly and indirectly, were literally left floating in the absence of it. This not merely affected their forward supply chain and supply-demand graph, but also nearly halted their production, since smaller businesses need working capital to manage wide-ranging operations.
But this added impetus to digital payments in India. Small businesses, including the ones who earlier perceived digital mediums to be needless, were quick to realise their growing importance. In order to keep supply chains intact, businesses drew support from disparate fintech service providers. This included a prominent usage of payment gateways, predictive analytics, finance planning, and credit lending.
The year was also phenomenal in terms of the rollout of a new tax regime – Goods and Services Tax (GST). GST has virtually eliminated the state borders that once used to exist in the country. This has allowed SMEs to travel beyond their geographical restriction and cater to a broader national market. More importantly, the increasing compliance of GST has also helped in the formalisation of small businesses and in channeling greater digitisation to the SME sector in general. Demonetisation was also pivotal in enhancing the liquidity of banks, which, as a result, enhanced their CASA (Current and Savings Account) ratio. A higher CASA ratio decreases the cost of funds and increases the net interest margin. This increased liquidity has created a larger surplus of funds to boost lending in India.
More of this fervour is expected to continue in the coming year as well. Here are major developments that are expected to take place in the year to come:
- Increased focus on MSME segment: The limited growth potential vis-à-vis CASA surplus for banks to lend within the corporate ecosystem has made them more likely to look towards the MSME segment to channelise funds. This, on one hand, will help the capital-starved MSMEs to avail the larger business opportunity that has transpired with GST. On the other, it will increase banking and financial institutions’ capital efficiency. Fintech cos. that can sub-segment the MSME / SME market and underwrite accordingly will start capturing an increasingly larger chunk of the pie.
- Cash flow-based lending: Complete implementation of GST will make cash flow-based lending more feasible as more data trails get generated about businesses, especially the smaller ones who’ve long remained out of the purview of digital technologies.
- Greater role of alternate lending: With the government recognising the role of alternate lenders in financial inclusion, capital accessibility to alternate lenders will improve, enabling them to target their customers more effectively. Also, volumes will turn out to be a game-changer in terms of regulation. In 2017, RBI entitled a few NBFCs that had over Rs 500 crore in AUM (Assets under Management) as ‘systematically important NBFCs’. By the end of 2018, many fintech players will have more than INR 100 crore in AUM themselves. Different fintech players and their success will compel regulators to act due to the huge volume of transactions they will undertake.
- Innovation and investment: The fintech sector, though recognised by investors as a favourable investment destination earlier as well, has become more pronounced with increasing digitisation in India. Investment momentum and innovation around fintech and alternate lending is expected to continue at top gear, and several players are expected to hit critical mass, further accelerating their and the sector’s growth.
- Bank-Fintech Partnerships: Partnerships are expected to grow between banks and fintech platforms to create new ways to acquire, underwrite, and manage loan lifecycles. Banks and fintech companies will leverage their area of expertise to address the underserved MSME segment with higher meticulousness. It will help them to target the MSME segments at low and variable costs for procurement, underwriting and cost of credit. This will enable banks and lenders to reach a larger, previously unserved and underserved mass at an acceptable cost and return as they utilise their surplus funds.
- Innovative financial products: Financial products such as Merchant Cash Advance and Business Lending will play a bigger role, especially in catalysing the penetration of the segment where Credit, Debit Card, Digital transactions are growing. With increased digitisation and data availability, green shoots for the invoice discounting and purchase order financing products will appear in hitherto untapped verticals to finance MSME dealing with mid and large corporates.
- Job Creation: Fintech sector will play a major role in “connecting” lenders to hitherto underserved/unserved customer segments in the MSME / SME space thereby facilitating finance to the economy’s growth engine and supporting the Government’s agenda of supporting entrepreneurs and generating employment through these segments of the economy.
- Paperless movement (Jandhan-Aadhaar-Mudra) – Post 2018, as lenders become more familiar with the models, as digitisation of the economy grows, as more SMEs / MSMEs come under the ambit of GST, hence affording access to transaction level data, will increase the “shift” of lenders to this segment and from direct sourcing / underwriting towards Partnering with Fintechs across the varying models of different Fintech cos.
The nudge that fintech received because of demonetisation will now offer more meaningful solutions to the market. 2017 gave market players plenty of time to test and reinvent their offerings, and in 2018, will be the year when they might finally come into their own and get widespread acceptance across the market.
Prior to joining Indifi, Rana has held a host of leadership positions in ANZ Grindlays Bank, ABN AMRO Bank, the Royal Bank of Scotland and RBL Bank. He played a pivotal role in creating and executing the RBS India, Retail & Commercial (R&C) Change and Transformation strategy.
Disclaimer: The views and opinions expressed in this article are those of the writer and do not necessarily reflect the views of The Banking & Finance Post.