India has come a long way in terms of its financial structure, especially when it comes to the banking and finance industry. Today, the methodologies to evaluate one’s credit worthiness have witnessed a sea change. People are being evaluated even in terms of their financial activities’ record of everyday life, Ahmad Shariq Khan of Elets News Network (ENN) examines all this and much more.
You may describe it as strange, interesting or simply the new norm in the financial world of India but certainly, thanks to fintechs, the financial sphere here has undergone a sea-change in last decade or so. After all, the Indians are now living in an era of fintech–backed e-payments.
In the recent times, the Indian banking sector coupled with its traditional financial services space have undergone a big transformation, thanks to the entry of Fintech players – that, backed by technology and innovation, along with many industry’s firsts, have brought a new kind of energy, and modus operandi to the whole banking and financial sphere.
Across the globe too, the fintech sector is flourishing.
As per KPMG, the fintech segment that by definition, comprises technology-based businesses that are competing against, enabling or collaborating with existing financial institutions, is likely to continue its current growth trajectory heading northwards, with the global fintech software and services sector forecasted to touch $45 billion by 2020 at a Compound Annual Growth Rate (CAGR) of 7.1 per cent.
In India too, the fintech space seems to be placed on a solid footing. Let’s explore the key reasons that have fuelled or are fuelling the sector’s growth in recent times.
Consider this, India is home to the largest unbanked or under-banked population in the world. As per a top auditing firm, the financial services market in India is primarily untapped, with 40 per cent of the nation, having no association with any bank and more than 80 per cent of the transactions across the country still carried out through cash. It’s in this backdrop it can be said that in recent times, a strong, proactive policy level push from the Indian government appears to have worked in favour of the sector, giving it the much needed boost to increased user-adoption in this segment.
For sure, Prime Minister Narendra Modi-led government’s recent consistent push towards initiatives such as cashless economy, Jan Dhan Yojana, Aadhaar and the emergence of Unified Payments Interface (UPI) plus a consistent push for popularising apps such as Bharat Interface for Money (BHIM), developed by National Payments Corporation of India (NPCI), based on the Unified Payment Interface (UPI), all such IT-driven measures have certainly provided a good foundation for Indian fintech companies to reach to, and cater to the potential demand across the nook and corner of the country, thereby facilitating the last mile touch-points and giving a significant boost to the idea of a holistic and effective financial inclusion across the country.
As per KPMG, the Fintech industry is likely to continue its current growth trajectory, with the global Fintech software and services sector predicted to touch $45 billion by 2020 at a Compound Annual Growth Rate (CAGR) of 7.1 per cent.
What’s Making Fintechs Tick?
Of late, India’s fintech landscape has witnessed a strong user-adoption. The sector, driven largely by the payments sector has enjoyed a boost, postdemonetisation of high-value currency notes by the current Government. In addition, one of its subdomain i.e. alternate lending, fuelled by the large number of unbanked, new-to-bank, and under-banked consumers has also emerged as a key growth driver.
According to Punit Jain, Chief Executive Officer, Nelito Systems Ltd, “The differentiator is: Agility. The technology plays a game-changing role here. Be it approving of loans or customers’ onboarding – in all such processes, technology has been the key enabler for NBFCs, setting them apart from traditional BFSI players.”
Mentioning how IT has brought efficiency across the sector, another industry stalwart, Ashish Ojha, Chief Technology Officer, Aye Finance, adds, “Thanks to technology enablement, our company grew from a start-up phase to a mid size one in a span of just two years. We grew from 150 Cr to 500 Cr in a matter of a year. Last year, our entire process was paper-based, and turnaround time was 10-12 days. Thereafter, thanks to the consistent usage of automation technology, we managed to reduce our loan disbursal time to 3-4 days.” Such is the potential of IT in driving the growth of the fintech space in India.
Fintech Sector’s Growth Drivers:
Digital Payments Of late, riding high on the demonetisation wave, the digital payments segment has garnered huge recognition. As per a leading international audit company, it is estimated that 80 per cent of economic transactions in India still happens through cash, contrary to around 21 per cent for developed economies. This certainly hints at the mammoth size of the opportunity that exists for fintech firms in this segment in the country.
Further, the digital payments sector in India is estimated to grow to $500 billion by 2020, up from roughly $50 billion last year, and representing around 15 per cent of GDP in 2020. Mobile payment solutions, such as wallets, P2P transfer applications and mobile points of sale, are al observing good growth in terms of strong user-adoption across Indian cities, tier-2 and tier-3 cities.
In addition, some fintech players in the sector have started taking advantage of Govt’s policy initiatives such as ‘Payments Bank’ licenses to become a hybrid model, thereby facilitating a blend of mobile-based services with many traditional banking services.
Sarath Chandra, Chief Technology Officer, Airtel Payments Bank, while summing up the lifeline role of technology in a modern day IT-driven NBFC such as his own (organisation), that as per him, right from the word go, has had the distinction of being a 100 per cent digital bank, opines, “Technology is so integral to us and to the NBFC sector, that without it, the sector cannot operate, let alone succeed. We are innovating each day to be more agile to customers’ needs.”
According to a research, over 95 percent of financial services incumbents seek to explore fintech partnerships.
Alternative lending is the second most funded and one of the fastest growing segments in the Indian fintech space. Worth noting is around 37 per cent of India’s GDP is contributed by MSMEs but the supply of credit lines to this important segment has often been found to be uneven. This has resulted in the growth of alternative lending as a medium for meeting the needs of different borrowers seeking financial products such as consumer loans, SME loans, working capital loans, and even payday loans among others. Recently, in this domain, many startups have brought in many innovative processes for credit scoring, risk assessment and loan disbursement.
According to Srivaths Varadharajan, Chief Information Officer, Niyogin Fintech Ltd, “Besides application programming interface (API) integration and a Credit bureau’s perspective, we now take into account the social profiling score.” Interestingly, it’s worth mentioning that in India, things have come down to the level that now even Swiggy’s (food delivery app) orders history is being taken into account by many fintech players for judging the credit-worthiness of customers. This very well demonstrates the level of excellence being enjoyed by Indian players in this domain – and things are bound to only get better here on, we believe.
Direct Lending includes platforms that have a lending license to lend funds to various sectors. The major contributors to the growth of this sector include a large amount of unmet demand for loans from MSMEs, with a gap of roughly $200 billion in credit supply, and a significant underbanked and new-to-bank population, as per PwC. Joining the bandwagon, recently many NBFCs have started competing with traditional banks in this segment – offering MSMEs with better offerings, hasslefree application processes, eKYC norms, alternate credit-scoring algorithms and lower processing time.
Peer-to-peer (P2P) lending involves building a marketplace to bring together individual borrowers and lenders through tech-enabled platforms. This allows borrowers to access low-cost quick loans at a rate they can afford. Increasingly, such marketplaces use alternate credit scoring models for risk assessment and underwriting. Vaibhav Pandey, Co-Founder, i2iFunding, tells us, “For a P2P lender like us, technology has been an enabler. Dealing in loans with a ticket size of Rs 50,000 to one lakh, all enabled through our mobile app, with customers’ insights from social media platforms, and its triangulation to effectively judge the credit-worthiness of our customers.”
Led by emerging technologies such as artificial intelligence, machine learning and BOT-enabled conversational banking services, this segment effectively forms the bedrock for fintech solutions being offered by fintech firms. The domain includes software solutions, fraud and risk management tools, regulatory compliance and other solutions for banks and other financial institutions (FIs) – all of which are essential for hassle-free IT- driven banking or a related experience.
With rising consumer expectations and increased access to technology-enabled efficiencies, insurers world over are increasingly looking to incorporate solutions that improve customer engagement, retention and improve the complete customer lifecycle. For example, backed by Internet-of-Things (IoT) enabled solutions and its collaboration with health and wellness data, can greatly help insurers predict consumer behaviour better.
Backed by Artificial intelligence (AI), Machine Learning (ML), coupled with an automation shift to a hybrid model, the asset and wealth management industry in India is one segment that in recent times has achieved significant growth. Globally, we are seeing a shift from robo-advisory to hybrid human-assisted robo-advisory and thus all such future innovations involving hybrid technologies are set to further fuel this segment’s growth in India too.
This domain involves raising funding opportunities from a large group of investors. Under the process, the investors can interact with the investees and view their innovative ideas on a crowdfunding platform meant for this specific purpose. Once the two parties agree, the financing can then be received in the form of donations. While, this form of alternative lending is at a very young stage in India, certainly there exist many untapped opportunities waiting to be explored.
The Roadmap Ahead
Despite a few concerns raised about regulatory clarity, the outlook for fintech in India remains very promising.
Going forward, increased regulatory support, push on financial inclusion and most importantly, a rapidly-increasing adoption of emerging technologies in the financial services industry are likely to further enhance the prospects of this domain.
Nevertheless, one built-in Achille’s heel of NBFCs that stems from the very nature of their inherent design is the fact as highlighted by Rakesh Dubey, Chief Executive Officer, SV Creditline Limited, saying: “Since a bank in India is synonyms with trust, hence being an NBFC equals to being a non-trust holding entity, hence to gain back the trust of the level of bank, the sector needs to work extra hard and needs better regularisation for the purpose.”
Equally important is another grey area that needs to be addressed i.e. the fact that the segment’s ecosystem, taken as a whole, still lags behind other global fintech hubs in terms of the number of middleware and B2B solutions – that are much needed for a robust and consistent performance of the sector since these effectively enable financial institutions to provide end-to-end solutions for their users.
Going forward, as the sector’s stakeholders proactively work towards enhancing the finer details of the entire fintech ecosystem, the domain is bound to register healthy growth in future.