UPI and rising data access among top factors shaping fintech in India: Report

Boston Consulting Group

According to a Boston Consulting Group (BCG) report, among other key factors, increasing data access, the reach of UPIs, and higher embedded finance will determine the future of India’s fintech sector. According to government estimates, the sector is expected to achieve a $150 billion valuation by 2025.

The ‘future of fintechs in India’ is the focus of the BCG report for July 2022, which predicts that growth in this industry will be fueled by a ‘large addressable demand.’

Citing the data sourced from Statista, the consultancy group claims that the middle class would comprise 46 per cent of total households by 2025 as against 37 per cent in 2018.

In 2022, the population residing in urban areas has climbed to 36 per cent from 33 per cent in 2017. Reports state that the growing middle class and urbanisation is expected to encourage the development of the fintech sector. Another element that will continue to fuel the fintech growth story is the unprecedented growth in data access.

“Unprecedented growth in data access with growing smartphone penetration (1130 million smartphones by 2025 vs 600 million in 2020), rising internet penetration (900 million internet users in 2025) and declining cost of data,” noted the report.

The report further added that the ‘maturing digital infrastructure’, which has been powered by the linking of Jhan Dhan accounts, Aadhaar cards, and mobile numbers, as well as the ‘pandemic-aided explosion’ in UPIs, has been pivotal to the sector’s growth.

Moreover, the BCG report stated that the number of UPI transactions increased by 2.6 times between April 2020 and April 2021, from about 1 billion to over 2.6 billion.

The UPI held over 60 per cent volume share of total non-cash transactions in FY22. “Increase in the proportion of digital payments driven by UPI has created more digital data that enables robust underwriting for lending,” the report added.

The reports stated that e-commerce marketplaces (Amazon, Flipkart), e-commerce enablers (Shopify, WooCommerce), traditional lenders (Bajaj Markets), and merchant discovery platforms (Zest, Simpl) now capture multiple stages in the journey from product discovery consideration, purchase, fulfillment, and financing via BNPL (buy now pay later).

Reportedly, the growth of embedded finance is anticipated to accelerate digital payments and credit penetration in the upcoming years.

Additionally, the growing use of e-commerce and the maturity of the Open Network for Digital Commerce (ONDC) will act as key catalysts to this topline growth. “India’s BNPL disbursements are expected to grow from around Rs 100,000 crore in FY21 to over Rs 700,000 crore by FY26,” the report noted.

“The open architecture of Account Aggregator, OCEN, ONDC is expected to lead to a dramatic explosion in machine-readable data, transform data into a utility and democratize payments, credit, commerce, and savings,” the report added.

According to BCG, the regulatory stance in India is ‘increasingly nationalistic, pro-innovation and pro-consumer’. The RBI continues to limit the ringfence of deposit-taking institutions in its ‘selectivity of handing out banking/NBFC licenses’, the report further said.

However, the report stated that the central bank seeks to complement this ring fence by opening it up to service providers via an open architecture.

In conclusion, the BCG report stated that the fintech sector will continue to find underlying demand growth in India which ‘is expected to stay strong’. They will have to operate in a vigilant regulatory environment, and the new players will have to compete against licensed incumbents who are ‘strengthening their digital capabilities’.

Also Read | UPI apps must obtain users’ consent before accessing location data: NPCI

The report finally added that the fintech companies also have to cater to an increasingly affluent and digitally-savvy customer base, which is “hungry for their financial needs to be met digitally, and most importantly, a large base of mass customers waiting to be digitally educated and serviced,” the report noted.

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