FinTech or financial technology has emerged as a relatively new industry in

India.FinTech is an industry comprising companies that use technology to offer financial

services. These companies operate in insurance, asset management and payment, and
numerous other industries.

India’s financial technology (fintech) sector may be young but is growing rapidly,
fueled by a large market base, an innovation-driven startup landscape, and friendly
government policies and regulations.

Several startups populate this emerging and dynamic sector, while both traditional
banking institutions and non-banking financial companies (NBFCs) are playing catch
up.

Earlier this year, the National Association of Software and Services Companies
(NASSCOM) reported that around 400 fintech firms operated in India, boosted in
large part by foreign investments in fintech-focused startup accelerators and
incubators.

NASSCOM predicts that India’s fintech software market alone could touch US$ 2.4
billion by 2020, doubling on the current rate of growth.

Technology and the financial services in the Indian market

Understood simply, fintech refers to the scope of financial services that can be
available on digital platforms. This new disruption in the banking and financial
services sector has had a wide-ranging impact. Key service offerings to emerge on
digital platforms include:

Peer-to-Peer (P2P) Lending Services: Companies use alternative credit models

and data sources to provide consumers and businesses with faster and easier
access to capital. P2P lending allows online services to directly match lenders with
borrowers who may be individuals or businesses. Examples are Lendbox, Faircent,
i2iFunding, Shiksha Financial, GyanDhan, and MarketFinance.

Payment Services: Companies allow both private individuals and businesses to

accept payments over the web and on mobile without needing merchant accounts.
Transfers are made directly to the bank account linked to the payee in order to
secure against fraud. Examples are Mobikwik, Paytm, and Oxigen Wallet.
Remittance Services: A few startup ventures, albeit registered abroad, are trying to
address the gaps in remittance transactions (both inbound and outbound) as the
current process is cumbersome and expensive. These startups aim to disrupt the
current monopoly held by firms like Western Union and MoneyGram. Examples are
Instarem, FX, and Remitly.

Personal Finance or Retail Investment Services: Fintech companies are also

growing around the need to provide customized financial information and services to
individuals, that is, how to save, manage, and invest one’s personal finances based
on one’s specific needs. Examples are FundsIndia.com, Scripbox, PolicyBazaar, and
BankBazaar.

Miscellaneous Software Services: Companies are offering a range of cloud

computing and technology solutions, which improve access to financial products and
in turn increase efficiency in day to day business operations. The scope of fintech is
rapidly diversifying at both macro and micro levels, from providing online accounting
software to creating specialized digital platforms connecting buyers and sellers in
specific industries. Examples include Catalyst Labs in the agriculture sector,
AirtimeUp which provides village retailers the ability to perform mobile top ups, ftcash
that enables SMEs to offer payments and promotions to customers through a mobile
based platform, Profitbooks (online accounting software designed for non-
accountants), StoreKey, and HummingBill.

Equity Funding Services: This includes crowdfunding platforms that enable the
funding of a project or business venture by raising funds from a large number of
people. Such internet-mediated platforms are gaining popularity across the world as
access to venture capital is often difficult to secure. These services are particularly
targeted at the early stage of a businesses’ operation. Examples include: Ketto,
Wishberry, and Start51.

Cryptocurrency: India being a more conservative market where cash transactions

still dominate, usage of digital financial currency such as ‘bitcoin’ has not seen much
traction when compared to international markets. There are, however, a few bitcoin
exchange startups present in India – Unocoin, Coinsecure, and Zebpay.

Scope for growth in India

Fintech service firms are currently redefining the way companies and consumers
conduct transactions on a daily basis.

This is why global investments into fintech ventures have been increasing at record
speed – tripling to US$ 12.2 billion in 2014 from US$ 4.05 billion in 2013, and
reaching US$ 19.1 billion in 2015.

In India, the scale has been much smaller but at similar growth rates – investment in
India’s fintech industry grew 282 percent between 2013 and 2014, and reached US$
450 million in 2015.

Additionally, India has a large untapped market for financial service technology
startups – 40 percent of the population are currently not connected to banks and 87
percent of payments are made in cash.

With mobile phone penetration expected to increase to 85-90 percent in 2020 from
65-75 percent currently, and internet penetration steadily climbing, the growth
potential for fintech in India cannot be overstated.

Moreover, by some estimates, as much as 90 percent of small businesses are not

linked to formal financial institutions.
These gaps in access to institutions and services offer important scope to develop
fintech solutions (such as funding, finance management) and expand the market
base.

Disruptive potential in the finance and banking sector

Fintech firms are breaking new ground in the formal finance sector through
innovative and dynamic use of technology in the lending process.

For instance, while traditional banks (around 100) and NBFCs (around 1100) in India
use technology to simply calculate credit scores, fintech ventures use machine
learning algorithms and alternative data points such as social media footprints, call
records, shopping histories, and payments to utility service providers to increase
efficiency and provide greater access to credit.

The turnaround time is also much faster for the approval and disbursal of loans by
fintech firms despite several banks (State Bank of India, ICICI, HDFC, and Axis
bank) digitizing and speeding up these processes markedly.
Challenges and opportunities for fintech expansion
While digital finance firms have benefited from the government’s pro-startup policies
and flexible regulatory conditions imposed by the Reserve Bank of India (RBI),
formal institutions possess an established infrastructure and legacy that is not easily
replaceable.

Fintech startups need to instill greater confidence among Indian customers, already
known for being conservative in their financial preferences.

Figuring out how to market to their needs and influence financial behavior are some
of the biggest challenges, as is setting up a strong and responsive regulatory
infrastructure to keep apace with the speed of technological innovation.

On the other hand, traditional banking and financial institutions can leverage their
existing customer base and adopt digital products that nurture strong financial
relationships while improving service efficiency and broadening access to meet
changing needs.

The disruptive potential of fintech firms can provoke the much needed modernization
of the traditional sector, reducing costs in the process and increasing the size of the
banking population.

Responding to these opportunities and challenges, banks like HDFC and Axis have
launched mobile phone applications to ease digital transactions; Federal Bank
announced a partnership with Startup Village to develop innovative banking
products; U.K. giant Barclays is set to operationalize its fifth global fintech innovation
center that will be located in India; and Goldman Sachs Principal Strategic
Investments Group (GSPSI) is looking to invest in Bengaluru’s fintech startup scene.

Thus, the growth prospects in technological innovation may not necessarily produce
a mutually exclusive relationship between traditional institutions and fintech firms in
India.

Right combination of incentives, policies, and regulation

Initiatives by the RBI and parallel government efforts have focused on fostering
financial inclusion.

This has meant encouraging competition and innovation in India’s nascent fintech
sector on a more or less even playing field.

This has allowed both online and offline solutions to emerge and has created a safer
financial system with far-reaching access.

Reserve Bank of India: The RBI has so far promoted the Unified Payments
Interface and the Bharat Bill Payments System, as well as digital payments, P2P
lending, and the use of automated algorithms to offer financial advice. Moreover, the
RBI has granted licenses to 11 fintech entities to establish payment banks that
provide savings, deposit, and remittance services.

Government Schemes: Government-led initiatives such as Jan Dhan Yojana,

Digital India program, and National Payments Council of India (NPCI) have provided
important enabling platforms for technology innovators. The removal of surcharges
on electronic transactions, tax benefits for consumers and businesses using e-
payments, and changes in authentication requirements are other examples of the
government’s efforts to encourage the growth of a fintech ecosystem in India.

Fintech Startup Sector: This is probably the greatest empowering incentive

towards the expansion of fintech ventures in India. An encouraging regulatory
environment has enabled the launching of more than 125 fintech startups in 2018
alone. As mentioned earlier, several national and international banks and investment
groups are also investing in India’s fintech startups and funding fintech solutions.
Observations
The digital and technological revolution transformed business operations across all
industries, and the financial and banking sector is no exception.

What is heartening is that the Indian government and regulatory institutions have in
effect promoted an entrepreneurial rather than obstructive climate for fintech in India.

However, policies and governance will need to match the speed of innovation in this
sector, particularly to ensure secure and transparent growth.

Editor’s Note: This article was first published on July 15, 2016 and is updated on
November 27, 2018 to accommodate latest regulations.

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