Refashioning Finance in India

Digital disruption has altered India’s finance landscape considerably.

From angootha-chaap to verifying everything with your thumb—the journey of an average Indian has come a full circle. Today, we can purchase groceries, get investment advice, buy investment products, buy insurance and even avail credit, online. Nearly every aspect of our daily activities can be conducted digitally, slowly making documentation and physical presence, relics of the past. All of this is being enabled by technological innovation, which has pervaded every nook and cranny of our lives.

The fact that you cannot listen to the radio without hearing the line Paytm karo at least once, is a testament to the pervasiveness of fintech in India. The financial services sector, which has been relatively slow in the adoption of technology, has now suddenly taken to it like fish to water. A huge opportunity lies at this crossroads of finance and technology. And that opportunity is fintech. “Fintech is increasingly becoming an integral part of our ecosystem as they bring along opportunities to streamline daily processes, security and data management as well as customer service” believes Kiran Shetty, CEO and Regional Head, India and South Asia, SWIFT.

India’s evolution as a progressive fintech nation has been nothing short of a miracle. It has been brought about due to a structured attempt by the government to perpetuate digital adoption. The first step towards this was to solve for identity with Aadhaar. The next step was to ensure that every individual has a bank account or equivalent to store her money. The third leap was to build scalable platforms to move money (UPI, IMPS) and the final was to allow banks and fintechs access to a platform like UPI to innovate and co-create. N eedless to say, that the Indian Fintech ecosystem has evolved substantially within a very short span.

According to Nithin Kamath, Founder and CEO, Zerodha, “Demonetisation was a tipping point for the fintech industry, while the payment stack - UPI and BHIM gave a terrific boost to it.” Fintechs in India are spread evenly (21per cent-27per cent) across ideation, prototype, early revenue and business expansion stages. While many equate fintech to digital payments, the sector has evolved considerably with domains like digital wealth management, lending and robotics process automation gaining traction. “What is encouraging is that fintechs are picking up specific use cases. For example, within the payments space, there is an offering for big players, for small players, e-ticketing and retail. Similarly, in the lending space there are players that might cater to specific segments or needs. The approach of identifying particular pain points and then building custom solutions to alleviate those, is a winning strategy for finetch companies” believes Sandeep Jethwani, Managing Partner, Head of Advisory, IIFL Wealth.

The bottom line is that they are adding value across the financial services ecosystem. They are bringing more people into the financial services fold by identifying the gap and picking up niche value pools to create differentiated offerings. “Fintechs will be enablers and not necessarily disruptors. They are expanding the market and reaching out to a lot of first timers” said Manish Mehta, National Head Sales and Marketing, Kotak MF. Navigating a traditional mind set, a population with a proclivity to cash transactions, security and trust issues and an unchartered territory, the innovation in the payments ecosystem has laid the foundation for fintechs in India. In 2010, India launched its first real time payments system (IMPS) and then six years later, in 2016, it introduced Unified Payments Interface (UPI). This is when the game changed, propelling India miles ahead of global players in the fintech innovation space. A common tech platform like UPI, enabled innovation by bringing together all stakeholders of the industry to co-create and flourish. With 60+ member banks and several large third party players offering payments using the platform, UPI is driving the growth of mobile payments in India.

Currently, there are 375 payments start-ups in the country with mobile or digital wallets, gateways, POS or mobile, POS sub-segments accounting for over 50 per cent of the payment start-ups in India. Commenting on the fintech spurt in India, Chaitra Chidanand, Co-Founder, Simpl, shared, “Decentralisation is the key and customisation is the future. There is an opportunity to reimagine what the payments platform should look like for the unique needs of the customer”. According to a report published by Google and Boston Consulting Group (BCG), the Indian digital payments industry is estimated to touch $500 billion by 2020, accounting for 15 per cent of the country’s GDP.

The mobile payments market is anticipated to reach $190 billion by 2023 from $10 billion in 2017-18. While supportive infrastructure increased, mobile and internet penetration and a proactive regulatory environment are proving to be conducive for the sector, its exponential growth can also be attributed to its core value proposition that is facilitating seamless peer-to-peer transactions. Additionally, the payments sector has also now become a huge repository of consumer data, which can be leveraged effectively by other players in the fintech space. Credit forms the backbone of an economy and acts as a launchpad for the multiplier effect of money. Access to credit (or lack of) is one of the biggest impediments to India’s economic growth. Traditionally, the banking system has been able to cater to only a fraction of the credit demand in the country. “India is over banked at the top end of the market and underbanked at the bottom of the pyramid. There is a huge gap to fill on the credit side - whether it is financial inclusion or microfinance, the opportunity is large. Technology will play an integral role in leveraging this opportunity,” believed Gaurav Arora, Head of Asia, Greenwich Associates, a provider of data analytics.

As per data, traditional ways of banking approve only 25 per cent to 40 per cent of loan applications. A consumer might be a millennial, below the age of 35, who may not have a credit history because he has never borrowed in the past. Then there may be a consumer who is 50 years of age but may have a low credit score because of a “less than desired” credit history. Both these borrowers might not be able to access credit through traditional banking channels. This largely stems from an inability to assess the credit worthiness of new-to-credit (NTC) and MSME borrowers. However, it has also been observed that millennials form a huge chunk of the fintech’s customer base. Catering to this section definitely demands alternate options within the financial domain. “India is changing - millennials are entering the mainstream. We need a more logical credit assessment structure, which is capable of assessing the credit risk of this growing population. We need to explore alternate sources” believed Ritesh Pai, Chief Digital Officer, Yes Bank.

Digital lending fintechs are targeting the unmet demand from Indian MSMEs as well as consumers for credit. For the fast-growing MSME community, fintechs are helping resolve the huge demand-supply mismatch by using technology to create new underwriting models that can adequately capture this risk of NTC and MSME borrowers. Digital loans to MSMEs are expected to grow between 12X and 15X, reaching almost $100 billion in annual disbursements. According to Abhinav Bansal, MD and Partner at BCG, "There is a huge gap in the lending space, which banks are unable to fill. Fintechs, due to their ability to leverage technology, are able to bridge these gaps. Players are forming multiple use cases.” From a small segment a few years ago, today India has around 338 lending startups catering to a large customer base. The ubiquity of technology and the way we engage with it, ensures that everything that an individual does, contributes to digital data. A lot of this data can be harnessed to make better lending decisions.

Commenting on an increase in digital data, Parijat Garg, Vice President, CRIF High Mark said, “An increasing number of borrowers are coming through digital channels - this is giving rise to two separate data sets - traditional credit bureau data and alternative dataset in the form of digital footprint. The two together can allow lenders to know more about consumers, and be more prudent in the credit analysis.” Ultimately, consumers will benefit.

Urban consumers, especially millennials can utilise lending services, precluding the need for heavy documentation, while the rural population can benefit from alternate scoring mechanisms. This can potentially provide access to a market with over 300 million unbanked households. Over time, new classes of fintech firms have emerged including wealthtech and insurtech. Wealthtech describes a new class of financial and investment firms that are leveraging technology to create digital solutions for clients in the investment management industry. This includes both, end investors and firms that service them.

According to Jethwani, “In the financial services space, access to the last mile customer can be very expensive. Mobiletech is allowing companies to leapfrog to a different realm. It is allowing fintechs to access customers without a substantial investment in physical infrastructure. This can be potent.”

Robo-advisors, digital brokerages, online investing tools and financial services software would all fall under the umbrella of wealthtech. The wealthtech industry in India is at the cusp of an explosion as innovative technological and business models solve investors’ unique needs. “Lending and Wealthtech are now witnessing a surge in growth and acceptability. Especially wealthtech, with its ability to service the bottom of the pyramid and drive financial inclusion, is attracting a lot of interest”, said Bansal. There are ~442 start-ups in the wealthtech space currently active in India. From sourcing of investment options to offering advisory and execution services, these platforms are helping Indians invest in a more efficient manner.

Commenting on the rapid growth of the wealthtech space, Sharad Singh, Co-Founder, Valuefy Solutions said, “Technology has brought a significant amount of ease in making investment decisions and executing transactions. Transparency and reduction in intermediary costs are benefits that fintechs have delivered in the investment management space.” Growing personal wealth, increased adoption of mobile and digital channels and information asymmetry in traditional channels are some of the factors propelling the industry forward.

On the other hand, technology has also forayed into the insurance industry, birthing a unique set of firms called insurtech. Insurtech refers to leveraging advanced technologies to provide innovative solutions in the insurance industry. While this landscape is yet to experience the heat owing to meagre insurance penetration (3.69 per cent, compared to global average of 6.5 per cent) the sector is all geared to embrace technology with special focus on user experience and customisation. Commenting on this new shift towards insurtech, Anand Prabhudesai, Co-Founder, Turtlemint, said, “Insurtechs are swiftly becoming a catalyst for transforming insurance companies. Insurers get good customer data insights, they reach more people efficiendy, and develop new age products to suit the customers.”

Digital transformation can help insurance companies serve their customers better, reduce operational cost and manage risk more efficiendy. It can speed up processes, increase the use of technology and provide better transparency to customers. Technologies like artificial intelligence(AI) and machine learning (ML) are being leveraged to make the underwriting process more robust and improve the loss ratio. Vijay Sinha, MD and CEO, COCO by DHFL GI shared, “Insurtechs are utilising AI, ML and other new-age technologies to create hyper-customisable, multivariate customer journeys where the digital customer platform actively learns from user behaviour to serve unique communication as well as purchase experiences depending on the need of every individual customer.” Adding further, Ratheesh Nair, Founder and CEO, Watch Your Health, said, “In addition to insurance related applications, other IoT devices are being used like fitness trackers and telematics devices to analyse customer behaviour and provide them with useful insights on how their lifestyle can affect their insurance premium.”

However, a simple adoption of technology is not the way forward. Insurtech, as such, is not a single-stop solution for everything that needs to change within the insurance industry. “The key is to adapt and innovate in everyday business. Insurers need to look at their business goals, prioritise and innovate in the focus areas. Moving from being a traditional giant to a connected enterprise needs not just Insurtech, but more importantly, a cultural transformation; and that is what the industry - be it insurers or Insurtech companies, need to think about,” believed Prabhudesai.

As fintechs begin to assume a more integral role in the ecosystem, it is important to anticipate its potential risks. Yes, fintechs do come with their fair share of pitfalls. Threat to cyber security is the foremost. Sharing his views on the aspect of fintechs’ cyber security, Kiran Shetty said, “Cyber security needs to keep pace with the fast-growing digitisation of processes and there is a pressing need to secure financial transactions and digital communications.” Another risk that could hurt fintechs is if we face a prolonged liquidity crunch. Experts opine that, fintech lenders are yet to see a complete credit cycle and most of the innovation so far has been on acquiring new customers with the collections side seeing little or no solutions.

Further elaborating on the security aspect, experts say that fintechs should adopt risk management systems in order to address potential threats. Commenting on the same, Rohit Mahajan, President, Risk Advisory at Deloitte India, said, “effective risk management is as much about value creation (opportunity) as it is about value protection (mitigating risk). Having the optimum risk framework and associated processes is important for developing the capability to recognize such opportunities.”

Nonetheless, despite the potential pitfalls, fintech’s contribution towards Indian economy is worth noting. Aspiring to become $5 trillion by 2025, India is well-positioned to witness an accelerated growth in the near future. Needless to say, the digital revolution has further bolstered India’s growth story.

Although rapidly growing, fintech in India is still an inchoate sector. Even though it has significnatly evolved over the last five to seven years, a lot more needs to be done.

Sharing his views on the same, Adhil Shetty, CEO, Bankbazaar said, “To make this transformation a reality, the need of the hour is a consensus between Fintechs, banks, insurers, regulators, and the government for a more paperless, presenceless approach to personal finance.”

Banks and large financial institutions have legacy systems that can hinder their innovation agenda. However, financial institutions now recognise that partnerships and crowdsourcing of innovation is conducive to enduring growth; financial services is a business of trust, something that banks have earned due to relationships fostered over a substantial period of time. Fintechs are yet to earn this trust. Hence, partnerships are equally integral to their growth process.

Naveen Kukreja, CEO and Co-founder, sums it up, “Hereon, the way forward would majorly depend upon two factors. One, the kind of data and technology innovations the fintechs bring into the system, and how much holistic impact they are able to add to the end consumer and the overall ecosystem. Second, you would observe that fintechs have deeper integrations with traditional players like banks, NBFCs, insurers and AMCs across functions. Fintechs would add agility and efficiency to traditional players, and the same would pass on to consumers.

Banks, financial institutions, fintechs and regulatory bodies need to work together to create an enabling environment for fintechs to thrive and serve the overall purpose of financial inclusion and customer satisfaction.

According to Suniti Nanda, Fintech Officer for Government of Maharashtra, Mumbai Fintech Hub, "The kind of impact fintechs can have is all encompassing. However, it is important to make collaboration as a theme to solve larger problems.”

The whole machinery, that even includes educational institutions as well as the government, needs to work together like the different cogs in a wheel that helps to move forward.

The call of the hour is to do more and to do it faster. 

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