We live in uncertain yet exciting times. It is no less than a challenge – more so a necessity – for corporations worldwide to manage internal and external risks, and stand resilient to evolving economic and political circumstances.
India, one of the world’s fastest growing major economies, is meanwhile shining under a spotlight with young entrepreneurs, innovators and visionaries. While disruptions and unexpected events are a fact of life, the country continues to show signs of gaining a steady momentum and transitioning to a global digital economy.
With favourable demographics and supportive government policies, India’s 2.3 trillion dollar economy is witnessing a phase characterised by innovation-led entrepreneurship. Young people are deploying new digital tools and communication technologies to disrupt the old order.
With economy growing at 7.4 per cent annually coupled with English-speaking workforce, robust information technology sector and booming IT-related services, the country is attracting investments in billions of dollars, undaunted by challenges like still immature start-up environment and labyrinthine laws and regulations.
This article is a part of the January edition of FICCI’s financial Foresights that focuses on ‘Leveraging the FinTech Opportunities in India’ and presents interesting propositions in the form of insightful write-ups contributed by both established and emerging players from the FinTech industry.
More articles from this series can be viewed here at: Financial Foresights
We’re organising Picup Fintech around this theme. Join us.
Innovation and technology are bringing radical changes in traditional financial services. A new generation of start-ups is utilizing tech tools and forging disruptive business models to bring in seamless and innovative financial services for the banked and unbanked population – from payments to wealth management to peer-to-peer lending to crowd funding.
These start-up firms engage in external partnerships with financial institutions, universities and research institutions, technology experts, government agencies, industry consultants and associations. Through these partnerships, they create a highly integrated ecosystem that brings together their expertise, experience, technology and facilities.
India is transitioning into a dynamic ecosystem offering FinTech start-ups a platform to potentially grow into billion-dollar unicorns. From tapping new segments to exploring foreign markets, FinTech start-ups are pursuing multiple aspirations. The traditionally cash-driven economy has responded well to the FinTech opportunity, primarily triggered by a surge in e-commerce and smart phone penetration.
The transaction value for the Indian FinTech sector is estimated to be 33 billion dollars and forecast to reach 73 billion dollars by 2020, growing at a CAGR of 22 per cent – over three times the GDP growth rate.
From e-wallets to lending to insurance, the services of FinTech have redefined the way businesses and consumers carry out routine transactions. Channels like ecommerce and m-commerce are opening up new ways for consumers to make purchases – like tapping their mobile phone, or reading a quick response code, or a wearable watch onto a contactless payment terminal. Adoption of these new innovations can help create new revenue channels and reduce overheads, thereby positively impacting the bottom lines.
PwC India estimates that cash in India constitutes about 98 per cent of all consumer transactions by volume and about 68 per cent by value. 12 per cent of the economy depends solely on cash. Cashless transactions, on the contrary, constitute a mere two per cent of the GDP. However, with Government’s decision to demonetize INR 500 & 1000 notes, more and more Indians are exploring the options such as e-wallets.
A report by McKinsey Global Institute titled ‘Digital Finance for All: Powering Inclusive Growth in Emerging Economies‘ says Indians lose more than two billion dollar a year in forgone income simply because of the time it takes travelling to and from a bank. The report further adds digital payments services in India can add 700 billion dollars to GDP by 2025 and create 21 million new jobs. Clearly, the scope for cashless India is huge.
Key enablers for the cashless economy
- Policy Support: The government along with regulators such as the Securities and Exchange Board of India (SEBI) and the Reserve Bank of India (RBI) are aggressively supporting the ambition of becoming a cashless digital economy with a strong FinTech ecosystem via both funding and promotional initiatives.
- Jan Dhan Yojana: The Jan Dhan Yojana added over 200 million unbanked individuals into the banking sector.
- The Aadhaar card programme: It started as a 12-digit individual identification number enabling online and cost-effective identification for every resident Indian. It has already been extended for pension, provident fund and the Jan Dhan Yojana. Innovations leveraging the Aadhaar card are expected to assist the financially excluded segments and remove financial untouchability.
- Direct Benefit Transfer: The opportunity for FinTech is enormous in the areas of government-to-person cash transfers too. The Direct Benefit Transfer (DBT) scheme will enable deeper penetration of financial services and help in achieving financial inclusion goals.
- GOI’s flagship programs: Digital India and Smart Cities initiatives have been launched to promote digital infrastructure development in the country as well as attract foreign investments.
- Tax Administration: Among the notable initiatives on tax and surcharge relief are: tax rebates for merchants accepting more than 50 per cent of their transactions digitally, 80 per cent rebates on patent costs for start-ups, income tax exemption for start-ups for first three years, and exemption on capital gains tax for investments in unlisted companies for longer than two years.
Besides, RBI has been trying to create an environment for unhindered innovations by FinTech companies, expanding the reach of banking services for unbanked population, regulating an efficient electronic payment system and providing alternative options to consumers. FinTech enablement has been primarily across payments, lending, security /biometrics and wealth management.
Investors’ role in fintech
Investors too have a key role to play here. The FinTech investment increased manifold from 247 million dollars in 2014 to more than 1.5 billion dollars in 2015. India has a far lesser number of angel investors (about 1,800 in 2016) as compared to 300,000 in the United States. However, India is witnessing increasing interest levels in start-up funding, which is evident by increasing number of angel deals from 370 in 2014 to 691 in 2015. Investors are coming to terms that FinTech is more than just payments technology and the interest is beginning to manifest itself in a variety of sub-segments such as investing, lending, wealth management, credit reporting among others.
FinTech investment increased manifold from 247 million dollars in 2014 to more than 1.5 billion dollars in 2015.
The BFSI sector is gearing for both acquisitions and funding-based routes to increase its presence in the emerging FinTech space. For example Citi Bank, Barclays and Goldman Sachs have launched FinTech focused accelerator programmes. Partnerships by FinTech product firms (in point-of-sale hardware, credit deals and social lending) with banks with a synchronised go-to-market strategy are addressing the immediate demand of digital-age consumers.
To counter a steady challenge by venture backed FinTech firms, many incumbents are augmenting their value chain with competing offerings and leveraging their own distribution and client base. Setting up, managing or investing in centres of excellence and FinTech hubs is an excellent strategy to take an inside view of the emerging FinTech firms’ working, and to nurture talent for a future competitive advantage.
Built on the block-chain infrastructure, virtual currency is enabling better speed and efficiency of transaction. Blockchain is being perceived in India as a game changer. If used to its full potential, it can offer an innocuous, quick and economical way for transactions, simplify international remittances and reduce transaction times by more than half.
Though it is at a very nascent stage and is yet to mature into a mainstream application, the technology is receiving encouraging reviews from market players in the country. The RBI has set up a committee to understand the possibility of using block-chain technology and to determine suitable regulatory policies.
There have been initial concerns over the emergence of virtual currency schemes. But the government recognises the need for regulators and authorities to keep pace with developments. Cryptocurrencies have garnered worldwide attention with the World Economic Forum, the Pentagon, Central Banks and the Government of Dubai announcing massive projects to rewrite the history of money.
Many of the world’s largest banks are said to be supporting a joint effort for setting up of private block-chain and building an industry-wide platform for standardising the use of this technology. This could transform functioning in back offices of banks, increase the speed and cost efficiency in payment systems and trade finance.
The new normal
Financial inclusion is projected to be driven largely by creation of an ecosystem where people get the opportunities to use financial instruments in their daily lives and banks make best use of the spread of FinTech and non-financial firms operating in inaccessible areas. At present, the financial inclusion penetration is low where 145 million households do not have access to banking services.
Rapidly growing penetration of smart phones and internet has led to the emergence of multiple technologies for replacing cash, providing credit information for screening, enabling online lending and purchasing of financial products through digital means. Going forward, the recent provision of payment bank licenses by the RBI is likely to aid in monetizing this digital trend and making technology as the core offering.
The RBI has also given licenses to 10 entities for setting up small finance banks. Through this initiative, the central bank aims to extend credit facilities to micro and unorganised sectors. It has also come up with a report on medium term path for financial inclusion which aims to achieve 90 per cent coverage by 2021.
While the FinTech sector offers innovation and disruptive technologies, banks can drive customer demand. It is for banks to leverage these concepts and disruptive ideas and adopt them into their mode. Banks will likely consume and integrate FinTech ideas into their normal course of business in coming times.
Bipin Preet Singh, Founder CEO & Director, Mobikwik writes this note for the January 2017 edition of our Financial Foresights.