Over the past couple of years, the term FinTech has evolved from being a buzzword among tech-savvy business executives to an organized sector characterized by hyper growth. Digital technology, and its avatar in the financial segment, is completely reinventing the way business has traditionally been done.
FinTech is basically the amalgamation of finance and technology. It refers to a new generation of companies that leverage cutting edge technology to offer financial solutions that are significantly more efficient and effective than those provided by traditional financial institutions.
Is FinTech merely a technological advancement?
Technology has been used by financial institutions for more than half a century. With the turn of the millennium, technology started playing a more critical role in the financial sector. Modern banking or financial services would struggle to stay relevant in the absence of technology. So, the question is: is FinTech any different and why is it positioned as a unique sector? Over the past 50 years, technology has “assisted” traditional financial institutions. However, there has not been any dramatic change in the products being offered or their target market.
FinTech is not a replacement for traditional banking services; rather it is a result of the inevitable evolution of the banking space. Banking services are now being provided with the added convenience of technology. The sector does this with the help of technology intelligence, intricate algorithms, machine learning and big data, which are swiftly replacing traditional financial practices. Backed by such powerful armory, FinTech is completely changing the corporate landscape in multiple industries and reinventing the way companies gain access to finance.
….Over the past 50 years, technology has “assisted” traditional financial institutions. However, there has not been any dramatic change in the products being offered or their target market. FinTech is the evolution of banking space.”
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
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What does the Indian FinTech landscape look like?
Traditional banking functions are being taken up individually by various companies that are creating separate constructs of the services. Firms are now specializing in certain banking functions, instead of taking an ggregator approach.
Digital Lending
These companies provide flexible options for financing to SMEs and consumers. Technology is being used to create better financial products, improve customer experience and increase the speed of loan approvals. Some prominent companies in this space include Capital Float, Lendingkart, Indifi, NeoGrowth, etc.
Payment Services
These companies allow individuals and businesses to accept payments without even swiping a card. Payments are made online and the payer just needs a smartphone, without the requirement of a merchant account. PayTM, Freecharge and MobiKwik are among the top players in this space.
Savings & Wealth Management
These companies help individuals save money as well as make and manage their own investments. Software helps to quickly compare different options so that they can make decisions. Scripbox and Funds India are to name a few.
Remittances
Inward and outward remittances can be complex, time-consuming and expensive. FinTech companies have made these transactions simple and affordable. Oxigen and Payworld are among the notable remittance platforms
Point-of-Sale
Several new players have emerged in this space and have quickly become prominent players post demonetization. Companies operating in this segment provide card swipe machines that enable customers to make cashless payments process easy. Mswipe, PineLabs, ICICI Merchant Services, etc are some of the larger POS machine providers in this space.
Insurance
FinTech has helped the insurance sector transform from being document-heavy to becoming paperless. Several new companies are increasing the ease of decisioning at the consumer end by aggregating insurance provider data and simplifying the application experience. Coverfox and Policybazaar are chief among the companies that have risen to prominence in the last few years.
Growth of FinTech in the global economy
Funding in this segment has grown rapidly, and 2015 recorded a 75% increase in global investments. Infact, FinTech became Investopedia’s “Top 10 Terms of 2015”. The global FinTech sector received an investment of a whopping $5.4 billion in the first quarter of 2016, according to figures published by Accenture. This represented a 67% jump over the figures of the same quarter in 2015. While the FinTech emerged in the Western world, the growth in the first quarter of 2016 was driven by investments in the Asia-Pacific region.
India is playing catchup
India is not very far behind the world in terms of the state of the FinTech sector, although there’s room for massive growth. The country has recorded $1.77 billion in FinTech investments between 2014 and 2015 through a total of 158 deals, according to Inc42’s FinTech Market Report 2014-2016. The average deal size was $9.82 million. While these figures highlight the growth of FinTech in India, there are several factors in play that support phenomenal growth in the near future.
Factors supporting FinTech growth in India
High adoption of technology
India has already proved itself as being pro-technology. Its high rate of technology adoption can be seen in the penetration of smartphones. Counterpoint Research points out India has already overtaken the US to become world’s second largest smartphone market, with more than 220 million active unique smartphone users. Lending is made significantly easier through high adoption of technology, as it helps reach a wider audience when compared to a feeton-street approach.
Internet penetration
The US might have a higher internet penetration at 89%, but due to the relatively smaller size of the population, the reach is limited to a little less than 300 million users. India, on the other hand, might have a lower internet penetration at just 35%, but because of the vast population, the reach is significantly higher, towering at almost 500 million individuals with access to the internet. This highlights the fact that internet penetration is not just growing rapidly, but has ample room to grow.
Government policies
The latest surprise demonetization move has given a massive fillip to the FinTech sector. Government policies in India are evolving quickly, providing a favorable backdrop for FinTech. By encouraging digitization, by promoting uniform and widespread identification (Aadhaar Card) and through bank account schemes, the government has taken several initiatives to boost the FinTech ecosystem. In short, FinTech ecosystem have a role to play in digital economy.
Increasing financial inclusion
Currently, Indian’s financial inclusion penetration is extremely low, with as many as 145 million households not having access to banking services. However, the RBI’s target is for the penetration to reach 90% by 2021. FinTech can play a crucial role in financial inclusion. The push for financial inclusion from the Government helps FinTech lenders, as digital lending platforms can target customer segments that were previously underserved.
Investors getting more interested
Venture capitalists, angel investors, high net worth individuals and private equity houses consider FinTech an attractive investment option. According to a report published by KPMG, FinTech investment in India surged from $245 million in 2014 to over $1.5 billion in 2015. Although India has only about 1,800 angel investors (as compared to roughly 300,000 in the US), there has been a surge in their interest in the FinTech Sector, as reflected in the increase in deals from 370 in 2014 to 691 in 2015.
Movement from ‘data poor’ to ‘data rich’
India now ranks third among global startup ecosystems, and is expected to end 2016 with 4,750 startups. India is expected to have more than 10,500 startups by 2020, providing employment to almost 2.1 lakh people, according to a report by NASSCOM. The startup wave and the huge investment (in excess of $5 billion in 2015) supports FinTech because this sector needs entrepreneurs who are open to innovation, are willing to experiment and are not tied to traditional ways of getting things done.
Huge working population
India has a population of more than 1.3 billion and a third of this population is urban. The median age in India is around 27 years, which means that most of the population is working and generating income. Working adults typically adopt technology much faster than the retired elderly. These working adults would have greater enthusiasm to avail the services offered by the FinTech sector. Availing credit will become significantly easier for young adults due to their familiarity with technology and data rich eco-systems that they frequently engage with.
Needs of Small & Medium Enterprises
While all the above factors support the growth of FinTech, the primary driving force has been necessity. The need for such solutions was most strongly felt by the Small and Medium Enterprises (SME) sector, which were being stifled by the lack of credit support offered by traditional financial institutions. FinTech promises solutions to the bottlenecks that are inherent in the traditional financial systems.
Over the past decade, the Small and Medium Enterprises (SME) sector has emerged as an important part of the Indian economy, with 36 million units, providing employment to over 80 million people and contributing about 8% to the country’s GDP. However, this critical sector faces several hurdles in raising funds the traditional way due to stringent eligibility criteria, long processing times, high interest rates and rigid lending terms and conditions of traditional lending solutions. Mostly, traditional financial institutions were reluctant to sanction loans to smaller companies or lowering interest rates as these enterprises are perceived as being high risk entities from a credit perspective. Banks typically charge 10-20% interest on loans. If SMEs don’t the meet the criteria set by banks for availing a loan, they turn to informal money lenders for finance. These lenders charge exorbitant rates of interest, ranging between 36-70%
This led to a huge mismatch between the demand and supply of funding, often resulting in the SMEs having to shelve expansion plans or even shut shop. FinTech emerged as an innovative way of securing funds quickly and easily. SMEs are now able to apply online by uploading all the necessary documents. The algorithms being used by FinTech companies are capable of executing the initial screening in minutes.
Moreover, cutting-edge technology allows FinTech companies to offer a lot of flexibility to SMEs. They can now raise smaller loans for shorter time frames and pay lower interest rates.
The future of FinTech in India
The global FinTech sector is expected to become $45 billion in value by 2020, growing at a CAGR of 7.1%. India would play a critical role, given that the backdrop is highly supportive. The Indian FinTech market is expected to reach $2.4 billion by 2020. FinTech has bright growth prospects. One of the factors that could propel the growth further would be partnerships between this dynamic sector and the experienced traditional banking sector. Collaborations between the two can bring together the best of both worlds and offer unique products to a larger number of people in India.
Recent partnerships between FinTech companies and traditional banks clearly suggest that two entities needn’t necessarily compete, but can co-opt. While banks can offer voluminous amounts of money for lending purposes, FinTech companies bring technological expertise, customized credit products and advanced data analytics to the table.
The FinTech sector has young businesses that need help in reaching their true potential. Incubators and accelerators can mentor these businesses and assist them in competing against the big players in an extremely challenging, cost-conscious Indian market.
Gaurav Hinduja, Co-Founder & Managing Director, Capital Float writes for our publication: Financial Foresights. Capital Float is an online lending platform that began operations in 2013.
