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The World of FinTech
Digitrack

The World of FinTech

Ravi Kumar Pillai

India’s audacious ambition to become a Five Trillion Dollar economy by 2024 is likely to remain just that unless the liquidity crunch is eased with bold and out-of-the-box solutions. The latest announcements by the Finance Minister to shore up the sagging growth and to pump up liquidity in the formal sector through additional capital infusion to Public Sector banks and easing restrictions on NBFCs are more reactive than strategic. The clearing up of the mess on angel tax and withdrawal of super-rich tax on Foreign Portfolio investors are in the same genre. The Angel Tax misadventure almost choked out investor interest in startups. When will India grow out of fits-and-start and myopic policy making habit?

The scenario beneath the surface is indeed depressing. There is a severe cash crunch out there that is impacting grass root investments, working capital and income of MSMEs, rural household safety nets and the massive underbelly of the unorganized segment of the population.

The strategic challenge for the economy, beyond the emergency tinkering, remains bringing millions of citizens at the bottom of the pyramid into the mainstream. In this context, the role, relevance and contribution of FinTech sector are indeed transformational. Innovative disruption and fast scaleup need massive private initiatives; Governmental programs at best can ensure an open and enabling policy framework that allows ideas, innovation and the animal spirits of passion and aspiration to thrive.

FinTech is today the most active and happening arena of startup environment globally. In India, FinTech dominates the unicorns list.

In simple words, ‘FinTech’ means and includes the application of digital technology to address the current and emerging financial services needs of the society. FinTech enterprises comprise of many Startups but also include the digital initiatives of established players in banking and financial services business. They focus on digital delivery of last-mile services in the financial value chain. The world over, FinTech enterprises are bridging the last mile liquidity and transactional services such as peer-to-peer and micro-lending, digital payment, trade-financing, receivables management and quick transfers.

India has the second highest number of financial technology (FinTech) startups globally, according to a recent study. The United States, with its legendary Silicon Valley driven “digipreneurship” spirit leads the field globally. There are more than 3,000 FinTech startups in India, nearly half of them in Bengaluru and Mumbai, with Delhi/NCR and Hyderabad emerging as the other key hubs.

The number of FinTech startups in the country has grown three-fold during 2015-2018. Demonetization and the window of opportunities for “cashless” transactions that it brought forth helped in this burgeoning interest in FinTech domain. The success stories in the Indian FinTech startup space include the likes of Paytm, MobiKwik, Policy Bazaar, PhonePe, Shubh Loans, Lending Kart and Faircent which gained traction, spurred by the digital transactions push following demonetization.

For India to become a middle-income economy, consumption and financial velocity among the bottom 500 million of the population need to increase manifold. This section includes the underserved categories of citizens like the migrant labour, farm workers, micro traders and entrepreneurs, domestic workers and contingent workers, many of whom survive on subsidies and employment guarantee payouts. These categories of citizens are largely yet to cross the threshold of financial inclusion. India and Bharat are still two different worlds!

Massive gap still remains in inclusive growth, as highlighted by some significant indicators:

  • Even after 34 crores accounts have been opened under PM Jan Dhan Yojana, more than 20% of the population is still in the unbanked category.
  • Insurance coverage is abysmally low in India. More than 900 Million citizens, nearly 75% of the population, do not have any form of insurance cover to meet the uncertainties of life. There is lack of awareness and credibility deficit about the sector, especially in rural areas.
  • Even after much efforts to increase digital payments, less than 2% merchants have enabled point of sale for cashless payments till date. Infrastructure cost, connectivity and cost of transactions are holding back progress in this area.

A look at China’s experience in the cashless economy is useful in understanding the role played by FinTech disruption in changing transactional habits of a vast population broadly similar to India. Ant Financial (Alipay promoted by Alibaba.com and restructured subsequently) is the largest FinTech venture in the world. Ant along with We Chat, the mobile payment app of tencents.com account for nearly 95% of all mobile payments in China. Use of Credit and Debit Cards are as much unwelcome as are cash transactions in China’s retail space. Needless to say, Chinese economy is far greater formalized than the Indian scenario. India has a long way to catch up with what level of maturity digital financing has achieved in China.

Globally, FinTech has attracted huge interest as potential business domain of startup entrepreneurs. The industry is likely to continue its current growth trajectory, with the global FinTech software and services sector predicted to touch USD 45 billion by 2020 at a Compound Annual Growth Rate (CAGR) of over 7%. The Indian FinTech software market is poised to touch USD 2.4 billion by 2020 with over 5% share globally.

Driven by the huge size of the potential market and the drive of startup dynamics, India boasts of an ecosystem with opportunity to exponentially grow. Breaking free of geographic and sector-specific constraints, FinTech start-ups are delivering innovation to provide seamless customer experience and last-mile delivery of a range of financial services to meet underserved or unserved needs of society. Apart from startups, traditional financial services companies have entered the fray in a big way attracted by the ability of digital delivery platforms to help scale up the business quickly. Retailers, telecom service providers and social media giants are driving mobile payment services.

The transaction value for the Indian FinTech sector was approximately $33 billion in 2016 and is slated to reach $73 billion in FY 20-21 growing at a five-year compounded annual growth rate (CAGR) of 22%. The number of FinTech deals in Indian start-ups has surpassed those in China, despite a slowdown in lending in India. India saw 23 FinTech deals during the second quarter of 2019, compared to 15 investments in China during the same period.

FinTech sector is addressing the needs of SMEs to meet their day-to-day operational needs and easing the liquidity pains. However, despite RBI approval, peer-to-peer lending as an industry has so far failed to gain ground in India. Last year, while the NBFC loan portfolio was around Rs. 2,00,000 Crores, peer-to-peer lending platforms registered with RBI hardly exceeded Rs. 100 Crores of business. Going forward, this sector is likely to see a flurry of entrepreneurial action.

Micro-finance, including contingency loans, small trade financing and farm sector bridge loans contribute greatly to poverty alleviation. The success of Bangladesh in leveraging trust and grass-route influencers network to enhance liquidity at rural touchpoints is globally hailed. It is heartening to note a robust 38% year-on-year growth in microfinancing industry in India in 2018-19. There is substantial scope for FinTech applications to enhance the reach and customer experience in microfinancing.

As the liquidity eases and startup ecosystem springs back to normal, we can expect a lot of startup initiatives leveraging the India Stack digital framework that enables Aadhar-enabled identity authentication process to rollout and scale up innovative FinTech products and services.

Reserve Bank of India has signalled its intention to regulate the digital payments space in the country and has formed a digital payments committee with Nandan Nilekani at the helm. RBI has also launched an Ombudsman Scheme for Digital Transactions (OSDT) for redressal of complaints regarding digital transactions. With RBI’s oversight and regulatory framework beef up, the customer confidence, reliability and resilience of financial services are bound to undergo a tremendous boost. This would bolster FinTech eco-system and attract fresh breakthrough products. With formalization of payments, lending and currency transactions, one can safely predict that FinTech will continue to be a robust and fast-growing domain for aspiring entrepreneurs.

*Ravi Kumar Pillai is CEO and Principal Consultant, Cherrypick India Consulting and Business Solutions Private Limited, Trivandrum and can be contacted at cherrypickindia@ gmail.com.