How the fintech industry will help India to achieve a $5T economy

Technology makes finance more efficient. Fintech or new-age technologies like blockchain are improving the transparency and speed of your dealings with a bank.

As internet adoption improves and banking functions penetrate further, we can do a better job in increasing the velocity of adoption by the underbanked.

In the same vein, technology in the next decade will make finance far more personalised and tailored for consumers than the one-size-fits-all banking we have been subject to over the last decades. 

The best way to think of finance is to list everything that a relationship manager at a bank has ever tried selling you.

1. Bank accounts 
2. Loans/credit cards 
3. Investment products
4. Insurance
5. Payments 

Besides front-end consumer products, there is a myriad of backend infrastructure required to deliver these services, including record-keeping, ledger-keeping, transaction tracking, KYC, and predictive modelling, among other support functions.

Technology is constantly evolving and adding efficiency. In the ‘90s, this meant starting the move from paper files to computers. In the 2000s, we started adding ERPs and digital core banking.

What is the version of the technology that will power the decade of 2021-30? 

Account Services meet Neobanks

Forget traditional bank branches. The next evolution of “The Bank” is a neobank — a digital bank without any physical branches, and entirely online.

Basically, a neobank is a fintech startup that provides a wide range of services listed above. While regulation around these is still developing, presently, they rely on traditional bank partners to piggyback on their licenses.  

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How neobanks are disrupting the traditional banking ecosystem

Loans/credit cards meet digital lending

In a credit-hungry country such as India, digital lending has led the fintech revolution so far. As a sector, it has the most depth, raised the most money, and continues to dominate conversations.

The premise is simple — technology powers better underwriting, penetration, and reach, and in general, customer experience. The digital lending space has evolved and split up into various subcategories, including personal loans, P2P lending, SME loans, point-of-sale financing, and supply chain financing, among others. 

Investment products meet platforms and new AMCs

This disruption is closest to our hearts, given that we are building new-age investment products. Banks have historically been the main distribution channel for investment products.

Additionally, they own asset management companies, which builds several products sold at bank branches. This entire ecosystem is being upended.

This year, a lot of money has been raised by platforms promising direct, transparent, and quick distribution of mutual funds to consumers. Meanwhile, others are building products to replace the humans that run these investment products. 

Insurance meets digital coverage

India is acutely underpenetrated concerning insurance, and hence, is ripe for disruption. Like investment products, banks are distributing and manufacturing insurance products.

There are fintech companies that are focused on creating new-age personalised insurance products, while others are building platforms to aggregate insurance providers and provide efficiency and transparency to the buying process. 

Payments go online

Payment tech was the first area to be disrupted close to 10 years ago. Since then, it has been disrupted many times. Ironically, the most revolutionary product in this space has come from the government — Unified Payments Interface (UPI). 

How the government and “old guard” are helping move this change along

• Over one billion Aadhaar enrollments have made KYC easier
• Government policies like demonetisation and Jan Dhan Yojana have given banking penetration a huge fillip
• We now have one billion mobile subscribers and over 500 million internet users 
• Demographics are in our favour — our median age is in the mid-20s — which implies faster tech adoption. Further, India is expected to add over 160 million middle- and high-income households in the next 10 years
• India’s API stack and data generation continue to flourish, allowing fintech companies to better target consumers and offer relevant services
• In fact, traditional banking is increasingly looking like a technology and data business. Most of the large Indian banks have forged partnerships with fintech companies, rather than competing with them. While banks bring brand trust, large balance sheets, and extensive networks, fintech companies bring their tech credentials to the table, with sophisticated data analytics capabilities and product innovation

Risks

As we scale, we need to make sure our security protocols keep pace with evolving technology.

Further, given how heavily regulated finance is in India, we need a more stable and clearer regulatory framework that keeps pace with new-age products. Regulations remain the biggest entry barrier to innovation in this space. 

Lastly, India is still predominantly a cash economy. According to World Bank, about 48 percent of bank accounts opened under the Pradhan Mantri Jan Dhan Yojana are dormant without a single transaction in a year. Therefore, a change in consumer behaviour is an extremely non-trivial problem for the industry to solve.

Conclusion

India is a massively diverse country. We are underbanked, underserved, and live in an ever-shifting regulatory environment. Therefore, our financial landscape and unsolved problems are unbelievably complex and may seem overwhelming at first. 

Similarly, about 1,000 startups that make up the fintech industry, in collaboration with traditional stakeholders, hold the key to unlocking India’s potential.

Fintech startups remain extremely well-funded, and every day, entrepreneurs are thinking of different ways to solve our many problems. 

As always, India lives on the hope of a better future, and fintech is no different.