FinTech India: Evolution, & Beyond

The government of India began liberalising the banking industry of India in the 1990s as it began introducing technology-led frameworks in the banking ecosystem. This also paved way for the then afresh banking technologies, viz. MICR, EFTs (electronic fund transfer), etc. However, these initiatives emanated majorly from the side of the government – and, hence, started lagging after a while. In her efforts to imitate the global banking and financial services’ developments, India also started embracing the startup culture to develop the financial technology (FinTech) space in the 2000s with the offerings centered on consumer-facing services.

The first development was the introduction of the banking correspondent (BC) meant to augment the penetration of financial services in rural India households. With this, the agents began having at their disposal the financial transaction apparatus that allowed BCs to provide an affordable alternative to setting up branches for financial institutions (FIs) in order to serve the rural people. This attracted FinTech startups like Eko and FinoPayTech to develop their service base with the BC model at its core. Then, prominent FinTech startups including Paytm, MobiKwik, Oxigen, etc. emerged in 2010 – when, payment services startups also began operating by offering mobile-wallets, e-bill pay, etc. Following this, various FinTech startups emerged essentially serving in segments such as personal finance and investment management, and lending. The interest of venture capital (VC) firms also peaked during 2014 and 2016 when the growth in investments (funding activity) in FinTech reached 40%.

These developments also summoned drafting of appropriate FinTech ecosystem and regulatory frameworks from the government in the form of Universal Payment Interface or UPI launched by the National Payments Council of India or NPCI. A major eCommerce firm of India – Flipkart – inked an association with YesBank to integrate their mobile payment system with UPI. On the other hand, YesBank inked associations with over 50 merchants in such segments as mobile payments, eCommerce, and lending so as to begin offering comprehensive UPI usage through the YesPay wallet. This increased P2P transactions’ efficiency whilst eliminating any probability of transaction failure in e-payment gateways. This then paved way for the inking of partnerships between banks and FinTech startups to enable contactless mobile payments (to promote NFC payments); digital invoicing; digital bank account opening’ offline balance inquiry, fund transfer and bank statement access via a mobile application, etc.

The VC firms having a specific segment (e.g., FinTech) as their focal point of investment are now making their way in India. Launching of the required initiatives by the government to support the startup ecosystem began with the ‘Startup India’ funding support program that accounted for USD1.5 billion for startups in India. This was also supported by various tax and surcharge reliefs, viz. income tax discharges for the initial 3 years for startups; offering credit guarantee via startup debt funding by establishing National Credit Guarantee Trust Company; letting off the capital gain tax on investments in unlisted companies for over twenty-four months.

The evolution of India as a FinTech destination can be organised as follows: 1. Identity formalisation (transparency) via Aadhaar (enabling e-KYC and transfer of benefit schemes. 2. Facilitating mass bank account accesses in the form of Pradhan Mantri Jan-Dhan Yojna (PMJDY) for storing money, and enabling P2P, C2B, and B2C transaction services. 3. Launching scalable platforms (IMPS, UPI, etc.) to stimulate monetary liquidity via assistance from FinTech firms’ innovative solutions. 4. Letting banks and FinTech firms (also the wealth/insurance/lending professionals) access UPI platforms to deliver innovation. 5. ‘Digital India’ campaign increasing digital services’ penetration in the population. 6. Tax rebates for merchants allowing at least 50% of their transactions to be digital. 7. Reserve Bank of India (RBI) launching the Bharat Bill Payment System (BBPS) to augment the present bill payment infrastructure to offer to customers “anytime, anywhere” payment facility. 8. Goods and Services Tax (GST) regime allowing FinTech firms to leverage on the digital footprint. 9. Licensing payments banks. 10. RBI acknowledging P2P lenders as NBFCs or Non-Bank Financial Corporations to augment sectoral growth. 11. RBI launching the Regulatory Sandbox for FinTech startups.

These frameworks have cohesively steered India towards a promising path of a FinTech revolution where the entrepreneurs already run 2035 startups across segments like RegTech, InsurTech, WealthTech, payments, lending, analytics and Big Data, etc. What’s more interesting is that a number of former successful tech entrepreneurs have made a comeback with their new FinTech startups, these include: PayTm, Zest, Zeta, KhataBook, IND Wealth, EZ Cred, to name a few. Why these stalwarts are banking on the FinTech space in their second innings is because legacy IT systems pose a lucrative avenue for them to disrupt and launch a profitable business by assisting traditional banks in modernising their technology infrastructure via open-API platforms.

In 2018 with the percentage of FinTech users being 57.9%, India ranked 2nd globally on FinTech adoption. A Statista report titled FinTech India Outlook states that, the overall transaction value in the FinTech market of India is projected to climb from approximately USD 66.1 billion in 2019 to USD 137.8 billion in 2023, increasing at a CAGR of 20.18%. Promising initiatives to strengthen the FinTech ecosystem at the state-level are also taken by Maharashtra and Andhra Pradesh Governments as they develop the Mumbai FinTech Hub and FinTech Valley Vizag, respectively. As for the future of FinTech in India, the model that is set to redefine the landscape is the Alternative Lending model that includes P2P lending, invoice financing, paylater loans, mobile lending, crowdfunding, digital mortgage, and direct lending models, viz. POS lending, and supply chain financing – particularly when the next promising FinTech-led financing service recipient sector is the Micro, Small and Medium Enterprises (MSME).