Analysis of Fintech Ecosystem of India

Abstract

Post 2008 global recession, financial institutions around the world has gone through enormous change by including financial technology in their products and service offering. World has seen an upsurge in technology startups and new businesses working on new platform called financial technology (Fintech) for catering financial institutions’ demand. According to NASSCOM, India’s Fintech business is projected to reach USD 2.4 billion by year 2020. In Indian startup ecosystem too, this is one of the field in which Indian startups are performing well and every year new Fintech startups are continuously springing up in startup ecosystem. Government policy frame work is not only giving push to this vibrant ecosystem but also creating a propagative environment of opportunities. The objective of this paper is to study enablers of Indian Fintech ecosystem which is creating conducive environment for growth of Fintech companies. Also it aims to study opportunities which are lying ahead to tap and to study challenges which can pose hindrance for Fintech sector.

Introduction

Financial institutions around the world has gone through enormous changes in their business processes by including financial technology in their products and service offering. This change could be attributed to 2008 global financial crisis. It could be said that global financial crisis of 2008 had jeopardized the whole banking system leading to crumbling of customer faith in banking sector. This crisis has made banking sector to think to come up with new financial innovative solutions to cater customer problem and also to make a platform that could well be efficient and effective enough to alarm the world of coming crisis and also that could cater demands of global customer. Today’s fintech era has evolved through three phases and this emergence has answered both the problems of risk diversification, competition and catalyzed the opportunities too. Arner, D. W.et al (2015, 2016) in their article stated that 2008 global financial crisis has given birth to “Fintech 3.0” and “Fintech 3.5” series in developed countries and developing countries respectively. Since then technology development companies has started focusing on banking and financial sector as their prospects as this change was fuelled by consumer and political fraternity’s expectations and demand. Developing countries are still struggling with inefficiencies of financial system and development needs so this has led to emergence of “Fintech 3.5” series in developing countries. That is why whole world has seen an upsurge in technology startups and new businesses working on new platform called financial technology (Fintech) for catering financial institution’s demand. According to BASEL (2017), “Fintech is technologically enabling financial innovation that could result in new business models, applications, processes, or products with an associated material effect on financial markets and institutions and the provision of financial services.” According to NASSCOM, India’s Fintech business is projected to reach USD 2.4 billion by year 2020. In Indian startup ecosystem too, this is one of the field in which Indian startups are performing well and every year new Fintech startups are continuously springing up in startup ecosystem. Government policy frame work is giving not only push to this vibrant ecosystem but also creating a propagative environment of opportunities.

The objective of this paper is to study enablers of Indian Fintech ecosystem which is creating conducive environment for growth of Fintech startups. Also it aims to study opportunities which are lying ahead to tap and to study challenges which can pose hindrance for Fintech sector.

As fin tech sector in India is still in nascent stage. Due to unavailability of data, compilation of secondary data is being done from various research papers, reports and publications by various authors, research agencies, data aggregator websites, companies and government bodies.

In last decade lot of definitions regarding financial technology has emerged and all the definitions somewhere emphasizes on important components of Fintech world but still in the evolution of definitions there seems to be a lack of unanimity on boundaries of fin tech sector. Financial technology (Fintech) is technology embedded in financial products and services aims to assist companies in organizing financial strands of their business. According to a Comprehensive Analysis of India’s Fintech Landscape report by YES bank report on fintech (2017-18), “Fin techs Are high growth organizations combining innovative business models and emerging technologies to enable, enhance and disrupt financial services.”

Philippon, T. (2018) states that new startups are continuously emerging in fintech sector as financial services are still very costly. Current regulatory approach have not made any major structural change but fin tech is capable to bring these changes and it also can create important regulatory challenges. IOSCO Research Report on Financial Technologies (2017) has pointed towards some key components which are aiding development of this sector namely consumer data abundance, decreased goods and service cost, increased computing power, disintermediation and re-intermediation and major consumer demographic changes. Truong, O. (2016) finds out in research that Technology has enabled financial products to be innovative along with this it has increased the “flexibility and usability of the financial services.” Also it has become mandatory for businesses to continuously innovate so that healthy competition can be maintained between organizations. Fintech providers are creating financial inclusion revolution in developing as well as developed economies. Along with financial inclusion, fin tech give various valuable facility to moderate income individuals that will cost them more when sourced from conventional banking channel. Varga, D. (2017) states that fin tech sector has made an impact on those who are not in reach of banks and it has provided flexible and easy solutions to these areas.

An Evolving Indian Fintech Ecosystem

Reserve bank of India Report of the Working Group on fin Tech and Digital Banking (2017) defines fin tech as “Fin tech is technologically enabled financial innovation that could result in new business models, applications, processes, or products with an associated material effect on financial markets and institutions and the provision of financial services.” According to Ernst and young (2017), India with 52% digitally active population is at second position after china in Fin Tech adoption rate. This means there lies lot of opportunities because half of population still is not in reach of fin tech services. Till now Mumbai is the only state who have made fin tech policy for startups and giving support to fin tech accelerators and incubators. Startups are being provided financial support of Rs10 lakh for three years in meeting out startups expenses. This will enable startups to come up with better product and services. According to NASSCOM & KPMG (2016), Indian fin tech sector is projected to grow 1.7 times and could reach USD 2.4 billion by 2020. KPMG (2018) points out that fin tech technologies are accelerating change prominently in three sectors that is artificial intelligence, open banking and block chain business.

In order to strengthen open banking Regulator of fin tech sector has taken three major steps. Firstly, by bringing Bharat Bill Payments System (BBPS) to facilitate security and easy and speed bill payment. Secondly, National Payments Corporation of India brought unified payments interface (UPI) and Aadhaar supported services. Thirdly, Reserve Bank of India (RBI) has tasked Non- Banking Financial Company to make Non- Banking Financial Company - Account Aggregator (NBFC-AA) in India to share customer information with their consent to other financial entities. Reserve Bank of India (RBI) has worked on Public Credit Registry (PCR) so that credit information of any individual and corporate can be accessed anytime. According to IBEF (2018), Securities exchange board of India (SEBI) is working on “regulatory sandbox” framework so that fin tech innovations in product and services can penetrate securities market in India. NASSCOM Artificial Intelligence Primer (2018) mentions, around 400 Artificial Intelligence startups have been working in India and fetched funding of worth 150 million dollar in last five years. Also block chain application is playing indisputable role in various banking services. NASSCOM (2016) “Indian fintech products-innovation driving growth” report states that 400 Indian startups emerged in year 2016 in fintech sector. The sector posted 282 percent growth between 2013 and 2014.

“Enablers” for Conducive Fintech Ecosystem

Though there are number of factors responsible for rise in fintech sector. But can say Indian market untapped need and abundant amount of efficient human capital are acting as enablers for conducive fintech ecosystem. Along with this, funding and financial structure created by government and regulatory bodies are acting as foundation of the fintech ecosystem.

Untapped Indian Market

In India, still today a major section of population is out of reach of banking and financial institutions and their products and services. RBI in a “Report of the working group in fintech and digital banking” (2018) stated that nearly 40 percent of Indian population have no connection to banks and nearly 87 percent of transactions are done in cash mode. This gives fin tech startups great landscape to capture untapped market.

India’s Human Capital

According to UNCTAD (2018) India has largest pool of STEM (Science, Technology, Engineering and Math) graduates. Back in 2012, out of five million STEM students passed globally, 29.2 percent belongs to India. India is well ahead of other countries in terms of human capital. This human capital acts as foundation stone for whole the Indian startup ecosystem.

Growth Capital & Investment

Past decade investment in Indian fintech startups has drastically increased. According to data aggregator your story research (2018), Indian fintech and financial sector got total funding of approximately 2 billion dollar as on 30 November 2018. Sector has fetched 132 deals in 2018 in comparison to 103 deals in 2017. Also, Top ten startups managed to raise 60 percent of total funding to fintech and financial sector.

Digital Infrastructure

Recent years, India has focused on making a framework for fintech startups by including “stack” in its financial infrastructure. In this stack, JAM has made a paradigm shift by including e-sign and digital locker in it. JAM is providing infrastructure to fintech companies to make business model and processes using it. Also, Immediate Payment Service, Bharat Bill Pay, Aadhaar Enabled Payment System, India Quick Response, Unified Payment Interface and National Automated Clearing House has created a payment system which has eased the operability of this stack in fintech ecosystem.

Government and Regulatory body

Indian Government has made lot of initiatives to create an enabling environment and creating linking pins of fin tech sector framework. For fin tech sector to thrive, government support is needed so that major section of unbanked population can come in direct reach of banking practices. Government has started an awareness movement called “Financial inclusion” for public to open bank accounts so that more and more people can come in ambit of financial services. This is being done to track the inflow and outflow of money and to transfer subsidies to needed population directly to their accounts. According to National Payments Corporation of India (NPCI) and UIDAI, by March 2018 banks were successful enough to link Aadhaar identity with 878 million bank accounts. Around 312 million Transactions of worth 542 billion rupees were being done through Unified Payments Interface in August 2018. For government, Reserve bank of India (regulatory body of fin tech sector) support is of utmost importance as RBI has worked aggressively in formulation of framework for policies implementation. RBI has introduced “Unified Payment Interface” to evolve India as digital and “cash-less” culture. RBI has taken some more steps. It has allowed entities and NBFCs registered under the Companies Act to become player in P2P lending platform. This P2P lending platform will solve the funding problem of startups.

Opportunities

Fintech sector can make happen financial inclusion of large number of individuals by giving them basic financial services and it can avail financial service to sectors who still are not in reach through mobile phones as fifty percent population in emerging economies now have mobile phone. According to Global Findex Database by the World Bank 2017, Around 19 crore Indian adults which is 11 percent of total global population having no bank accounts belong to India. This population segment is both an opportunity and challenge for fintech sector. Also, According to NITI ayog (2018), digital payment has increased many folds in India. It is estimated that digital and mobile payment business would reach up to 1 trillion dollar and 190 billion dollar respectively by year 2023. An estimated 15 billion machine-to-machine and consumer electronic devices could be added directly in formal financial system. There lies opportunity in cyber insurance also as in 2016 alone cyber insurance sector addressed a growth of 35 percent in India because of the reason that now companies are trying to save their business from responsibilities arising due to cybersecurity regulations. Pointing on lack of rigid and efficient regulatory frame work worldwide. Arner, D. W.et al (2016) states that “Fin-Tech requires Reg-Tech” and for that efficient and effective data driven model of regulatory sandboxes need to be created. According to Basel Committee on Banking Supervision Sound Practices (2018), Introduction of Reg-tech at global level could increase “cross-sectoral and cross-jurisdictional cooperation” between countries. It could solve risk management and compliance problem arising out due to different process and laws of countries.

Challenges

Ramasastri A. S. (2017) put his view that there are various challenges lying ahead of Indian fin tech ecosystem as fintech products and services are risky in processing. Data security, marketing cost, “Interoperability and integration challenge” of product and cultural difference along with lack of agreement in regulations are creating hurdles for startups. Deloitte (2017) states that Indian regulatory bodies of fintech sector are still adopting “consultative approach” and adequate regulations are still in nascent stage specifically in public funds area that is P2P lending and crowd funding. According to NITI ayog (2018) report on digital payment, “cyber-attacks and data breaches” are major threat for startups and companies in fintech industry as these not only harm personal and commercial information but also severely hampers GDP of targeted country. Mc Kinsey global institute (2016), India still don’t have efficient telecom infrastructure as slow internet speed and rural people’s questionable computer literacy is still a hurdle. Around 90 percent population has been using 2G mobile data and 3G mobile data has been struggling with “poor quality, overload at peak time and signal drop”. Also, Regulatory bodies of fintech sector around the world lacks uniform cybersecurity regulations. This is a major challenge which need to be addressed so that uniform fines and liabilities for data breach can be imposed on cyber attackers.

Discussion and Observation

This paper tries to understand how fin-tech ecosystem is evolving in India. There is no doubt that in recent years government has left no stone unturned to make India go cashless. So many incentives and schemes are being provided to business people and companies so that more and more transactions could be done in cashless mode. India, too has become attractive destination for investors interested in pooling money in fintech industry. Thrust on cashless culture and demonetization has move Indian business entities towards digital era and this act as catalyst for fin-tech sector. But as various report states still a large segment of Indian are not in direct reach of financial institutions so, this is both an opportunity and challenge. Along with this, a bright segment of engineers and technocrats mind is fuelling the growth of fintech sector. This can be concluded India can well surpass the best ecosystems of world if proper regulatory measures are implemented.