India’s fintech sector all set to become a role model for many aspiring nations
Making ease of living for common people a reality in India, fintech sector in the country is smashing traditional way of financial dealings with speed while maintaining uninfringeable transparency
With the banking and financial service sector making a prompt and determined move towards innovation and technology adoption process, India is today placed at the third position behind the US and China in terms of total number of registered fintech companies.
These fintech companies have registered an annual growth rate of more than 20% for the last three years in the areas of payment services, credit lending, investment and wealth management and insurance. As per Bain research, India with 23 unicorn fintech and placed at second place behind the US, has attracted investment of more than $35 billion as of date.
For this success story of growth in the fintech sector, multiple government initiatives taken in the last two decades are key reasons. The union government headed by Prime Minister Atal Bihari Vajpayee (1998-2004) made a conscious policy decision to shift focus on mobiles instead of landlines.
The successful auction of spectrums during the Manmohan Singh era (2010-24) and Prime Minister Narendra Modi’s concerted attempt to scale up internet speed and its bandwidth contributed immensely to cyber and mobile phone growth in the country.
But then it should not be forgotten that seed of fintech industry in India was sowed when the Vajpayee government conceptualized a unique identification card and under the Manmohan Mohan Singh’s regime it took a shape of “Aadhar” card as an optional document and the same got universalized during the first term of Prime Minister Narendra Modi.
The Modi government initiative to open zero balance accounts (Jan-Dhan) in 2014 helped in increasing the banked adult population from 35% in 2011 to about 90% in 2021. On top of these, a scheme named Digital India started in 2015 enabled high-speed broadband internet connectivity and creation of Common Service Centers (CSCs) in rural India for easy delivery of public services digitally.
The policy decision to implement GST in July 2017 created a high demand for efficient tax filing fintech solutions while demonetization in November 2016 resulted in huge demand for digital payment solutions. With the lockdown announced in 2020 to prevent Covid-19 spread, the entire supply-chain network shifted primarily to digital mode and business services required fintech to bridge the gaps created by hurdles in physical movement.
Fortunately, India has highest young demography with a thrust on human resource development and government policy support via Start-up India, Make in India, and public infrastructure developments such as India Stack, helped the fintech industry to rise to the occasion by innovating such products that resulted in visible impact across several dimension of the Indian economy.
First, it helped the business to innovate on new products to be used by common people. For example, fintech payment firms developed payment wallets for consumers, point of sale platforms for merchants and payment gateway platforms to facilitate transactions. This enabled the growth of e-market / e-commerce such as Flipkart, Amazon, Jio Mart, and e-service providers such as Zomato, Swiggy, Grofers and Urban Company.
The innovation of UPI (Unified Payments Interface) is such a huge success that from a zero-transaction value in June 2016, it has grown to ₹12.99 lakh crore in January 2023 and is being used by the poor and marginal income group engaged in unorganized sector such as small provisional stores, vegetable vendors, milkman, street vendors and eateries.
Second, fintech credit lending solutions are enabling the growth in Peer to Peer (P2P) lending, crowd funding, online lending, and e-loan aggregators resulting in formal credit growth for individual as well as the MSME sector, which were in dire need of funds post the Covid19 pandemic. Similarly, fintech solutions in the areas of investment and wealth management are helping the small savings to fund India’s growth via share market mechanism.
The number of demat accounts in India increased from 4.1 crore in Q1 2020 to 10.8 crore at the end of Q4 2022. These credit growths have helped in reducing the cost of capital and thereby, helping the economy to produce competitively priced products, an essential requirement in the goal of “Aatmnirbhar Bharat.”
Third, the insurance fintech solutions have resulted in higher penetration of the insurance products among common citizens and are thus helping India to register a robust GDP growth. A recent study by leading insurance firm Swiss Re has estimated an annual growth rate of 14% that will result in making India’s insurance sector the sixth largest in the world by 2032.
The success of firms like PolicyBazaar have helped people to conveniently search insurance products, customize the product offering as per individual needs and opt for affordable policies. The increased insurance coverage is improving the social security cover for the common people, especially, not covered under any government or private insurance schemes for employees in the formal sector.
Lastly, fintech companies involved in providing solutions to the financial infrastructure challenges have helped the Indian financial system to move towards efficiency in operation, customization in services, use of data in strategy and management of regulatory compliance.
With internet connections jumping from 25.15 crore in March 2014 to 83.69 crore in June 2022 and broadband connections rising from 6.1 crore in March 2014 to 81.62 crore in September, 2022 and at the same time number of smartphone users reaching 60 crores, the mobile and e-banking is the most preferred way for banking services in India.
The large data handling capacity developed via Machine Learning and AI, fintech companies are also helping the financial world in leveraging and processing real time data for decision making on matters related to financial services. In the midst of all this, the government has set up 75 Digital Banking Units (DGU) in 75 districts across India.
All this while banks have partnered with the fintech firms to offer banking services via business correspondent in those areas where brick and mortar banking branches were not operating in close vicinity. The fintech solutions in managing the regulatory compliance such as GST filings since GST implementation in 2017 have been instrumental in lowering the compliance cost for the smaller firms and individuals.
Digital payments, on the other hand, are helping in facilitating leakproof welfare services in the country. Subsidies in LPG cylinders are directly deposited in consumer accounts. Several social welfare schemes such as Kisan Samman Nidhi, Atal Pension Yojna, Atal Pension Yojna, PM Suraksha Bima Yojna, PM Jan Arogya Yojna, PM Awas Yojna, household toilets construction under Swachh Bharat are using JAM (Jan-Dhan, Aadhar and Mobile) infrastructure and fintech solution to provide targeted support for underprivileged section.
Appointment of Business Correspondent by Public Sector Banks (PSBs), opening of 5.49 lakhs CSCs, and starting of doorstep banking services by India Post Payments Bank have helped in increasing the financial inclusion in the remote areas and have enabled the payment to landless laborer for their employment under MNREGA.
While these initiatives are playing a major role in removing corruption, reducing leakages due to wastage of resources, and facilitating the real time payment to reduce transaction cost in the economy, they are also improving the transparency in public affairs, creating robust demand for fintech products, and facilitating the inclusive growth with last mile delivery in governance for the poor. In all, they are facilitating the growth in consumption and investment expenditure and thereby, propelling the GDP growth rate.
***The author is working as a Vice President in Barclays Bank, handling its Model and Risk Management unit; views expressed are his own