How India is Adopting a New Space for Fintech Brands? MSME digital lending has the potential to grow 10 to 15 times larger by 2023, to INR 6-7 lakh crore, or $80-100 billion nearly as large as the entire global microfinance industry today

India has walked a long way from a high cash concentrated economy to a country with the second highest FinTech adoption rate in the world as per EY's Fintech Adoption Index of 2017. In the early 1990s, the country started using technology to manage money in the form of FETs. Yet, it is interesting to see how it is responding to this new habit of Fintech adoption.

It is always exciting to know how banks make money. As per various banking experts, the simple and most fundamental way in which banks make money is by lending money at a higher rate than the interest they pay to customers who deposit their money with them. To analyze this, one understands that the interest banks pay on deposits and short-term borrowings comes from the interest it collects on loans and interest payments from their debt securities. Though the history of banks seems impressive, technology is helping people to live with fewer complexities and more ease, even in terms of financial transactions. And here FinTech services come as a smarter way to manage finances in a simpler, easier and less time-consuming way.

FinTech Industry Size

NASSCOM says Indian FinTech market is estimated to reach USD 2.4 billion by 2020 from a current USD 1.2 billion. The estimated transaction value for the same sector was approximately USD 33 billion in 2016 and is predicted to reach USD 73 billion in 2020, growing at a five-year CAGR of 22 per cent, according to India Fintech Opportunities Review Report 2017-18.

Growth in Consumer Credit

Overall, with the increasing FinTech adoption rate, India has been witnessing a gradual growth in the consumer credit segment too. Backed by growth in the unsecured lending categories including credit cards, personal loans and consumer durable loans, Indian consumer credit market continued to expand over the past year, said the latest report released by TransUnion CIBIL CYQ4 2018 Industry Insights Report (IIR). These categories witnessed a 31.3 per cent growth in CYQ4 2018 compared to the same period the year before.

India Story

If we see the large consumption base that as a country India poised, we have a largely untapped market. In the country where 40 per cent of the population is currently not connected to banks and 87 per cent of payments are made in cash, there is immense scope for growth for this sector. Moreover, smartphone penetration is expected to increase to 85-90 per cent in 2020 from 65-75 per cent currently, and internet penetration steadily climbing, the growth potential for FinTech in India looks interesting. Also, if we analyze the small businesses, we see a massive 90 per cent of small businesses are not linked to formal financial institutions. These are the areas where FinTech services offer important scope and expansion opportunities.

Industry Landscape

FinTech as an industry has three major categories such as transactions, lending, and investments. The transactions space has almost matured, lending is maturing, whereas investments in this space are nascent.

Transactions

Although the usage of technology to manage money was prevalent in the country, change started after 8th November 2016, when Indian PM Narendra Modi announced demonetization of currency notes, leaving India with no option than switching to virtual money and digital transactions. As per media reports, Paytm's traffic increased up to 435 per cent, and other digital wallets like PayU India witnessed a highlighting 80 per cent growth in transactions and FreeCharge claimed to observe a 12 times increase in its average wallet balance on its platform post the demonetization announcement. Similarly, MobiKwik reported over 40 per cent hike in the app download within less than 18 hours of the announcement. Most interestingly, digital transactions observed a 22 per cent hike almost immediately after the note ban intimation.

Also, the emergence of Jio's new plans for India's telecom industry offering internet at negligible costs and the emergence of low-cost smartphones have also fuelled the adoption rate of FinTech services. Jio's internet offers at almost free of cost was a stepping stone towards making India more digital. As per Times of India reports, India had 481 million internet users at the end of December 2017, which was 11.34 per cent growth as compared to the number of internet users in 2016. The report further stated that internet penetration in urban India was about 64.84 per cent in December 2017 as compared to 60.6 per cent in December 2016 and the internet penetration in rural India has grown from 20.26 per cent in December 2017 from 18 per cent in December 2016.

The introduction of UPI was a game changer in this segment too as it is reaching billions of Indians to use its services for financial management making the country go digital. It brings benefits like reduction in money laundering and tax evasions also.

Lending

In lending, FinTech companies are offering services to help avail consumers' credit facilities from financial institutions. In this regard, companies are trying to enter the lending space and vying for a license from RBI. In the MSME segment too as per a recent Omidyar Network & BCG report, "MSME digital lending has the potential to grow 10 to 15 times larger by 2023, to INR 6-7 lakh crore, or $80-100 billion nearly as large as the entire global microfinance industry today."

In delivering the lending services in B2B and B2C level, technology like Machine Learning (ML) and Data Science are helping a lot. For instance, FinTech companies use ML algorithms, social media analysis, call records, purchasing behaviours, and payments to share with utility service providers to increase efficiency and provide greater access to credit. The difference between a traditional bank and a FinTech company is that the speed is better with the latter despite the fact that few banks trying to match speed with them.

Investments

When it comes to investments, India as a country has always been lagging in financial literacy. Where we see almost a negligible keen users are investing in Mutual Funds and Stock markets. This has been augmented by the convenience of using the mobile app, easy interfaces, and lower fees. Yet, when it comes to adoption in this space, middle to lower income groups are yet to adopt FinTech for investments. However, considering the larger growth opportunity in this space, big players like PayTM, PhonePe & GooglePay are making entry into this space. Another pattern which is in vogue these days, individuals are also using FinTech in purchasing gold which is gaining traction.

On the Flipside

Starting with the FinTech adaptability in India, the sector has been facing many issues encompassing regulatory headwinds, user awareness around security among others. In the regulatory policies, the sector is facing uncertainty as to the major issues in payment policies and data localization forms. These are affecting all three areas of Transaction, Lending, and Investment for FinTech. Going by the trend, industry experts say, the segment may not see disruption as we witnessed in the e-commerce segment. However, with the increasing consumption, it will be on the path of a steady climb in the next 5-7 years. In this growth story clearly, banks, NBFCs (Non-Banking Financial Companies) and AMCs (Asset Management Companies) will have a large role to play in shaping the FinTech.