9 Months agoIndia's FinTech ecosystem is on the up and up. Read on for a deep dive into India's FinTech industry.
The traditional financial services have globally undergone a radical transformation that has been brought about by technology and innovation. In 2015, more than 12,000 start-ups sprouted in the Fintech space across the world with a massive investment of USD 19 billion.1 By definition, Fintech comprises of technology–based businesses that are competing against, enabling or collaborating with existing financial institutions. These companies also collaborate with universities and research institutions, government associations and industry bodies.2
The industry is likely to continue its current growth trajectory, with the global Fintech software and services sector predicted to touch USD 45 billion by 2020 at a Compound Annual Growth Rate (CAGR) of 7.1%.3
At this juncture, India has created an ecosystem that provides start-ups an opportunity to exponentially grow into big businesses. Right from delving into a range of unexplored segments to engaging with foreign markets, Fintech start-ups are delivering innovation that was previously difficult to achieve. The Indian Fintech software market is poised to touch USD 2.4 billion by 2020 from the current USD 1.2 billion in the Financial Year (FY) 2016.4
In the last few years, the Indian economy, which is significantly cash-driven, has taken advantage of the Fintech opportunity. With a range of options, including e-wallets, lending and insurance, the variety of services provided in this sector are immense and have changed the way consumers carry out their daily transactions. Fintech in India is especially advantageous, since the country boasts of an unrivalled youth demographic which is rapidly growing. Furthermore, smartphone penetration is likely to witness an upsurge - from 53% in 2014 to 64% by 2018. The financial services market in India is primarily untapped, with 40% of the population having no association with any bank and more than 80% of the transactions carried out through cash. This represents an opportunity for Fintech start-ups to massively spread their wings in different segments.5
Since the Fintech ecosystem is based on the principle of integration and collaboration with other agencies, this is where the exchange of ideas and strategies, building of networks and conversion of opportunities plays a significant role.
Below are the key stakeholders that define the success of this industry:
- Start-ups: Contrary to popular perception, the start-up Fintech space is not just limited to mobile wallets. Presently, India boasts of over 600 start-ups in Fintech that belong to various segments and the number is predicted to rise, especially with the introduction of initiatives such as a focused accelerator program by local and state governments and banks. Additionally, support through funding is provided by leading corporates and venture capital. At this point, the start-ups are undergoing a makeover - from disrupters to enablers of change.6
- Universities and Research Institutions: Academic bodies play a significant role in shaping the mindset of prospective entrepreneurs. Lately, leading institutions in India are playing a proactive role by organising events and competitions as well as offering technical courses. For instance, IIT Roorkee, one of the premier institutions of our country, organised the Global Entrepreneur Conclave to enhance entrepreneurial skills and recognised those students who displayed exemplary skills in technology-related fields.
- Government and Regulators: The Government, along with regulators such as the Reserve Bank of India (RBI) and Securities Exchange Board of India (SEBI), are extending all the support to Fintech companies, in order to realise the country’s vision to become a cashless economy. Through the ‘Startup India’ initiative that was launched in 2016, the government envisages to build a strong ecosystem for start-ups in the country, promote innovation, drive sustainable economic growth and generate large-scale employment opportunities. To further aid start-ups, the government has launched a range of tax and surcharge reliefs, including income tax exemption for start-ups for the first three years, a credit guarantee mechanism through debt funding for start-ups as well as other exemptions.7
- Financial Institutions: With the rapid emergence of the Fintech sector, various BFSIs are collaborating with Fintech start-ups on a variety of platforms such as wallets and online client acquisition, among others. They are proactively mentoring, supporting, and investing in innovative start-ups. For example, Bank of India offers a wallet in collaboration with Paynimo that is powered by TechProcess.8
- Incubators and Accelerators: This is a critical component of the Fintech ecosystem. The role of incubators and accelerators is not just limited to funding, but also to strengthen the financial industry and enhance soft skills. Financial institutions play a significant role to discover talent and develop platforms and solutions. A case in point is the Kotak Fintech mobility hackathon that partnered with NASSCOMM 10,000 start-ups to identify founders developing apps that revolve around innovation in banking. Secondly, non-financial institutions focus more on incubation than acceleration. Some of the most significant initiatives include PayPal Incubator and Yes Fintech.9
- Users: The users, comprising of customers in the form of both individuals and organizations, have shown impressive receptivity to the transition of India’s economy being technology-driven. The routine transactions made by cash have given way to cashless transactions and mobile banking.10
A range of factors have contributed towards the success and development of the Fintech ecosystem in India. With India’s population going digital at a very fast pace, the number of internet users touched 450-465 million in June 2017 and is expected to rise even further. With government’s consistent efforts to promote digital services through ‘Digital India’, there lies an opportunity for existing Fintech start-ups as well as potential investors.11
Apart from this, the government’s push towards financial inclusion for India’s population is a critical factor as well. The launch of ‘Jan Dhan Yojana’ scheme aims to provide a bank account to every citizen. The Fintech start-ups can capitalise on such opportunities by offering simplified and efficient transaction services. The government’s biometric identification database, Aadhar, contains information of over 1 billion Indian citizens; this is likely to minimise the effort required for first-level verification of customers.12
Furthermore, to provide an impetus to cashless transactions, the government has introduced tax rebates for traders accepting more than 50% as electronic payment.13
Taxation & Regulations
India’s primary regulator, RBI, introduced a new set of guidelines in 2014 and relaxed the rule of undergoing a KYC process for customers carrying out transactions up to worth Rs. 20,000/month . Under this, the customer can download a wallet of his choice and use it for services such as booking of tickets and paying bills without furnishing any documents or photographs.14
RBI is now expected to introduce new set of norms in 2017 to revamp the Indian peer-to- peer (P2P) lending market. In April 2016, the government came out with a consultation paper that categorises P2P as a Non-Banking Financial Company (NBFC). P2P is a kind of crowd funding, wherein loans are raised and paid back with interest. The interest rate is set by the platform or the borrower and lender can mutually decide upon a rate. After the adoption of new norms, P2P will only serve as a medium to bring the borrower and lender at a common platform.15
Significant growth in capital investments, government policies and an entrepreneurial mindset make Fintech an emerging industry. This interest is likely to witness a spike with continued participation from banks and regulatory bodies. With this momentum, the transaction value for the Indian Fintech sector is likely to touch USD 73 billion in 2020, growing at a five-year CAGR of 22%.16