Authors: Shivali Vij and Amit Datta
Institute: Indian Institute of Management Lucknow
In the current era of digital revolution, technology has changed the way in which we lead and live our lives. This is visible in almost all areas including Finance. Financial Technology or FinTech refers to the digital platforms and services solutions in finance related areas like banking, personal finance, peer-to-peer payments, insurance and many more.
Financial services industry had huge barriers to entry in the past: unmatched distribution through branches; insurance and interest on savings, expertise in credit analysis through data as well as extensive network.
Using technology, start-ups are now innovating products and services and disrupting the industry, in segments like consumer banking and payments, insurance and asset management. FinTech innovation is fueled by a large market base, an innovation-driven startup landscape, and friendly government policies and regulations. We observe a 7% CAGR in FinTech start-ups.
According to Accenture, global investments in FinTech ventures tripled to tripled to $12.2 billion in 2014 from $4.05 billion in 2013, a 201% YoY increase.
India provides a huge potential for startups in this area. From getting into untapped segments to targeting foreign markets, FinTech startups in India are pursuing multiple dreams. The Indian FinTech market is expected to double to $2.4 billion by 2020 from a current $1.2 billion as forecasted by NASSCOM.
An encouraging regulatory environment has enabled the launching of 174 FinTech startups in 2015 alone , as per data analytics company, Traxcn.
The Indian economy has been traditionally driven by cash transactions. But with the high penetration rate of the Internet, e-commerce and smartphones this scenario is fast changing. With 40% the population is unbanked, 87% of the payments made in cash and 53% of the population owning smartphones which is expected to rise to 64% by 2018, the India market hold a promising potential for FinTech startups. The transaction value of the India FinTech market is estimated to be $33 billion in 2016 and is forecasted to reach $73 billion by 2020 growing at a CAGR of 22%.
When compared to the global markets, the growth may not seem to be overwhelming, but if the large pipeline of easy-to-hire and inexpensive technical workforce is considered, India shows huge growth potential. Mobile wallets, internet banking, cashless transactions have redefined the way people access financial services. With a high rate of adoption, especially among the youth, India is positioned as an attractive market for FinTech startups worldwide.
Growth opportunities in the FinTech market
Next generation payments (Current adoption - high) and P2P lending (Current adoption: medium): FinTech played its role by converting a device people already own- a mobile phone- into a sales system. Startups offered unique prepositions like allowing businesses and individuals to lend and borrow between each other, alternate credit models (using data analytics) to price risks. Lower operation costs by removing human intervention and savings in infrastructure meant all cost savings were passed on to the customer. The RBI has promoted the Unified Payments Interface and the Bharat Bill Payments System and has set up a committee to understand the risks involved and emergence of new models, and assess how the banking system could then adapt and respond to them.
Bank in a box (Current adoption: medium): Banking solution designed for a non-bank financial institution wishing to open a deposit taking division and to operate on an inexpensive technology platform, with flexibility for growth. They exploit Software as a Service (SaaS) and reduced the capital expenditure for themselves possibly through partnerships, to cover call center, back office; fulfillment; account reconciliation; check processing and other services. Several financial institutes are looking into this for rapid market penetration and ease of introducing digital lending products.
Financial inclusion (Current adoption: high): Advantage of FinTech is that they cherry pick their small segment and use analytics to make offerings to them. Indian FinTech startups target unique segments like education (Shiksha finance) which provides loans to parents for fees and to schools against assets. Catalyst labs links farmers to bulk buyers of crops, verifies quality and acts as a digital market. Profitbooks is taking over the accounting and inventory tracking industry.
Blockchain (Current adoption: low): FinTech are using solutions that leverage biometrics for fast and robust authentication coupled with technologies like Blockchain to achieve best ever security standards.
Even the government is promoting technology using in finance industry by introduced RuPay. RBI has even proposed a committee to study the usage of Blockchain technology to reduce the use of paper currency, recognizing the power of FinTech.
Robo-advisory (Current adoption: medium): Automated investing and tailor made financial products are another offering that FinTechs provide. Wealth managers are increasingly using analytics solutions at every stage of the customer relationship to increase client retention and reduce operational costs.
Challenges were faced by the traditional industry as to how to cater to small investors, but now automated FinTech solutions can run algorithms for a customer’s risk appetite and generate a portfolio just for him. Such advisory capabilities will put pressure on traditional advisory services and fees and will transform the delivery of advice.
Security and biometrics (Current adoption: medium): Dynamic Signature Facial Finger Prints Voice and Iris are now being used to authenticate a person’s identity, thereby removing the need to enter pin every time. They also help strengthen the fraud detection mechanism.
Insurance (Current adoption: low): 5 fold increase in global InsurTech start-up investments has been observed in 2015. FinTech is changing the standard customer offerings; like customer centric designs create compelling user experiences (e.g. quotes obtained by sending a quick picture of the driving licence and the car vehicle identification number (VIN)). Auto insurance pay-as-you drive is now the most popular usage-based insurance (UBI) where FinTech has played a role.
Customers’ demands for personalised insurance solutions. The ability to access and capture remote risk data gives FinTech edge over the traditional FS models. Start-ups like Lemonade are introducing peer-to-peer insurance model and employing psychologist Dan Ariey for changing the way industry looks at insurance selling. Indian startups can explore this huge segment.
Remittances (Current adoption: medium): Transfer and payments in remote areas, aid in managing exchange rates and premiums. eKYC Aadhar enabled KYC is helping startups like ZestMoney make online payments and set EMI installments without customer having to use the credit card. This fastens up the approval process from 2 weeks to 2 hours.
Analysis of FinTech startups in India: Shiksha Finance
An RBI-licensed, non-banking financial company (NFBC) that offers microfinance to middle and low income school students in Tamil Nadu. Students are provided loans for education, books and uniforms, while schools are provided loan for infrastructure expansion.
Shiksha Finance has successfully dispensed loans that amount to INR 10 crore to over 85 government-recognised schools and over 100 individual students in eight other schools.
Business model: Raised money through equity and debt, on which they pay interest. They earn interest from loans offered to schools and students.
Repayment incentives: If EMI is paid on time, the loan can be repeated; Fees is paid directly to schools to avoid misuse of funds; Interest rate as low as 50% of market rate; Schools get easier repayment periods like 24-60 months in comparison to 10 months by banks.
Competition: No banking or finance company, at this stage, offers loans for school student education.
Issues FinTech startups may look into
Youth preference for convenience and speed accelerates FinTech, but regulators have difficulty assessing the risk profile of these startups. Online banks rely on transparency, service quality and unlimited global access to attract Millennials, who are willing to access multiple service channels.
Challenges: Regulatory tolerance for lapses on issues such as anti-money-laundering, compliance, credit-related disparate impact, and know-your-customer will be low.
It is now just a matter of time before we see a rise in the number of FinTech startups coming up to aide the financial institutions. But unlike other areas, this will be a totally collaborative approach taken by the multiple unique ideas that will come up. They will pave the way for the more traditional players to come in.
Although many will raise questions like security of transactions, privacy of information, threat of data-theft to the extent that economies can be brought down overnight - it is just a matter of time that technological prowess and development over-shadows these. With increasing literacy, higher adoption of technology and greater internet penetration probably FinTech startups are the best way in which small business owners can grow beyond the identity of the owner. Finally, it is just a wait for the policymakers to allow the digital revolution to take over and create a transparent and accountable platform for the betterment of the society.
FinTech Innovation Lab, Accenture Consulting
India emerging hub for FinTech Startups, NASSCOM
‘Cash outlook: India’, IBGC working paper 13-01
Statista.com - Forecast of mobile users in India
Statista.com - FinTech India
KPMG - FinTech in India: A global growth story
FinTechranking.com - The Reserve Bank of India announces Blockchain committee
Techcrunch.com - Still stealthy new insurance company lemonade continues to impress
McKinsey.com - Cutting through the noise around financial technology
PWC FinTech global report
Tech.co - FinTech landscape in India 2016