We discuss major trends shaping the future of Fintech in India and break down how the Fintech market is evolving in key service and technology segments. As of June 2022, India has a total of 21 Fintech unicorns. Reports suggest that over the next few years, the Fintech sector will mint the maximum number of unicorns in India.
Recently on December 3, 2021, at the launch of InFinity forum, a thought leadership forum on Fintech, Indian Prime Minister Narendra called for a “Fintech revolution” in India with a “security shield”, primarily to be driven by income, investments, insurance, and institutional credit. The statement comes at a time when India has the highest Fintech adoption rate in the world - at 87 percent - and significantly higher than the global average rate of 64 percent. Enabling factors here include the Digital India initiative, a conducive policy environment, and the presence of a sizeable talent pool.
According to Amitabh Kant (CEO, NITI Aayog), the Indian Fintech industry has a cumulative funding of over US$27.6 billion and is expected to be valued at over US$150 billion by 2025.
During the pandemic, when every other sector has experienced slump in growth, the Fintech sector has thrived as COVID-based restrictions curtailed physical movement and encouraged contactless transactions. A study conducted by the Boston Consulting Group (BCG) in association with the Federation of Indian Chambers of Commerce and Industry (FICCI) stated that India’s Fintech industry could reach US$150-160 billion by 2025. In fact, 33 Fintech investment deals worth US$647.5 million were closed in the Indian market in the quarter ending June 2020.
Fintech market in India
There are over 2100 Fintech companies in India, out of which more than 67 percent have been set up in the last five years. India's Fintech segment has also seen exponential growth in funding; investments worth more than US$8 billion were received across various stages of investment in 2021.
The Fintech transaction value size is pegged to grow from US$66 billion in 2019 to US$138 billion in 2023, at a compound annual growth rate (CAGR) of 20 percent. India has met remarkable growth on the digital payments front, registering a monthly volume (total digital transactions) of over 5.7 billion transactions worth approximately US$2 trillion as of September 2021.
Supply side enablers, such as exponentially growing computing power, widespread internet penetration, and increased internet speed and coverage, coupled with demand side stimulants like need for inclusive financial services, customer expectations, and the business need to reduce costs while providing faster, safer, and more reliable services are some of the key factors shaping the Fintech revolution in India.
Additionally, as Fintech platforms and services mature with a strong user base and product-market fit, they have been identifying more opportunities to diversify their revenue streams, in turn giving rise to Super apps. Super apps bring a diversified set of services under one umbrella that can facilitate multiple daily use-cases. With increasing levels of digitization, greater affordability of smartphones, and a COVID-induced preference for digital services, Super apps are finding greater acceptance across the Indian market. It is also worth noting that BigTech, such as Google, Amazon, and WhatsApp, have tweaked their offerings to provide tailored services in India like Google Pay, Amazon Pay, and WhatsApp Payments, respectively.
Payments app Paytm, too, is set to become a Super app. Paytm has brought in financial service product and services, including payment, loan, investment, and insurance on the same platform that also integrated e-commerce, value added services for merchants, and consumer internet services (such as gaming and entertainment) in one app.
At present, globally, there are 187 Fintech unicorns of which 21 unicorns are in India. These are Acko, BharatPe, BillDesk, Chargebee, Paytm, Mobiwik, Oxyzo, PhonePe, Pine Labs, Coin DCX, Coinswitch Kuber, CRED, Slice, Razorpay, Cred Avenue, DIGIT, Groww, Policy Bazaar, Zerodha, Zeta, Open. In 2022, Open (Fintech - neo bank) and Oxyzo (FIntech - marketplace - SME lending platform) became the newest entrants in the unicorn club.
Most of these platforms have now taken to financial services re-bundling by incorporating a bundle of services under the same umbrella, driven by opportunity to monetize the data and user base. These firms are cross selling different financial products and services. For example, Pine Labs, which was primarily a POS/Payment gateway firm has now ventured into value added services for merchants, rewards and loyalty, consumer financing, neobanking, as well as merchant lending. Similarly, Yono, which was primarily as digital banking platform, has now grown into a venture that also caters to new customer acquisition, pre-approved consumer loan, insurance, as well as e-commerce.
Different Fintech segments in India
Real-time payments, faster disbursal of loans, investment advisory, transparent insurance advisory and distribution, peer-to-peer lending, and several other services that traditionally required human capital are now rapidly becoming a part of the digital-native Fintech landscape. The Fintech ecosystem in India can now focus on lending for both consumers as well as MSMEs. At the same time, more traditional financial services, such as insurance, personal finance, and gold lending, are included within this sector.
- PayTech: In this segment, the consumer centric services offered include third party application providers (TPAP), prepaid card/Wallet, bill payment, QR code payment, payment aggregator, point of sale (POS). Business centric services include corporate cards, B2B payments and invoice payments. In this segment, Fintech comes into play through use of services like payment gateway, card networks, application programming interface (API)/White label solutions, as well as payment security. Paytm, PhonePe, MobiWik, and Google Pay are the major players in this segment.
- LendTech: The consumer centric services offered in this segment include buy now pay later (BNPL), personal loan, salary loan, gold loan, auto loan, education loan, and P2P lending while the business centric services include corporate card, fixed term finance, as well as trade finance. Fintech services employed in this segment include collections management, credit bureau, alternate credit scoring, lending as a service, and loan origination system (LOS) and loan management system (LMS). Google Pay, M-Swipe, and Razor Pay are emerging as leading lending platforms for consumers as well as merchants.
- Digital banking: Technology is leveraged in this segment through establishment of digital subsidiary of banks, retail neobanks, as well as SME (small and medium enterprise) neobanks. Neobanks are basically digital platforms for business banks. The Fintech services employed in digital banking include conversational platforms, account aggregators, API providers and aggregators, banks with open APIs, banking as a service, and core banking. Yono, Kahatabook, and Crazybee are some of the major firms with primary engagement in digital banking.
- InsurTech: The scope of services offered through the use of technology in this segment include insurance comparison platforms, digital insurers, electronic insurance, as well as employee insurance. In this segment, Fintech can be employed by providing services like claims management, sales platform, underwriting risk management, insurance infrastructure API, insurance product configurator, and policy admin system. Policy bazaar is a market giant in this segment.
- WealthTech: Within this segment, technology can be employed to provide services related to wealth and expense management through robo advisors, discount brokers, mutual fund investment platforms, research platforms, and alternative investment platforms. The Fintech services applicable in this segment are white label robo advisors, portfolio management suite, and CapTable management. Prominent firms in this segment are Zerodha and Smallcase.
- Finance Fintech: The various services that can be provided in this segment include:
- Accounting: Services are provided at the level of enterprises, SMEs, and micro-size businesses.
- Procure to pay
- Quote to cash
- RegulationTech: The technology is also being utilized to fulfill compliances and regulatory requirements within the financial services sector, including KYC, digital onboarding, fraud detection, anti-money laundering (AML), as well as banking compliance and risk management solutions.
Major trends driving fintech revolution in India
Supply side factors
Growth of Fintech in India is driven by various macroeconomic factors, such as enabling government and regulatory initiatives, India’s demographic dividend, increasing national disposable incomes, large unbanked population, improving internet access and smartphone penetration, and a rapidly evolving e-commerce marketplace.
Government support has been key - not only from the regulatory standpoint - but also in providing critical enabling assistance. Be it broadband infrastructure to enhance internet access in rural areas or digital literacy and financial programs, various government programs have accelerated the growth of the Fintech industry in India. These include Startup India, Digital India program, India Stack, E-RUPI, license for payments banks, Jan Dhan Yojana, recognition of P2P lenders as NBFCs, National Common Mobility Card (NCMC), regulatory sandboxes by RBI, and IRDAI for Fintech. Moreover, a robust public digital infrastructure aided with Aadhar, UPI, account aggregation etc. and a supportive regulatory environment has eased and augmented the technological transition in India. Regulators (RBI, IRDAI, and SEBI) have undertaken numerous measures to ensure increased accountability and the uninterrupted availability of secure and affordable digital financial systems. As of October 2021, India’s Unified Payments Interface (UPI) has seen participation of 261 banks and has recorded 4.21 billion monthly transactions worth over US$100 billion as of October 2021.
According to Kant, “India has a clear shot at cementing a position in the global landscape through regulatory sandboxes” (live testing of new products or services in a controlled environment) and an agile and responsive approach to policies.
Recently, the Reserve Bank of India selected Open Financial Technologies Pvt Ltd to build a blockchain-based cross-border payment system as part of the second cohort under its regulatory sandbox framework. For the cross-border payment system under the RBI’s regulatory sandbox, the start-up would use Hyperledger Fabric, which is a Linux-based open-source blockchain. At present, there are two types of cross-border payments: one is Rupee Drawing Arrangement (RDA), which is used for individual remittances and the other is Online Payment Gateway Service Providers (OPGSP), used for fund transfers by exporters.
The government has also set up various mechanisms to support growth of Fintech in India, including an Inter-Ministerial Steering Committee (IMSC) on Fintech and a Joint Working Group (JWG) on Fintech - established bilaterally between India-UK and India-Singapore - to promote fintech solutions, interoperability standards, and payment linkages.
Additionally, the International Financial Services Centre Authority (IFSCA) was established in 2020. It is a unified authority for the development and regulation of financial products, financial services, and financial institutions in India's International Financial Services Centre (IFSC).
Investments in India's Fintech sector
In line with global trends, India’s Fintech ecosystem has seen tremendous growth in recent years, making it one of the world's largest and fastest-growing Fintech markets. According to Tracxn's database, the total volume of Fintech funding till June 2021 was US$20.8 billion, with 36 percent of the funds raised in the last two years and amounting to US$8.6 billion. Further, in the first three quarters of 2021, investments worth US$4.6 billion were recorded in India’s Fintech space with Pine Labs receiving investment worth US$600 million, followed by BharatPe (US$370 million), OfBusiness (US$207 million and US$160 million), Digit Insurance (US$217 million), and Khatabook (US$100 million). Recently, consumer internet group Prosus’s payment arm PayU acquired the Indian payment gateway service provider BillDesk for US$4.7 billion.
A sectoral breakup of the funding received over the last two years (US$8.6 billion) reveals that the payments segment remains the biggest funding segment (48.5 percent), followed by alternate lending (28 percent), internet first insurance platforms (7.9 percent), investment tech (5.4 percent), banking tech (5 percent), and finance and accounting tech (3 percent).
According to S&P Global Market Intelligence, despite the pandemic, the Asia-Pacific region managed a steady inflow of investments. In 2020, India topped among Asia-Pacific (APAC) countries in Fintech investment with 121 deals amid COVID-19 led disruptions in the funding ecosystem. It must be noted that investments into the Indian fintech landscape were almost double that of China.
According to UK's Chancellor of the Exchequer Rishi Sunak, British fintech firms have announced investment plans worth over US$132 million for the Indian market.
Demographic opportunities in India
The total number of internet users in India has increased from 795.18 million at the end of December 2020 to 825.30 million at the end of March 2021, registering a quarterly growth rate of 3.79 percent, as per data by the Telecom Regulatory Authority of India (TRAI). India’s active number of internet users is further expected to expand, mainly driven by high rate of rural adoption. It is further estimated that by 2030, India will add 140 million middle-income and 21 million high-income households, driving the demand and growth for the Indian Fintech space.
Demand side factors
As the financial services industry is evolving from following a transactions-based approach earlier to adopting a more consumer centric approach, the cutting-edge technology employed by the Fintech space has created a niche for itself by offering tailor-made products according to consumer preferences. India’s fast emerging tech-savvy consumer base led by millennials is leading the adoption of mobile-first products and services. Across various parts of the country, especially in tier-2 and 3 cities and smaller towns, consumers have leapfrogged cards and wire transfers and moved directly to smartphone banking. Moreover, it has been observed that in the smartphone banking space, it is easier to onboard new customers.
Additionally, Fintech is significantly contributing towards bridging the social gap in India by providing employment as well as democratizing education by providing solutions to overcome the challenges posed by the traditional financing practices. Recently on December 9, 2021, Paytm signed an MoU with the skill development ministry to train over 6000 young Indians in Fintech through a six-month course and even offer employment to eligible candidates.
Fintech has also helped in augmenting financial inclusion by not only normalizing credit but also by bringing gender parity as studies suggest that overall trend of savings and investments among women in India has improved with increased usage of mobile apps, wallets, and platforms.
According to Experian estimates, before COVID-19, 22 million Indian consumers were seeking credit every month, and 70 percent of them dropped their applications mid-way due to complexities. The current Fintech industry is normalizing credit in smaller and daily life purchases through mechanisms like buy now pay later (BNPL), which is ensuring provision of frictionless credit to people. Simpl, Lazypay, Flipkart pay later, Scan Now Pay later, etc. are examples of apps as well as processes that are normalizing smaller credit lending in everyday life.
The overall financial services market is witnessing a major transition leveraging new and cutting-edge technologies, such as blockchain, AI, ML, and cloud infrastructure. Three key technology factors driving growth of Fintech include a strong talent pool, increasing collaboration between banks and Fintech enterprises, as well as the fast pace of technological innovations on an everyday basis. According to a UNESCO study, India ranks among the top countries producing university graduates, and around 32 percent of all students in India pick Science, Technology, Engineering, and Mathematic (STEM).
Technology is being exploited to bring in efficiency in processes like payments, claims processing, and savings marketplaces through e-KYC, video KYC, IoT, AI, digital signatures, and account aggregation infrastructure. Moreover, these technological advancements are bringing a sense of security among consumers through biometric identity verification techniques, such as voice, face recognition, and iris scanning
What are the major challenges affecting Fintech adoption in India?
While Fintech adoption in India has been unprecedented, it continues to face certain challenges like risk of data security and privacy leak, platform downtimes, lack of financial literacy and awareness in India, as well as differential adoption rates among MSMEs that dominate Indian economy. Further, rapidly changing regulations due to the evolving nature of the sector also poses cost-related challenges for users and businesses. For example, regulations for investment exits, cryptocurrency, payment regulations, data, infrastructure security, and consumer protection are still evolving.
This article was first published on December 12, 2021 and last updated on June 9, 2022.