Fintech in India: Potential & Challenges

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Context

• India’s Fintech sector saw investments worth $2 billion in the first half of 2021, almost matching the total
investments garnered in 2020.
• The fast-emerging Fintech sector is evolving as an alternative financial platform to offer a new and
diverse financial services and products.

What is Fintech?

• Fintech or Financial technology refers to technologically enabled financial innovation that can result
in new business models, applications, processes, or products that have a meaningful impact on
financial markets and institutions, as well as the provision of financial services to end customers.
• It uses technological tools such as information technology, internet, mobile, blockchain, artificial
intelligence, etc. to innovate new financial services to the doorstep of the people.
• Application: m-banking, e-wallet, digital payment, insurance, UPI, peer to peer lending etc.
• Examples: Paytm, Cred, Mobikwik, Policy Bazaar, Capital Float, LendingKart, BankBazaar, Instamojo
etc.

Status of Fintech Sector in India

• FinTech ecosystem - 3rd largest globally.

• Fintech Market Growth rate – Among the fastest – 67% of the more than 2,100 fintech entities in
• India have been set up in the last five years.
- Out of a total of 65 unicorns in India, around 1/6th are FinTech companies.
• FinTech Adoption Rate - highest globally, along with China.
• Sub-segment - Payments, Lending, Wealth Technology (WealthTech), Personal Finance
Management, Insurance Technology (InsurTech), Regulation Technology (RegTech) etc.
• Neo-banks (with only digital presence) are emerging as a key segment for growth in the Indian
Fintech space.

Significance & Potential of Fintech in India

• Enhanced customer experience - FinTech firms offer convenience, personalisation, speed,

transparency, accessibility, and ease of use – factors that empower customers.
• Reduced cost of transaction & improved quality of services - Fintech are not burdened with
expensive physical branch networks and the benefits of leaner operating models are passed on to
customers.
• Financial inclusion - Enabling the outreach to unbanked population and vulnerable sections by the way
of Mobile banking and Payment banks using fintech tools.
• Formal Sources of Credit to Unserved/Underserved sectors: For eg.
 MSME – Paperless simple process of securing MSME loans along with value add services like
Peer to peer lending, crowd funding, invoice discounting, MSME Registration, financial advisory,
etc.

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  Agriculture – Low cost credit and insurance services to farmers. E.g. PayAgri, Jai Kisan and
FarMart that connects with farmers and provides financial services.
• Innovative model of Risk Assessment
• Powered by artificial intelligence (AI), machine learning (ML), & data analytics, FinTechs can
identify risks, fake practices, spam information, and suggest the right course of action to
customers and Businesses for investment, and Banks for lending purposes.
• Offering credible credit scores lowers the credit risk for banks, lower NPAs, & enhances lending
to credible ‘thin-file clients’ like MSME, Farmers etc.
• Wider range of financial products - to enhance the choices for customers and induce
competition in the market. For E.g. virtual banking, m-wallet, new trading platform, online stockbroking
& wealth management investments.
• Efficient delivery of Govt. Benefits – Direct Benefit Transfers and other government benefits through
tech-enabled platforms. E.g. JAM trinity, Bharat Bill Payment System etc.
• Boost to Cashless Economy - Fintech revolution augments government’s vision of cashless economy
by reducing the dependency on cash and formalising economic transactions.
• New employment opportunities & Innovation – created by emerging start-ups & businesses in
fintech.
• Allows continuity in market operations – For eg. During COVID 19 crisis, digital transactions have
helped people maintain social distancing and ensure the sustenance of market functions.
• Enhanced Security - Blockchain technology and biometrics provides secure way of financial
transactions.

Key Initiatives in Fintech Sector

NPCI Initiatives Government Initiatives

• Bharat Bill Payment System (BBPS) • JAM (Jan Dhan Yojana, Aadhar, Mobile)
• Payment Banks and Small Finance Banks Scheme
• Unified Payments Interface (UPI) • India Stack Project
• RuPay • Start up India
RBI Initiatives • Digital India Campaign
• Regulatory relaxation for start-ups • Gujarat International Finance Tech-City
• Regulatory Sandbox for FinTech (GIFT)
• RBI fintech innovation competition • Removal of surcharges & provision of Tax
• • Simplification of KYC norms Benefits on e-payments.

Key Challenges Faced by the Fintech Industry in India

• Financial & Digital literacy constraint: Only 24% Indians are financially literate and 20% are
digital literate which can be a challenge in adoption of fintech product and services.
• Regulatory constraints - Lack of clarity in regulation of emerging fintech industry creates an
uncertainty in developing fintech policies.
 Lack of coordination between multiple regulators such as RBI, SEBI and IRDAI.
• Security constraints: Challenges relating to breach of financial data, consumer data privacy.
• Infrastructural Constraints - Non-availability of digital infrastructure, unreliable access to electricity,
data storage, data centers and weak Internet coverage/speed are major challenges.
• Trust and behavioral constraint - Indian consumers are known to have more comfort in physical
transactions in the form of cash, than digital transactions.
• Skill gap - The shortage of skilled workforce also poses a challenge in developing fintech
products/services in India.
• Funding constraints for start-ups - lack of seed funding and high cost of capital mobilization to
develop or scale up fintech business ideas.
• Accessibility constraints:
• Regional disparities between low-income & high-income states; rural-urban divide pose a
challenge in outreach.
• Digital Divide: more than 400 million people still have no access to the internet.
• Most Indian fintech start-ups are currently targeting upper and middle-income segments.

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Way Forward

1) Expansion of Fintech Services

• Improving the access of financial products for MSMEs, farmers low-income, remote populations, tier-2
and 3 cities and rural population.
• More innovations are needed in priority areas such as health, education, and social transfers that
directly affect a majority of women.
2) Fostering data security:
• Expeditious enactment of Financial Data Management and Data Protection laws to match the speed of
innovation in this sector to ensure secure and transparent growth.
• Regulatory Sandbox (RS) mechanism as a live testing of innovative financial can aid in identifying the
data security and financial security risk.
• Establishing Cybersecurity Consortium Network between financial institutions, universities,
regulators and fintech companies can increase the collaborations in cyber security.
3) Awareness and changing consumer perception:
• Improve financial & digital literacy and perceptions about emerging financial products. For eg. Pradhan
Mantri Gramin Digital Saksharta Abhiyan (PMGDISHA).
• Fintech products/services need to build usability features in local languages.
4) Regulations: Balancing Act to foster innovation
• Clarity: it will strengthen the sector in long run, help it gain customer trust, and attract more capital.
• Create an environment that fosters innovation while adequately addressing concerns on customer
protection, data security and privacy.
5) Financial Infrastructure: There is an urgent need to expand digital infrastructure at merchants level.
6) Boost Innovative Business models: Need to consider permitting new or innovative business models that
can reduce costs and enable choices for consumers.

Practice Question: The Indian Fintech sector is witnessing a boom. Outline the factors and government
initiatives that have aided this growth. What are the challenges going forward?

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