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The FinTech Transformation

The post demonetization era saw the rise of Indian financial services industry, with an amalgamation of various sectors into one — the FinTech. Explore with us the whole ecosystem, emerging models and upcoming opportunities for IT channel

Kalpana Singhal

The demonetization drive in 2016 in India can safely be called the landmark moment which redefined the FinTech ecosystem as it was understood until then and put many FinTech startups in India on the map. The ban on Rs 500 and Rs 1,000 currency notes, which wiped out 86.4 percent of cash from the economy overnight, forced the public to switch to digital payments and online transactions en-masse.

It was this impetus to the wave of digitization that led to the boom of the existing digital payments platforms and the founding of new ones. While the existing players went on to achieve soaring valuations, new FinTech startups quickly scrambled to fill in the existing opportunity, and bring technology to the many sub-sectors of FinTech.

Today, FinTech has expanded to include any technological innovation in — and automation of — the financial sector. This includes advances in financial literacy, advice and education, as well as streamlining of wealth management, lending and borrowing, retail banking, fundraising, money transfers/payments, investment management and more.

“The FinTech industry in India is rapidly expanding, and the adoption rate is growing faster than anticipated. One of the reasons for strong growth is that traditional financial services companies have entered the fray in a big way,” says Mahesh Makhija, Partner and Leader, Digital and Emerging Tech, EY, in a press statement.

The ecosystem

India’s evolution as a progressive FinTech nation is not a miracle. It happened at the back of executing a four-point approach. Firstly, solving for identity in the form of Aadhaar for formalization. Secondly, getting everyone a bank account to store money. Thirdly, building scalable platform(s) to move money (IMPS, UPI, etc.). And finally, allowing banks and FinTech organizations and wealth/insurance/lending players also to access platform like UPI to innovate. This framework has led India to a FinTech revolution.

As per a NASSCOM report, in 2018 there were around 400 FinTech companies operating in India; this number is constantly growing. NASSCOM predicts that the revenue generated in India from FinTech companies will touch $2.4 billion by 2020.

The Indian FinTech market has seen the emergence of a few dominant segments that are disrupting the financial services value chain by offering technology-led innovations to improve customer experience and engagement, and to drive operational efficiency. Within this space, digital payments and alternative lending have emerged as the most mature segments, driven by sustained funding, Government support and huge untapped market opportunities.

Almost 75 percent of Indian FinTechs are either in lending or payments. In 2018, lending continued to be the hottest sub-sector, mopping up half the equity funding invested in Indian FinTech ecosystem. As per the recent analysis, digital payments are just about 13 percent of the total volume and currently, 87 percent of the transactions happen through cash. Thus, FinTech is a lucrative sector to invest in and is set to grow exponentially in the India growth market.

Payments

Payments have been at the forefront of India’s digital revolution, with digital payment transaction volumes (worth $3.5 trillion) touching approximately 24.13 billion in 2018. The demonetization drive launched in November 2016 and lucrative returns on mobile wallets and UPI transactions (which led to their widespread adoption) have been key to driving exponential growth in digital transactions. In addition, the rise of digital commerce, innovation in payments technology using AI, blockchain, the Internet of Things (IoT) and real-time payments; and the introduction of mobile point of sale (POS) devices have led to a reduction in the cost of acceptance infrastructure and also contributed to growth.

“Digital payments have been in the foray of bringing the unbanked population into the mainstream. Linking wallets such as Paytm to UPI has made transactions much simpler and apt. Going forward, these would start working as a full-fledged marketplace and also emerge as change agents for digital economy,” highlights Ritesh Varma, Global Head, Business Solutions, Newgen Software.

The emerging trend in digital payment is interoperability. “You can make payment in a secure manner directly from your mobile phone through various applications. Most companies are now trying to understand how they can use your payment data as well as app usage frequency to enable various utility apps to go beyond just making bill payment or recharges,” adds Dev Ramnane, VP & Business Head, B2B Business, ClearTax India.

Alternative lending

Technology-driven alternative lenders are upending the traditional lending value chain by engaging in both product and process innovation to improve customer experience and drive operational efficiency. These new-age lenders employ advanced technologies like artificial intelligence (AI) and machine learning (ML) to optimize their customer acquisition process for reducing costs, incorporate alternative data for credit underwriting and adopt sophisticated risk management solutions for vastly improving downstream lending activities, including collections management and loan resolution.

The number of business models that surround the alternative lending space is on the rise every day, both locally and globally. Broadly it can fall in to two categories, consumer lending and SME lending. For consumer lending, the emerging business models include peer to peer marketplace, all types of term-loans, payday loans and line of credit. “Some startups in this space also provide easy check out options for the customers during an online/offline purchase. In addition, the entire customer on-boarding and loan disbursement processes including application submission, eKYC, credit scoring, underwriting and disbursement are done online. There are many startups which specialize in providing one or more of these processes as a standalone service to BFSI organizations and thus have built their business models around the same. In the B2B segment, the emerging models include supply chain finance, invoice discounting, working capital loans and crowd-funding to name a few,” details Suresh Narayanan, Product Strategist and Fintech Consultant & Former Head of Product, AssetVault.

 

In the B2B lending space, supply chain finance is an emerging area. “If a company requires working capital loans, in the supply chain finance there is a concept called invoice discounting. This is where you already have an invoice that you have sent to the client, they will give you early payment and the customer will get discount and the vendor instead of waiting for 60-90 days for payment will get immediate payment,” shares Ramnane.

He further highlights that few models will emerge around GST. “As GST has access to all of the data, we will see models to analyze the flow of invoices and cash. That can enable us to underwrite the customer in a better way and reduce the cost of underwriting, making it more accurate and reduce the NPAs by using GST data.”

InsurTech 

With the emerging InsurTech landscape, global insurance firms are offering customized solutions by leveraging data like tailor-made health policies based on customer’s orientation towards remaining fit. Few startups are also exploring the integration of AR to smoothen the consumer experience towards automobiles claims. Few firms also operate on differentiated business models where the total policy amount is pooled centrally and used to pay off claims and the remaining balance determines the next premium amount for all policyholders.

InsurTech landscape is quite nascent in India at this stage. The current insurance penetration is quite low at 3.69 percent, compared to the global average of 6.5 percent. Some of the key areas that need to be developed for better adoption of digital insurance in India are AI/ML-based underwriting assessment that can better assess the risk and improve the loss ratio. In addition, IoT-based preventive insurance solutions can result in proactive customer engagement and premium, and claims reductions for both insurers and insured.

Armed with the capabilities of AI/ML, predictive analytics, and data captured by IoT-driven connected devices, InsurTech players are exploring ways to make the most out of deep data insights and drive the transition from a reactive approach to proactive prevention. Preventive insurance providers are gaining significant traction, across the entire insurance value chain from health insurance to home/equipment/ transit/automotive insurance.

The newer business models, such as micro-insurance on-demand, are changing the nature of the insurance industry by moving from complex long-term insurance products to short-term insurance products based on time, usage, and activity. The focus on the niche segments is driving this trend and enabling the rise of innovative, tech-driven InsurTech players in these areas.

Collaboration is the Key

In the context of the compete-vs-collaborate debate, the increasing trust in the financial services ecosystem has brought traditional financial service providers, IT channel partners and FinTech players together to explore more opportunities for collaboration. These partnerships have led to innovative customer propositions and new revenue streams – traditional partners adopt technology and innovation in a more seamless and rapid cycle, while FinTech players symbiotically increase their presence through the distribution infrastructure of IT channel partners.

“The whole space is going to work on a partnership approach. Gone are the days when anybody can say that they will do it all by themselves. Not from just the investment and cost perspective, but even from the changing technology perspective, you need a technology partner who has the ability to bring in emerging and upcoming technologies,” shares Ramesh Iyer, Vice Chairman and MD, Mahindra Finance.

 

IT channel partners can serve as aggregators for FinTech players and provide access to the end customers. “They can leverage the FinTech partnerships to address the financial requirements of end customers by giving them access to various FinTech solutions like peer-to-peer lending and so on,” adds Varma.

Girish Kannalli, Vice President and General Manager, Insurance and Healthcare BU, InfoGain, highlights that leveraging API (Application Programing Interfaces) will enable greater collaboration between traditional financial companies and the non-financial companies to provide greater services to the customers. “FinTech is creating huge opportunities for companies with capital to collaborate with companies who have customers to offer broad range of services.”

The parting thought

During a recent address, Amitabh Kant, CEO, Niti Aayog, highlighted that FinTech market in India is likely to expand to $31 billion in 2020. He further said that India is one of the fastest growing FinTech markets globally. India is the only country in the world with over a billion mobile connections and biometrics, providing enough scope for penetration of FinTech technology, Kant highlights.

“The Indian FinTech ecosystem is the third largest globally. Over $6 billion investments have already happened in FinTech market in the country in the last 3-4 years,” he adds.

Bringing it all together, the FinTech revolution is slowly collaborating all the existing technologies in one complex environment. While digitization is the beginning of the revolution, it is further leading the millennials to the future comprising smart homes, smart cities, smart contracts, open banking and much more. The adoption of blockchain and cryptocurrency will just add a finishing touch thereby bridging the FinTech startups, banks, finance institutions and consumers in one loop. Definitely, the future with FinTech is worth looking forward to!

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