(This article was first published in The Economic Times.)
FinTech firms in India are setting new benchmarks for financial services in the country. A large number of Indians are today not catered to by financial service providers in the country. This is a huge segment of the market that FinTech firms are looking to tap into through their innovations, a majority of which come from startups. Hence, their use will only rise as awareness grows, consumer concerns fall and technological advancements reduce switching costs.
India already has the second-highest FinTEch adoption rate in the world, at 52%, second only to China. According to Credit Suisse, the digital payments industry is currently pegged at $200mn and is expected to grow five-fold by 2023.
On the whole, the FinTech industry is backed by the government as well. Initiatives such as Jan Dhan Yojana, Aadhaar and UPI have enabled a larger number of Indians to access financial services. Consequently, the business environment has flourished thanks to programs like Startup India, which has enabled more companies to cater to this ecosystem.
Additionally, The National Payments Council of India (NPCI) has leveraged the growing presence of mobile phones with the introduction of UPI. This has helped in the reduction of the cost of infrastructure for FinTech ventures substantially. With the smartphone user base expected to expand, the digital banking footprint is projected to grow faster than ever before.
But all of this is currently happening on a large scale in urban India. FinTech has become an almost ubiquitous part of our lives, but our fellow citizens in rural India are still way behind. The fact that they can’t afford these services coupled with illiteracy is some of the reasons for this.
Additionally, the needs of the population without bank accounts are very different from the traditional population. The need for money and the spending habits of a daily wage worker in a smaller town or village are very different from those of an office goer in a bigger city. Transitioning to digital platforms is difficult for people who have spent their life using cash.
But that’s not to say that things are not changing. They are because smartphones and internet access are both increasingly available more easily in every part of the country. The government is working in unison with FinTech companies to make sure that this part of the population also gets access to financial services and products. FinTech companies are also adapting themselves to meet the needs of this segment as Indian consumers in smaller areas become more accepting towards UPI platforms and mobile phone wallets.
On the other hand, that is complicated in an economy like India which is dominated by MSMEs. And for MSMEs, entering the digital realm for payments can be complicated. But on the plus side, FinTech companies have taken it upon themselves to build products that solve this problem. Payment gateways are one such example. Sure, the margins might be low, but the scale definitely isn’t. This is why more massive payment gateways target a handful of giant retailers. This makes it that much harder for FinTech companies catering to the latter to come up with sustainable business models. Fintech is supposed to enable small companies and has done so in mature economies.
In all, FinTech firms are establishing themselves as noteworthy providers of financial services, with the greatest traction not only in banking but also increasingly in insurance and wealth management. They are demonstrating success in innovation, whether as a new business model or a new service and, in the process, are shaping the future of the financial services industry. As a result of the rise of FinTech, we are moving to a world where products are unbundled from full-service incumbent firms and bundled by platforms that disrupt traditional merchant-consumer relationships by allowing consumers to manage their finances on the go.
Although we are on the right path, we also have a long way to go, to make sure we are able to strike the balance, in the next five years – FinTech has the potential to democratize access to finance in ways that we are yet to comprehend completely. Hence, it is imperative, that the financial services industry and the government put together a collective effort to leverage the benefits of FinTech for the betterment of the Indian society as a whole.