Stirring Up A Revolution: A Close Look At India’s FinTech Boom & Way Forward

The Indian banking system is a melting pot of paradoxes. On the one hand, we have emerging technologies, like AI/ML and Blockchain, changing the face of the game dramatically. On the other, we have 20% of India’s population unbanked[1] and yet to experience the benefits of the saved rupee. Government intervention can only do so much to elevate the quality of banking in a country of 1 billion. The rise of India’s dynamic FinTech sector can be the much-needed breakthrough, connecting the dots and bridging the gap between banks and the Indian public.

Wealth distribution is a problem unique to India. This is unlike the developed West, where it is likely uniform, regardless of where you look. Wealth distribution is just one of the many ways in which the Indian banking system differs from the rest of the world. There are other issues as well – lack of digitization and modernization, legacy issues, financial inclusion, and so on. 

FinTech: Reshaping India through innovations 

The FinTech sector is a key facilitator of innovative, yet profitable solutions to solve the complex problems in India’s banking system.

Challenge 1: Increasing India’s banked population and boosting profitability

Plenty is being done by the authorities to resolve India’s alleged banking crisis. But, the impetus for digitalization will be moot if it doesn’t reach the unbanked on time. Through smart solutions and innovative approaches, FinTech can lend themselves as a partner to the banking ecosystem. By working as extensions of banks, they can be influential in solving the problems of profitability and outreach. 

Challenge 2: Unlocking insights from the customer journey

Banks spend a lot of time processing customer accounts and transactions, but not in the interim, exploring the customer lifecycle. FinTech can leverage the power of big data and analytics to analyze customer activities, discover hidden intelligence and devise profitable solutions that enhance competitiveness.

Challenge 3: Tackling systemic problems, like NPAs

India’s banking sector has yet to master the balancing act between regulations and profitability. The sheer transactional volume is a major obstacle to employees achieving anything beyond the routine tasks and competencies. FinTech innovations are an ideal solution to this challenge. For example, Early Warning Systems leverage advanced technologies to identify, flag and resolve the problem of NPAs, preventing unwarranted escalations, while alleviating the transactional burden on bank employees.  

Challenge 4: Fostering a culture of innovation

By collaborating with FinTech companies, the ecosystem of PSUs, private banks, NBFCs and community banks can usher in systemic changes within the institution of banking. They can resolve their fundamental challenges, and invest in intuitive solutions to enrich customer experience and improve competitiveness.

India vs South East Asia: The big picture

India’s FinTech sector is rapidly evolving, but it trails behind some of its counterparts in South East Asia. South East Asia is a mixed bowl of banking technology readiness. While countries, like Singapore, are advanced and boast of exceptional success, others are still playing catch-up. 

Nevertheless, the rise of FinTech in South East Asia has been a commendable story. Just five years back, Singapore had a monopoly in FinTech. Today, hubs like Manila, Hanoi and Bangkok are growing impressively. 

The two markets – India and South East Asia – have many similarities, in terms of population, customer demographics, socio-economics, and customer expectations. Yet, up close, some of the fundamental elements of the South East Asian FinTech industry are in stark contrast with India’s:

1. Flexible and loosely-governed regulatory controls: Routine activities, like opening a bank account, are easier and less formal in South East Asia. This has positives as well as negatives, vulnerability to fraud being one of the negatives. Regulations and governance need to be balanced in most of the countries here – Singapore is an exception.
2. Complex local flavours: Customizations required for South-East Asian markets are more complicated, which leaves no room for a templatized approach. Hence, internal players dominate the market. 
3. Legacy issues are prevalent: South East Asia’s FinTech landscape is older than India’s, and legacy core banking issues and challenges are common roadblocks to modernization.

4. Indian FinTechs have a more global reach: Global implementation expertise brings in extensive sectoral knowledge, which is further enhanced by English-language proficiency. However, typically, FinTech in South East Asia is cheaper than in India, so cost-competitiveness is downgraded.

1. The mindset to explore and experiment: Initiatives like the innovation sandbox are widely accepted in South East Asian countries. Saying ‘yes’ to experimentation has led to a lot of success stories.
2. Scale matters: The larger outreach, the better the profitability – this wisdom holds true for FinTech as well. South-East Asia has a larger customer base than India, and a banking set-up favourable to cross-border trade. The growth of trade between countries that have similar demographics has only contributed to profitability. 

Indian FinTech: Has it arrived?

What lessons can India learn from the South East Asian FinTech success story?

The shift from physical to digital banking, in many of the South-East Asian countries, has been executed very well. There is a lot for India to learn from these success stories. 

Characteristically, overseas transactions between countries in South East Asia are easier than between India and its closest neighbours. Mobile banking is on the rise, even among the rural population. Peer-to-peer electronic lending has also picked up. As the banking sector evolves and goes ‘phigital’, there is a need to be foresighted and agile enough to capture the market heads-on. 

While the flexible regulatory scenario in South East Asia is conducive to innovation, some checks and balances are necessary – which is something that India gets right. Simple exercises, like the credit card validation PIN, go a long way in preventing fraud. India’s massive population and transactional volumes mean that the cost of failure is high. So, it is natural that any innovation will be tested intensely, scrutinized and RBI-approved. This is an absolute must.

The Indian technology ecosystem does not lend itself naturally to innovation. This is unlike the Silicon Valley, and whose products stem from co-innovation between the corporates and the academia. What the Indian FinTech industry needs is for all its stakeholders – from the academia to regulators to innovators to venture capitalists– to come together and innovate. Only then can we truly arrive.