Fintech's 2024 Odyssey: Balancing Innovation, Inclusion & Cybersecurity In Digital Finance Evolution

In 2023, the fintech industry maintained a delicate balance between competition and collaboration, which is highlighted by the agility of new-age fintech firms.

These firms challenged existing regulatory models and advocated for adaptive frameworks. The year 2024 will emphasise harmonious collaboration among fintechs, traditional banks, regulators and self-regulatory organisations (SROs), suggests fintech industry experts.

Due to the increasing accumulation of sensitive information by fintechs, the industry placed significant importance on data privacy and security. The shift towards digitisation significantly expedited financial transactions, fostering direct engagements and enhancing financial inclusion.

AI-Powered Solutions For Inclusive And Responsible Lending
More recently, apart from traditional digital lending, FinTech, empowered by AI, has stepped in, proffering custom solutions for Micro, Small and Medium Enterprises (MSMEs) collaborating with banks and non-banking financial companies (NBFCs).

“Fintechs have emerged as a major enabler and facilitator of digital lending and its share in total lending is rising sharply both through banks and NBFCs.The Reserve Bank India (RBI) as a regulator is playing a supportive role with new provisions for wider participation. One important development relates to the introduction of First Loss Default Guarantee (FLDG) in a gradual manner,” said Managing Resurgent India's Director, Jyoti Prakash Gadia.

AI is being used to a very large extent for assessing creditworthiness, particularly with reference to credit scoring models and new innovative benchmarks are being evolved to capture consumer behaviour along with creditworthiness which will go a long way to further extend the role of fintech, Gadia of Resurgent India added.

AI technology can evaluate the creditworthiness of people who don't have a conventional credit history by examining alternative data such as payment of utility bills, social media activity and even mobile usage patterns. Unlike traditional risk modelling, AI continuously learns from new data, enabling it to adjust and refine its risk assessments.

“Creditworthiness is a result of the ability to pay, which is entirely dependent on a person's earning potential, a facet already addressed by credit bureaus. Fintechs need to transition their mindset, aligning more closely with traditional banks and view risk in a more holistic manner, beyond merely the act of granting loans. The inadequacy in most fintechs lies in their neglect of collections, historically exacerbated by excessive funding,” said IDfy's Chief Executive Officer (CEO) and Co-founder, Ashok Hariharan.

Creditworthiness is an important factor in determining effective and responsible lending.

“Responsible lending has improved borrowers and the loan environment in several cases. Financial institutions and fintech businesses collaborate to streamline lending processes and provide transparent terms,” said SingleDebt's Founder, Harish Parmar.

UPI's Monumental Surge, Redefining Digital Transactions
According to the Reserve Bank of India (RBI) data, in October 2023, Unified Payment Interface (UPI) surpassed a staggering 11.4 billion transactions, setting a new benchmark with transaction values exceeding Rs 17,600 billion.

“The RBI's move to raise UPI payment limits to Rs 5 lakh in some cases shows rising confidence in digital transactions, giving users more flexibility and convenience. The RBI's fintech repository shows its commitment to industry innovation and collaboration. We expect a digital payment paradigm shift around 2024. Digital payments indicate a major change in customer behaviour and expectations for the sector,” said Manan Dixit, founder, FidyPay. 

Digital payments backed by fintechs will further help strengthen microfinance and microinsurance.

“Microfinance has emerged as a major sub-sector of usage of fintechs echo system besides retail and consumer credit. The UPI-linked payments for non-smartphone users will further enhance the scope for microfinance and micro insurance,” says Gadia from Resurgent India.

AI, Blockchain and Chatbots Transforming Security and Support

Along with scaling creditworthiness, AI is also instrumental in deterring cyber threats and cyberfrauds, providing better consumer safety.

“AI fortifies fraud prevention, personalised user experiences and predicts future trends with historical data. Blockchain elevates transaction security, transparency and efficiency. The dawn of 2024 can witness a surge in A2A (account-to-account) payments, expanded use cases for central bank digital currency (CBDCs), generative AI's transformative insights, increased adoption of digital wallets and identity solutions and fortified machine learning (ML) tools leveraging AI. These trends underscore fintech's evolution, charting an innovative course amid a digitally driven economy.” said Rajat Deshpande, CEO and co-founder FinBox.

Further, some fintechs are using chatbots to provide assistance and better grievance redressal.

“Chatbots and virtual agents powered by AI are being used to provide 24/7 customer support, handling inquiries and resolving issues promptly. AI is transforming the operational models of financial institutions, facilitating collaboration between business and technology teams,” said Prasenjit Datta, chief technology officer (CTO), Vivriti Capital.

This year also saw a rebound effect on cryptocurrencies, where multiple firms trading in cryptocurrencies, leveraged the benefits offered by AI. 

“Indian investors booked healthy profits from crypto towards the end of the year with several top coins growing at a healthy clip. While the ecosystem focused on building real-world solutions using crypto, investors backed them with patience and traders reaped benefits from the volatility in the market. In 2024 approvals for Bitcoin and Ethereum exchange-traded funds (ETFs) are highly anticipated events and could lead to more institutional capital coming into the ecosystem,” said Balaji Srihari, Business Head, CoinSwitch.

Rural Financial Inclusion and Development

Providing basic amenities of financial services to the tier 2, 3 and rural areas lies at the core of financial inclusion. The financial inclusion does not happen in isolation but microfinance, microlending and microinsurance go hand in hand with it.

“There has been a notable uptick in the expansion of rural insurance. The noteworthy uptick in rural insurance growth is indicative of a growing trend in insurance penetration across many demographic groups. The sector is changing to better serve the particular requirements of rural areas, which benefits both company expansion and the nation's general socioeconomic advancement. The industry is about to undergo revolutionary changes as 2024 draws near, thanks to technology that will spur innovation, alter consumer experiences, and increase the sector's resilience and adaptability.” said Rakesh Kumar, founder, Square Insurance broking.

There is a lot that has been achieved in insurance penetration but a specific focus on rural insurance needs to be calibrated to provide better rural investment.

“Rural industry investment increases financial inclusion and unlocks rural markets' potential. This fosters investments that support individuals and local economies and a financially savvy culture requires banking product knowledge,” said Jitendra Dhaka, founder, BankSathi. 

As Mahatma Gandhi envisioned about the Swaraj, the benefits of development should reach the person standing last in the row. Similarly, to make financial inclusion reach all the stakeholders it is important to understand the key areas where there is improvement required.

“Regarding financial inclusion, there is a significant opportunity, but companies must reimagine the products they offer. To truly impact the underserved, fintech must revamp their credit models, collection strategies and internal processes. Currently, there is a USD 1 trillion credit gap in the country that demands attention, but conventional thinking won't suffice. An enterprise capable of solving this challenge could bring about substantial changes in the market. Such an endeavour requires a long-term plan spanning seven to ten years,” said Hariharan of IDfy.

A mutual cooperation and coordination between fintech firms and other conventional banking enterprises can be critical for achieving financial inclusion.

“Collaboration between fintech firms and traditional financial institutions may also become more prevalent, creating hybrid models that combine the strengths of both sectors. In terms of the outlook for fintech in 2024, a significant trend is the evolution of business models which index towards early profits,” said Neha Juneja, CEO, IndiaP2P.com.

Juneja further added that startups are likely to continue facing difficulty in capital raises prohibiting growth models that rely on high customer acquisition costs in the medium to long term.

As we approach 2024, the emphasis on harmonious collaboration and adaptive frameworks signals a transformative era for fintech, with a spotlight on data privacy, digitisation and inclusive financial practices. With the evolving dynamics of rural financial inclusion, the fintech sector is set for a dynamic and impactful journey into the digitally-driven economy of the future.