India’s New Sunshine Sector

Over the past few years, fintech in India has taken a giant leap forward. For those not aware, ‘fintech’ is a portmanteau that combines the words ‘finance’ and ‘technology’ and represents the amalgamation of traditional financial services with innovative technologies resulting in value propositions that enrich the financial lives of consumers. It is estimated that more than 600 startups, coffers filled with burn-capital, are currently jostling for a piece of the Indian fintech pie across a multitude of subdomains.

Interestingly, the very definition of what constitutes fintech has undergone broad changes over the past few years. Originally coined as a term to define backend technologies that enabled banking and financial institutions to strengthen their existing brick-and-mortar setups (think ‘finacle’), fintech in India now covers a much wider spectrum of business models and service providers comprising of e-lenders, online payments systems, automated investment advisory platforms, personal finance platforms such as tax filing portals, insurance aggregators or ‘insur-tech’ platforms, and banking technology.

“Today you can summarise fintech as an evolving ecosystem driven by disruptive technologies, helping to deliver banking and financial services to customers in a way that is faster, more cost effective, intuitive and easy to consume,” says Vikram Pandya, Director, Fintech, S.P. Jain School of Global Management.

India, A Fintech Breeding Ground?
The emergence of new and exciting technologies such as machine learning, big data and AI have resulted in the mushrooming of several innovative fintech ventures in India in recent times – and a confluence of factors suggest that this is just the beginning.

For one, India’s GDP is expected to grow at 6-8 per cent per annum for the next 5-10 years, and it is quite likely that the fintech space will grow at a much quicker clip than that considering the fact that investment and asset management, as well as household credit, are deeply underpenetrated segments the moment you look beyond tier 1 cities. Couple that with the increasing adoption of digital services as a whole, among what is the one of the largest young populations in the world, and you have a recipe for potentially explosive growth for the sector.

“The high adoption of technology, Internet penetration, availability and affordability of infrastructure – including mobile devices, government policies and framework, increasing financial inclusion, changing investor preferences, and the availability of huge amounts of data and related intelligence are some of the factors that will drive the growth of Indian fintech sector in the medium to long term,” says Pandya.

By ‘framework’, Pandya alludes to the ‘India Stack’,  a set of APIs that that allows fintech companies to leverage India’s unique digital infrastructure towards the lower cost, paperless and efficient delivery of a plethora of financial services. And indeed, it is a fact that regulatory bodies such as the IRDAI, Sebi and the RBI have been refreshingly accommodative towards the Indian fintech sector, by bringing in adequate checks and balances without imposing crushingly prohibitive restrictions that could stymie the overall growth of the ecosystem.

“In India, we have extremely progressive regulators, who understand the importance of technology and the value it adds to the entire financial ecosystem,” says Naveen Kukreja, CEO and co-founder of Paizabazaar.com.

Competition Or Cooperation?
While a burgeoning number of experts believe that fintech companies will bring the shutters down on many existing brick-and-mortar Fin Serv business, Kukreja expresses a different point of view. He hypothesises that the medium-to-long term growth in Indian fintech will be propelled not through competition, but rather via deep synergies and effective collaborations between existing and new players across functions and channels.

“Consumer expectations are changing rapidly, and so is the technology used to meet and surpass these expectations. This means traditional players like banks, with massive customer bases, will not be able to do everything themselves, at least not at the speed required today,” says Kukreja, suggesting that they will need to join hands with emerging fintech companies to stay relevant.

Contrarily, Pandya believes that many traditional financial services distribution businesses in India will be given a run for their money by their more nimble and disruptive fintech counterparts. “Fintech companies are more agile and customer centric in their approach,” he explains.

Two such standout examples are from the lending and the investment advisory spaces, respectively. By using AI- or artificial intelligence-based credit scoring models, fintech lenders will be able to serve a “new to credit” segment of clientele while traditional business models that rely purely on credit scores to decide whether to loosen their purse strings or not, will miss out.

Similarly, we have witnessed tectonic paradigm shifts in the global investment advisory space in recent years, with ventures such as Betterment and Wealthfront proving that wealthy millennials no longer feel the need to interact extensively with a “wealth manager” (at least, not on anything that doesn’t relate to their investment portfolios!) to make money decisions. The same changes are now percolating into the Indian investment advisory ecosystem, with an increasing number of younger investors trusting the automated or semi-automated advice that emanates from robo advisory platforms or bionic advisory platforms that engage clients telephonically.

It’s Not All Rosy, Though
Although lower than most e-commerce businesses, it is a fact that the requirement for initial “burn capital” in fintechs is high. Therefore, a squeeze in venture capital funding could potentially throw a spanner in the works – not so much for established and cash-positive businesses, but certainly for new entrants. According to Pandya, not many Indian fintechs are receiving capital funding that’s sizeable enough to compete with their global counterparts. “We can already see consolidation happening here, where small fintechs are being acquired,” he observes.

Kukreja is more optimistic, predicting that this is the start of “hockey stock growth” for the Indian FinTech space. “Of course, there will be some casualties, but that’s part of any industry evolution cycle,” he says.

The Indian fintech ecosystem is at an inflection point. If funding stays vibrant and the environment remains as conducive as it is now, there is no reason why India cannot emerge as a dominant player in this space in the next five years.