Financial technology in India

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Financial technology (also called FinTech) is an industry composed of companies that use technology to offer financial services. These companies operate in insurance, asset management and payment, and numerous other industries. FinTech has emerged as a relatively new industry in India in the past few years.[ citation needed ] The Indian market has witnessed massive investments in various sectors adopting FinTech, which has been driven partly by the robust and effective government reforms that are pushing the country towards a digital economy. It has also been aided by the growing internet and smartphone penetration, leading to the adoption of digital technologies and the rise of FinTech in the country [1]

Contents

According to a report by Ernst & Young (EY), India is one of the largest and fastest-growing FinTech ecosystems in the world. It stands second after China in terms of the FinTech adoption index with an adoption rate of 87%. [1] The overall estimation of the FinTech market in 2021 for India has come out to be $50 billion as mentioned in a report by FIA Global. [2]

Rise of FinTech in India

The number of startups in India has grown significantly over the past few years. The number of newly founded startups has increased from 733 in 2016–17 to over 14000 in 2021–22, making India the third largest startup ecosystem in the world after the US and China. [3] Among them, around 6600 startups have been in the FinTech industry, evaluating a market value of US$31 billion in 2021. [4] This rapid growth in the number of startups has been a result of a large talent pool, conducive regulations, and an increased venture capital flow in the past decade. [5] An increased smartphone and internet penetration coupled with a demand for tailored services and superior customer experience by the public, has helped as well.

Financial Technologies has received substantial funding from venture capital and private equity firms. A total of US$8 billion has been invested in FinTechs across around 1000 deals according to a Tracxn database obtained by Deloitte over a period starting 2015 to mid-2020. [5] With another US$8 billion investment in 2021 alone, there has been an exponential rise in the funding. [4] The majority of these deals have been in the digital payment sector and recently in alternative lending and InsurTech as well. Top investments include a PE investment of US$600 million in Pine Labs, and large VC funding rounds by BharatPe (US$395 million), Razorpay (US$375 million), and OfBusiness (US$325 million). [6]

Key Drivers

Increased funding: A substantial increase in investments from venture capital, private equity and institutional investment has encouraged the rise of FinTech startups.

India Stack: India Stack is a set of APIs that allows governments, businesses, startups, and developers to utilize a unique and common digital Infrastructure. These open API platforms include Aadhar, Unified Payments Interface (UPI), Bharat Bill payments, etc.

Innovation in Technology: New business models are being developed using technologies like Machine learning and Artificial Intelligence.

Increase in smartphone and internet users: India has the 2nd highest number of smartphone users globally with numbers around 550-600 million, and 2nd largest Internet user market with over 795 million internet users as of December 2020. [4]

Government initiatives and Regulators: Government initiatives like Jan Dhan Yojana, Startup India, Digital India program, Account Aggregator Network, Trade Receivables Discounting System (TReDs), etc. have played a vital role in encouraging the growth of startups. Startup India, for example, has enabled an online platform-based solution for entrepreneurs to safeguard their intellectual property (IP) and it has offered the startups some exemptions from taxes under certain eligibility criteria. [7] The regulations developed by the Reserve Bank of India (RBI), IRDAI and SEBI has ensured increased accountability and the uninterrupted availability of secure and affordable digital financial systems. [1]

International Collaboration: Startup India has enabled collaboration between Indian startup ecosystem and the global startup ecosystem by enabling bridges that provide a soft landing to emerging new startups from the partnering countries. It has helped promoted enthusiasm by fostering knowledge exchange and fund support mechanisms. [7]

Startups and Unicorns

According to the Economic Survey published by Invest India, National Investment Promotion and Facilitation Agency, 44 Indian startups achieved the 'Unicorn' status in the year 2021 alone, increasing the total number of Indian unicorns to 83, with a total evaluation of over US$277 billion. [3] Out of 83, 15 unicorns belong to the FinTech industry with a current valuation of around US$60 billion. [1]

Fintech hubs

Fintech Valley Vizag, O-hub Bhubaneswar, Bandra Kurla Complex, FinTech Hub Kolkata, Mumbai Fintech Hub are fintech parks created by the respective Government to promote business infrastructure in the state, and attract investors and multinational financial corporations to set up their offices in the hub.

FinTech Sectors

Figure 1: Trends in Digital Payment Methods Digital payment trend1.png
Figure 1: Trends in Digital Payment Methods

Digital Payments

In recent years, there has been an extensive adoption and significant growth in the digital payments sector with a compound annual growth rate (CAGR) of around 60% from FY2016 to FY2020 and 37% from FY2019 to FY2021. [1] [4]

Figure 2: Trends in Transaction Volume of UPI Digital payment trend2.png
Figure 2: Trends in Transaction Volume of UPI

The use of digital payments increased significantly in the past few years, with the key reasons being the demonetization initiative announced by Indian Government in 2016 and the outbreak of COVID-19 in 2020. Due to demonetization, the number of cash transactions decreased as the old currency was replaced by new ones to put an end to illegal transactions and tax evasion. [8] This made people resort to using digital payment methods. Similar effects were seen with the onset of the COVID-19 pandemic when people started preferring contactless payment methods to curb the spread of infection. [9] Figure 1 shows that there is an exponential rise in the value of transactions made using UPI. Figure 2 shows the yearly trend in the number of UPI transactions. This increase in the use of UPI can be attributed to the ease with which UPI can be plugged in any consumer tech platform and help it add payment as a useful consumer-centric feature.

In India, digital payment FinTechs have received the highest amount of funding among all the FinTech sectors as per a report by EY. [1] According to a Tracxn database obtained by Deloitte and EY, over 500 FinTech startups were founded in this sector between 2014 and 2019. [1] [5] Digital payments FinTechs obtained an investment of about US$1 billion in just first five months of 2021 as opposed to just US$1.4 billion during the whole of 2020.

Due to a substantial increase in investments in 2021, 3 new unicorns were added to the Digital payment sector by first quarter of 2022, taking the total to 8 unicorns valuating to a total of US$243 billion and these unicorns include: BharatPe, BillDesk Cashfree, CRED, Paytm, PhonePe, Pine Labs, RazorPay, Zeta. [10]

Alternative Lending

The aim of the FinTechs in the alternative lending sector is to deal with the large demand-supply gap of credit in the country. They address the gap by focusing on improving customer experience and gain operating efficiencies, by implementing both conventional and alternative credit scoring models, and digital workflows.

According to Tracxn database obtained by EY, alternative lending as the second biggest receiver of investment in FinTech after Payments sector, at 29% of the total share. [1] India's retail digital lending space has grown significantly in the past decade (2012–22) from US$9 billion to US$270 billion with a CAGR of 39.5%. [11] This huge rise in the lending space can be attributed to various factors.

Low credit card penetration: As per the data from RBI, the number of credit card holders was 62 million in 2021. [12] Though it has increased at a CAGR of 20% in last 4 years, the actual number is low keeping in mind India's credit card eligible population.

Unbanked population percentage: According to the World Bank's Global Findex Report 2017, 80% of Indian adults (age 15+) have a bank account. [13] This shows that round 190 million Indians above the age of 15 don't have a banking account and thus no access to credit or any kind of loan.

High credit gap: India's consumer financing gap stands at $300 billion while the financing gap for the Micro, Small and Medium Enterprises (MSME) stands at $240 billion. [11]

Around 450 FinTech startups were founded in this sector during the period 2014–19 with a total funding of US$1.7 billion. [5] The unicorns in this sector include Slice and Oxyzo Financial Services. [10] There are many more alternative platform, like Anq Finance, emerging in this space to solve for high credit gap by innovating and widening the scope

The key business models that have worked for alternative lending FinTechs include digital lending, EMI/Point of Sale (PoS), MSME lending, Buy Now Pay Later (BNPL) loans and Peer-to-peer (P2P) lending.

Digital Lending

Digital lending aims to provide a differentiating factor of either user experience, speed, convenience, or customer service to its end customers. [14] They also bridge the gap between unaddressed lending opportunities like new-to-credit customers and consumers with credits scores under 700. [14] According to data shared by the credit bureau Experian, $350 billion has been given out digitally to consumers, 36% of which are new-to-credit. Fintechs are disbursing the majority share of credit to these first-time consumers. [15]

The Indian financial ecosystem encourages non-bank finance companies (NBFCs) to provide these alternate options to consumers by leveraging innovation and technology. [16]

Within individual digital lending, there are two main business models: Consumer and Loan Marketplace. [14] Consumer lending models, like Moneyview bring new-age interfaces and provide ease of use to the lending experience. [16] Loan Marketplace models like Paisabazaar provide consumers with multiple options within one single banner.

In addition to improving experiences, some NBFCs like Revfin, DMI Finance, FlexiLoans and LendingKart also digitise underwriting so as to provide real-time offers for consumers. [16]

BNPL

Buy now pay later (BNPL) is a short-term financing solution that allows customers to make a purchase and pay for it at a future date, usually interest-free. The key value proposition for BNPL is trouble-free credit during checkout. Similar to any lending product, the primary revenue source for BNPL is the income through interests and the fees incurred when customers don't pay back on time. While the BNPL products prefer to avoid the words ‘loan’ or ‘credit’, it is an IOU (acronym for I owe you) in different form.

Until 2019, monthly 22 million Indian consumers were looking for credit and a 70% of them dropped their applications mid-way due to various intricacies in the traditional process. [11] This is where the key features of BNPL products such as transparency with costs and benefits, and frictionless payment made a significant difference and helped mitigate the effects of high consumer credit demand and low credit card penetration.

Some examples of BNPL include food aggregators (Swiggy and Fassos) which use platforms developed by startups like Simpl and Lazypay which allow the customer to pay for their food deliveries at a later stage. Cab aggregators (Uber, Olacabs) and e-commerce platforms (Flipkart, Amazon) have also started providing “pay later” options to their customers.

P2P

P2P lending is a monetary arrangement between two individuals without the intervention of any mediator, thus removing the expenses made to the financial institutions. Lenders who want to make higher returns from their surplus funds lend to borrowers seeking low-cost and quick unsecured loans. The loans can include personal, business or educational loans. Fintech Firms such as Faircent offer the necessary P2P lending infrastructure to such lenders and borrowers.

P2P FinTechs include LenDenClub, Lendbox, Faircent, RupeeCircle, i2iFunding, Paisa Dukan, etc. [17]

MSME

MSMEs are important to India's economy as they contribute over 29% to the country's GDP with a share of 49.4% and 49.8% in the total exports in 2021 and 2020 respectively. [18] According to MSME Pulse report by Small Industries Development Bank of India (SIDBI) made in collaboration with TransUnion CIBIL, MSMEs hold a total credit exposure of INR 17.75 trillion which is about one fourth of the total commercial lending exposure for India totaling to INR 64.45 trillion as of Jan 2020. [19]

Some of the key FinTechs in this space include LendingKart, Flexiloans, KredX and C2FO.

InsurTech

The life insurance penetration in India was tracked at 3.2% in FY21, while the non-life insurance penetration was at 1.0%, totaling to 4.2% overall penetration. [20] Insurance penetration is calculated as a percentage of insurance premium to GDP. However, the insurance market in India has tremendous potential to grow due to its population majorly in the middle-class income category, and favorable regulatory policies. India's total real premium growth was 6.9% which was more than twice the world average of 2.9%. [21]

In recent years, the Indian insurance sector has begun aiming at implementing new technologies for an efficient insurance distribution. These technologies include but are not limited to wearables, IoT-linked products, etc. The market is experiencing a sudden increase in demand for small premium bite-size insurance, microinsurance, remote claims management capabilities, and chat bots for enhanced customer service. This has given rise to new opportunities for InsureTech segment in India.

According to Tracxn database obtained by EY, there are more than 300 InsurTech companies which include Acko, easypolicy, turtlemint, Policyboss.com, etc. [1] The sector has generated two unicorns as well: PolicyBazaar and Digit Insurance.

Further reading

Related Research Articles

Peer-to-peer lending, also abbreviated as P2P lending, is the practice of lending money to individuals or businesses through online services that match lenders with borrowers. Peer-to-peer lending companies often offer their services online, and attempt to operate with lower overhead and provide their services more cheaply than traditional financial institutions. As a result, lenders can earn higher returns compared to savings and investment products offered by banks, while borrowers can borrow money at lower interest rates, even after the P2P lending company has taken a fee for providing the match-making platform and credit checking the borrower. There is the risk of the borrower defaulting on the loans taken out from peer-lending websites.

<span class="mw-page-title-main">Zopa</span> British financial services company

Zopa Bank Ltd. is a British online bank which offers deposit accounts, personal loans and credit cards. It began as the world's first peer-to-peer lending company in 2005 and gained a full banking licence in 2020. The peer-to-peer side of its business closed in December 2021.

<span class="mw-page-title-main">CRIF High Mark Credit Information Services</span> Indian credit bureau

CRIF High Mark Credit Information Services Pvt. Ltd. is an RBI-approved credit bureau in India. It serves retail, agriculture and rural, MSME, commercial and microfinance.

SoFi Technologies, Inc. is an American personal finance and financial technology company. Founded in 2011 at Stanford University, it operates as a direct bank and supports other financial institutions through its technology platform. As of 2024, SoFi reports 9.4 million customers and 160 million platform accounts.

MobiKwik is an Indian financial technology company, founded in 2009 that provides a mobile phone-based payment system and digital wallet. In 2013 the Reserve Bank of India authorized the company's use of the MobiKwik wallet, and in May 2016 the company began providing small loans to consumers as part of its service.

"Fintech", a clipped compound of "financial technology", refers to the application of innovative technologies to products and services in the financial industry. This broad term encompasses a wide array of technological advancements in financial services, including mobile banking, online lending platforms, digital payment systems, robo-advisors, and blockchain-based applications such as cryptocurrencies. Fintech companies include both startups and established technology and financial firms that aim to improve, complement, or replace traditional financial services.

<span class="mw-page-title-main">Cross River Bank</span> American financial services corporation

Cross River is an American financial services organization that provides technology infrastructure to fintech and technology companies. Based in Fort Lee, New Jersey, Cross River services its clients with embedded payments, cards, lending, and cryptocurrency, and is an FDIC member. Cross River is noted for its embrace of the trend in the financial services sector towards API-based payment platform services.

PT Gojek Indonesia is an Indonesian on-demand multi-service platform and digital payment technology group based in Jakarta. Gojek was first established in Indonesia in 2009 as a call center to connect consumers to courier delivery and two-wheeled ride-hailing services. Gojek launched its application in 2015 with only four services: GoRide, GoSend, GoShop, and GoFood. Valued at US$10 billion today, Gojek has transformed into a super app, providing more than 20 services.

<span class="mw-page-title-main">Funding Societies</span>

Funding Societies is a Southeast Asian digital financing platform for small and medium-sized enterprises (SMEs), headquartered in Singapore. It was the first such platform in Singapore to engage an escrow agency to independently and safely manage investors’ funds. In Indonesia it is known as Modalku. Since its launch, it has disbursed more than US$2.6 billion in business financing to MSMEs through more than 5.1 million loan transactions.

Nium is a Singapore-headquartered cross-border payments company. Initially founded by Prajit Nanu and Michael Bermingham, and launched as a consumer-remittance platform Instarem in 2014. In 2016, the company introduced its B2B payments platform and rebranded as Nium in 2019, subsequently elevating Pratik Gandhi to co-founder in 2021. However, Gandhi left Nium in October 2023, around the time Nium's Chief Product Officer also left the company and Nium announced a layoff of over 10% of its global staff.

<span class="mw-page-title-main">Zeta (company)</span> Indian banking tech company, founded 2015

Zeta is a banking software company that was founded by Bhavin Turakhia and Ramki Gaddipati in 2015. The company provides credit and debit card issuer processing, BNPL, core banking and "mobile experiences". Zeta provides its products to banks and fintechs.

<span class="mw-page-title-main">Affirm Holdings, Inc.</span> American financial services company

Affirm Holdings, Inc. is an American technology company that provides financial services for shoppers and merchants. Founded in 2012 by PayPal co-founder Max Levchin, it is the largest U.S. based buy now, pay later lender. As of 2024, Affirm reports 19.5 million users, processing $26.6 billion in payments annually.

Sezzle is a publicly traded financial technology company headquartered in Minneapolis, U.S, with operations in the United States and Canada. The company provides an alternative payment platform offering interest-free installment plans at selected online stores. As of June 2021, the Sezzle platform had over 10 million user sign-ups and over 48,000 participating merchants.

Pine Labs is an Indian company that provides point of sales systems and payment systems, founded in 1998. The company has a valuation of over US$5 billion.

OVO, officially a product of PT Visionet International, is a digital payment service based in Jakarta, Indonesia. It was established in 2017 with an e-money license from Bank Indonesia, and in 2019 was Indonesia's top digital payment service. Owned by Grab and local investors, in 2019, OVO became Indonesia's first finance-tech business unicorn.

<span class="mw-page-title-main">Cred (company)</span> Indian financial technology company

Dreamplug Technologies Pvt. Ltd. d/b/a CRED is an Indian fintech company, based in Bangalore. Founded in 2018 by Kunal Shah, it is a reward-based credit card payments app. CRED also allows users to make house rent payments and provides short-term credit lines.

Buy now, pay later (BNPL) is a type of short-term financing that allows consumers to make purchases and pay for them at a future date. BNPL is generally structured like an installment plan money lending process that involves consumers, financiers, and merchants. Financiers pay merchants on behalf of the consumers when goods or services are purchased by the latter. These payments are later repaid by the consumers over time in equal installments. The number of installments and repayment period varies depending on the BNPL financiers.

Checkout.com is a British multinational financial technology company that processes payments for other companies. Founded as Opus Payments in 2009, it is headquartered in London, United Kingdom. It had a valuation of $40 billion in 2022, making it the most valuable European fintech startup. Customers include Netflix, Pizza Hut, and digital asset exchange Coinbase.

<span class="mw-page-title-main">Zilch (company)</span> Financial technology company

Zilch Technology Ltd., known as Zilch, is a direct-to-consumer ad-subsidised payments network. Headquartered in London.

LenDenClub is an Indian P2P lending platform owned and operated by Innofin Solutions. Founded in 2015, the company's headquarters are situated in Mumbai, India.

References

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  2. ↑ "Fintech in India- A Global Growth Story". 30 September 2022.
  3. 1 2 "Economic Survey 2021-22" (PDF). Invest India: National Investment Promotion and Facilitation Agency. February 2, 2022.
  4. 1 2 3 4 "India - A global FinTech Superpower". Invest India: National Investment Promotion and Facilitation Agency. Retrieved April 14, 2022.
  5. 1 2 3 4 "FinTechs in India – Key trends" (PDF). Deloitte. December 2019.
  6. ↑ "Pulse of Fintech H2'21" (PDF). KPMG. Retrieved April 17, 2022.
  7. 1 2 "EVOLUTION OF STARTUP INDIA: Capturing the 5-Year story" (PDF). StartupIndia. Retrieved April 17, 2022.
  8. ↑ "How a Cash Crunch in India Led to the Widespread Adoption of E-Pay Technology". KelloggInsight. January 2, 2020.
  9. ↑ "Coronavirus outbreak boosts digital payments in India as people fear to handle cash". Mint. July 13, 2020.
  10. 1 2 "Venture Intelligence Unicorn Tracker". Venture Intelligence. Retrieved April 17, 2022.
  11. 1 2 3 "A REVIEW OF INDIA'S CREDIT ECOSYSTEM" (PDF). INVEST INDIA Experian. Retrieved April 18, 2022.
  12. ↑ "BANKWISE ATM/POS/CARD STATISTICS". Reserve Bank of India. Retrieved April 18, 2022.
  13. ↑ "World Bank's Global Findex Report 2017: Unbanked" (PDF). World Bank. Retrieved April 18, 2022.
  14. 1 2 3 "Unleashing potential - the next phase of digital lending in India" (PDF). EY. Retrieved 23 March 2024.
  15. ↑ "Digital lending at an inflection point, and other top tech, startup stories this week". The Economic Times. Experian. Oct 14, 2023. Retrieved 23 March 2024.
  16. 1 2 3 "The Shifting Landscape Of Lending: NBFCs Give Banks A Run For Their Money". Inc42. Jun 26, 2018. Retrieved 23 March 2024.
  17. ↑ "India P2P Lending Market - Forecast(2022 - 2027)". IndustryArc. Retrieved April 19, 2022.
  18. ↑ "MSME Industry in India". India Brand Equity Foundation (IBEF). Retrieved April 19, 2022.
  19. ↑ "MSME Pulse" (PDF). Small Industries Development Bank of India. April 9, 2020.
  20. ↑ "Indian Insurance Industry Overview & Market Development Analysis". Indian Brand Equity Foundation (IBEF). Retrieved April 19, 2022.
  21. ↑ "ANNUAL REPORT 2019-20" (PDF). Insurance Regulatory and Development Authority of India (IRDAI). December 1, 2020.
  22. ↑ "RBI must accommodate fintech innovations, not ban them".
  23. ↑ "Making digital finance work for women - ET BFSI".
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