India’s fintech landscape: Accelerating growth through innovation


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India is rapidly emerging as a global fintech powerhouse. Digital payments is a key segment within fintech cohorts that is spearheading growth. Prominent developments that fueled the fintech revolution include the Indian Government’s digital push including the formalization of Aadhar as a common identification with linkages to one’s mobile number, driving penetration of bank accounts to enable universal access to money, the establishment of digital payment infrastructures to encourage online transactions, enabling fintech players to access data repositories like Digi Locker, GSTN, etc and launch innovative technology products, access to PE/VC/angel funding, a growth imperative for start-ups and a skilled talent pool.


Scripting a success story

According to a FICCI-BCG report, with 2100+ incumbents, the fintech sector is currently valued at $50-$60Bn, with valuations expected to soar to $ 150-160Bn by 2025. Several factors have contributed to this rapid growth – favourable Government policies, inherent consumer demand inclined towards digital adoption, adequate capital funding, entrepreneurial risk-taking spirit and robust tech capabilities. Notwithstanding the pandemic, India’s fintech ecosystem has continued its forward juggernaut, undeterred, with the rise of 3 new Unicorns and 5 new Soonicorns (>USD 500Mn+ valuation) since January 2020. India attracted $2.2 Bn by way of investments in the fintech space in 2020, ranking 5th globally. The chart below summarizes the steep growth curve of the fintech ecosystem:

Source: FICCI-BCG

 

We shall look at the key factors that have boosted the fintech movement in India along with the trends that are expected to emerge.

 

Nimble players with a strong tech stack

Given the relatively smaller size of fintech players compared to their traditional counterparts i.e. banks and financial institutions(FIs) with huge, distributed asset base and well-capitalized balance sheets, agility in decision-making with use of the latest, cutting-edge technology namely AI, ML, data analytics, cloud and the likes is an inherent advantage that fintech possess. The below table summarises the distribution:

Source: GoMedici

 

Rise of the digital natives

 India has witnessed an upsurge with a spike in internet usage and smartphone owners. It is estimated that India has a sizeable 550-600Mn smartphone user base in 2021, a 60% jump over 2016. The 5G data revolution in 2021 would further push down data tariffs and enhance penetration levels of the internet. Owing to the pandemic, a large proportion of Indians, with access to mobiles and the internet, made the transition to digital mediums across formats- be it e-commerce shopping, digital payments, online investments, credit, insurance, wealth management or neo banking. The underlying preference for digital has been internalized by many and is expected to last even beyond the pandemic, spelling good news for the fintech space. 

Source: FICCI-BCG

 

Favourable regulatory policies and related reforms

The Indian Government has introduced several initiatives aimed at giving wings to the growth ambitions of fintech players. These include Budget announcements of dedicated allocation of INR 1500 cr towards promoting digital payments, RBI policy guideline towards enhancing digital security including New Umbrella Entity(NUE) to catalyse the digital payments domain, the Regulatory Sandbox framework and Open Credit Enablement Network (OCEN). IndiaStack, the public digital architecture along with open API has also benefitted fintech players in launching customised products for a diverse user base. 

Source: GoMedici

 

Fund-raising gets a fillip

The timely availability of growth capital and adequate funding is the lifeline of fintech start-ups. It is well-known that a sector expected to witness robust growth and promising profit prospects attracts sizeable funding from VC/PE/angel investors. As per statistics revealed from a study, the number of deals stood at 1153 in 2019 with a marginal dip to 1138 in 2020. With product diversification into new verticals by fintechs, attuned to customer demand and expectations, one can expect renewed interest from the investor community. In the coming days, one may also witness Indian start-ups in the fintech space opting to list overseas via the SPAC route to access higher capital. 

Source: FICCI-BCG

 

Realisation of collaborative opportunities

Currently, fintech players in India operate at a certain level of specialisation. For example, those present in digital payments are focussed on product developments with payments as a core offering. Symbiotic partnerships and alliances with banks, FIs, corporates and big tech players can lend depth and add value to the current fintech portfolio suite. For example, banks could set up dedicated start-up incubation launch pads or provide financial funding, with necessary guidance, based on their know-how of the financial services domain to fintech players. A distribution partnership could be entered into, whereby the fintech players markets products like insurance or mutual funds launched by the financial institutions (FIs). Another option would be that the bank or the FI buys products of fintech players and offers the same under a white-label arrangement. Reports indicate that establishing a robust, pan-India blockchain network with distributed ledger technology would further boost cross-channel collaboration by ecosystem stakeholders with fintech players. 

 

Conclusion: Moving towards a well-oiled, mature fintech ecosystem

Given the intense competition within the fintech space, it would be prudent for incumbents to draw an effective differentiation strategy either by way of product offerings and extensions based on specific customer requirements, deliver superior user experience, forge synergistic alliances with forward or backward linkages along the value chain and pursue entry into new markets or geographies. 


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