SUMMARY
An EY report puts the adoption rate of fintech in India at 87%, a whopping 20% above the global average of 64%
An impressive feature has been the rising power of fintech firms in multiple facets of rural life in India, ensuring that a large section of underserved consumers is brought into the system
Fintechs can position themselves for global expansion by developing solutions for semi-urban and rural locations
In the past few years, aided by the smartphone revolution and cheap data plans, fintech has dominated investors, consumers, and startups in India. An EY report puts the adoption rate of fintech in India at 87%, a whopping 20% above the global average of 64%. The report projects the Indian fintech market to reach a cumulative value of $200 Bn by 2030.
Meanwhile, estimates in Bain and Co.’s India Fintech Report 2022 state that the boom in smartphone adoption in India could push the net valuation of fintech services in India by 3.5 times, from $100 Bn to $350 Bn in the next four years. Bain expects India’s financial services market to grow from $1.3 Tn to a whopping $2.3 Tn by FY26.
With more than 6,386 startups in the fintech space and dominance of investment tech, digital lending and payment companies, India has emerged as the global fintech factory. According to estimates from the Mumbai-based VC firm Blinc Investment, more than $24 Bn has been invested in Indian financial technology.
2021 and 2022 saw more than $19 Bn of fintech funding and the addition of 18 fintech unicorns in the country, cementing its status as a powerhouse. An impressive feature has been the rising power of fintech firms in multiple facets of rural life in India, ensuring that a large section of underserved consumers is brought into the system.
Serving The Underserved
The pandemic, with its focus on digital payments, meant that micropayments and digital payments in India took off. According to RBI data, total digital transaction volumes in 2020-21 increased by around INR 1,000 Cr. Digital lending is fast becoming a success story in India.
An INC42 report has estimated that the digital lending market will grow from $270 Bn in 2022 at a CAGR of 22% between 2022 and 2030. It will account for a whopping 60% of the Indian fintech market by 2030. The report suggests an increase in the proliferation of formal finance, growing per capita income and greater internet penetration will drive this growth.
The government’s focus on schemes has helped improve financial inclusion. They have also assisted firms in reaching tier II plus cities across the country and increasing credit access. Moreover, startups are adopting innovative technology to better facilitate the customer and deploying kiosks, point-of-sale (PoS) devices, micro ATMs, and mobile vans to digitise most cash-related activities.
This has resulted in an increase in the use of digital means, aided by the availability of low-cost internet and smartphones. Kirana stores have become a one-stop destination for multiple services such as Aadhar-Enabled Payment Systems (AEPS), micro ATMs, and so on.
Norms allowing cash withdrawals via UPI have also ensured that swathes of the country largely ignored by formal banking have become a part of the system. New technological innovations such as 5G, better smartphone penetration, and data availability ensure that the numbers are bound to increase soon.
The creation of regulatory sandboxes and the promotion of digital lending and payments have helped to create a supportive environment for fintech companies and played a part in their rapid growth. Regulations in the space have seen significant change and will eventually contribute to the creation of a complete framework.
Way Forward
If one were to forecast the direction that India’s fintech industry will take in the upcoming years, it would revolve around enhanced adoption of digitalisation. To drive growth in areas such as digital lending, fintechs and government regulators must collaborate to ensure that regulations are followed and that the business of legally operating lenders is not harmed. The process of availing credit must be seamless for the consumer and fraud must be prevented.
India has taken giant leaps in fintech. There has been a great deal of evolution in Indian fintech. The year 2023 will see the rise of responsible fintech, defined as well-regulated, compliant, and focused on customer rights and delight.
Growth has been driven primarily by India Stack and digital currency, but there is still much work to be done in terms of reachability, awareness, and lead indicators. With multiple sub-sectors, we need self-regulatory organisations (SROs) within the space to regulate. More intermediary interfaces like the SROs could be a big leap in terms of working together with regulators.
Artificial intelligence (AI) and machine learning (ML) will be used, notably in areas like customer service, fraud detection, and credit risk assessment. Businesses that use AI/ML tools will provide effective services. It’s an interesting phase, and the fintech revolution may see huge growth if the government and businesses collaborate.
As cutting-edge technology like blockchain and AI are quickly embraced, the industry’s prospects will improve. We might profit from interoperability-based solutions. More significantly, just 8% of fintech founders now claim to fall under the “sustainable fintech” umbrella. There are numerous green fintech companies and initiatives around the world, and now India is following suit.
We anticipate robust growth in the digital lending sector in 2023. Increasing per capita income, better access to formal finance, and increased Internet penetration in rural areas have contributed to the growth. Through sandboxes, incubators, and evolving India stack solutions, we expect to facilitate co-creation between businesses and regulators as the fintech industry expands. The key focus of fintechs would be on the convergence of solutions in terms of depth and scale — lending, wealth management and insurance.
The co-lending model, in which banks work with digital lenders, will find widespread favour, and digital lenders supported by NBFCs will succeed. Fintechs can position themselves for global expansion by developing solutions for semi-urban and rural locations. Fintechs that will solve for ‘Bharat’ and Tier II plus cities and possibly position themselves for global expansions will see massive growth opportunities.
