It is a well-established fact that FinTechs are playing an important role in the Indian economy. India’s FinTech market is now the third-largest in the world. As per the report “The World of Fintech” by BLinC Invest, FinTech comprises US$31 billion in the US$500 billion Indian BFSI sector. The country already has 10 unicorns and many “soonicorns” across segments. ETILC’s BFSI sub-committee, in a recently conducted session by industry experts and Deloitte India (as the knowledge partner), discussed the role of FinTechs in the envisioned US$5 trillion Indian economy.

Role of FinTech in India’s US$5 trillion economy

“Fintechs have a crucial role to play in the country’s dream to become a US$5 trillion economy. They can solve problems of access, reduce friction between customers and financial institutions, and attract capital to India. They bring in a tremendous amount of flexibility, the ability to bundle and unbundle products, and specialize in areas where there is a gap,” says Soumya Dwibedi, Partner, Deloitte India.

Removing friction and strengthening ecosystems

The panelists felt that FinTechs are fundamentally reducing friction in money transfers. As we focus on the accelerated growth of the economy, there is increasing importance on reducing friction between financial institutions and their customers, including retail and institutional. Further, there are other ecosystems, such as those between the government and businesses, and the government and customers, where frictions are causing inefficiencies and FinTechs could help bridge the experience gap.

“I think there’s a big opportunity for FinTechs to integrate not just the current banking and financial services system, but also the actual public policy system of the government. So, if you look at the amount of developmental work that the government is doing to reach parts of the country, it can become the engine that powers some of this. We’re already seeing some of it in action, but there is much more that can be done,” says Uma Ratnam Krishnan, Co-CEO, Barclays Global Service Centre India.

Driving access and awareness

A critical role that FinTechs have played is in improving access to the gamut of financial services for the masses. It has democratized digital payments, increased access to credit—especially small-ticket loans, and access to investments owing to the discount brokerage model. However, there are still miles to go as a large part of the country remains untapped. While the JAM (Jan Dhan – Aadhaar – Mobile) has significantly enhanced basic credit access for the rural and unorganized economy, it remains a challenge for Micro, Small and Medium Enterprises (MSMEs). In a country of ~125 crore people, we have ~8 crore DEMAT accounts and ~2 crore mutual fund investors; however, only ~20 percent of MSMEs have access to institutional credit. There is a tremendous amount of potential on the Business-to-Business (B2B) side.

“Credit-risk assessment and lending based on the knowledge base, space, and sector hold tremendous potential, which can accelerate the journey towards the US$5 trillion economy. The credit gap as of today is somewhere close to INR 13 lakh crore,” says Nanda Kumar, Founder and CEO, SunTec Business Solutions.

Improving affordability and awareness

The greatest advantage of FinTechs is their flexibility in product design and distribution. Their ability to unbundle an offering and provide modular access or a “ sachetized” version of the products help attract first-time customers and customers in the fringe. Further, the players, especially aggregators, have shown tremendous flexibility in integrating offerings from multiple players—both traditional and new age—to provide a wide bouquet of choices for the consumers.

“They can bring in more inclusion because of their cost structure. Additionally, there is a role that they can play in providing knowledge and financial literacy so that customers have the right products that suit their needs and risk profile,” added Vijay Chandok, MD and CEO, ICICI Securities.

Key enablers

Adapting new business models and adopting self-regulation

However, one aspect that FinTech firms in India must figure out is how to run the business profitably.

“Lending is not the silver bullet it is made out to be. Hence, the two solutions that have been implemented so far, either selling access to the acquired customer base through advertising or lending to them, are not sustainable in the long term,” says Shivashish Chatterjee, Co-founder, DMI Finance.

Further, there are two key areas where there is an increasing need for self-regulation. First, as FinTechs thrive on customer data, there would be enhanced access to customer data, and with this access comes the responsibility for customer privacy and data protection with adequate infosec and cyber security measures. Second, guardrails on responsible lending practices, which protect consumer interest as well as the risk profile of the organizations, will help avoid shocks and setbacks that could weaken the trust in the system.

The partnership between traditional players and FinTechs

When the FinTech segment was in its early days, the narrative between the traditional players and FinTech was antagonistic. FinTech was claiming to disrupt the banking and financial services sector and take business away from the incumbents. In recent years, both this narrative and the relationship between the two have changed. Traditional banks see FinTech for the value they bring in terms of technology and flexibility, and FinTechs see the large institutions for what they bring to the table in terms of large customer bases, product portfolio, and monitoring of risk and controlled processes.

“Just like a payments bank or small finance banks and large banks have a role, everybody has a role. Similarly, NBFC & HFC’s role was to go ahead and expand the markets. FinTechs bring in that agility, new technologies, and innovation, and that is where partnerships can come together. The problem begins when we start to get into each other’s shoes. Some structures can be created, which will be self-regulated, while policymakers can also contribute there,” says Anirudh Kamani, MD and CEO, ICICI Housing Finance.

Continued push from policymakers

One of the reasons FinTech has been successful in India is because of the base digital infrastructure provided by the government. Initiatives under “Digital India” and “India Stack” have been immensely successful.

“There is nothing like the UPI-based payment infrastructure available anywhere in the world. What is now required from a FinTech is to take what is available for public benefit. In this case, UPI, and build something without converting it into a walled ecosystem,” says Shivashish Chatterjee, Co-founder, DMI Finance.

Industry experts feel more such infrastructure or enabling framework that helps provide access to central repositories will go a long way. As there are multiple regulators (RBI, SEBI, IRDA) controlling the financial sector ecosystems, harmonization in policy and adapting regulatory best practices (e.g., provision for sandboxing) across segments could drive more integration and simplification in customer onboarding and service.

Considering the huge growth potential of FinTechs in India, the success of a few start-ups has set the ball rolling for continuous Private Equity and Venture Capital investments. From 2016-to 2021, the segment attracted total funding of US$16.5 billion. Further, taking a cue from Singapore, creating platforms/organizing large-scale events such as Singapore FinTech festivals will have a multiplier effect in generating new ideas, and fostering new partnerships in attracting investments.