The year 2016 has drawn to a close and it has seen rapid strides made by fintech industry in India. A large market base, encouraging government policies and a start-up space that is driven by innovation and encouraging VC funding has led it to be in the forefront of growth.
Having spent close to 15 years in financial services in the US, I have always believed that technology will be key to realizing the large potential of financial services in India, where about 40% of individuals and almost 90% of small businesses do not have access to formal banking and financial services. Physical distribution driven traditional financial services models are just not economically viable for this large unbanked population, and that’s where Fintech will change the game.
NASSCOM has predicted that India’s fintech market will touch USD $2.4 billion by 2020.
In a lot of ways, 2016 has been an inflexion point when many factors and policies have come together to put the sector on a path to this exponential growth.
Let’s try and understand this further.
Key Changes in 2016 that will Enable Fintech Growth in the Coming Years
Continued Growth in Mobile:
Almost 65% of working population in India is below 35 years of age. This segment is rapidly adopting technology. More than 220 million people had smartphones in 2016 which had surpassed the 200 million smartphone users in the US. Mobile internet is growing at a blazing pace (thanks to companies like Jio). Mobile internet penetration had increased to almost 40% in 2016 for the millennials and is expected to grow faster in 2017.
This will lead to growth of digitally connected users using mobiles as their preferred mode for shopping, payment and even banking services. Fintech companies are seeing this as a great opportunity to offer a bouquet of services to capture this new user base.
Progress on India Stack:
The government has been putting policies in place with its Digital India, Jan Dhan Accounts, Demonetization and other initiatives to give a definite thrust to digital economy. Last year saw the platform being put in place for UPI, Aadhaar based eKYC, digital signatures etc. to enable ease of use of financial services and make regulatory processes simpler.
Shift towards Digital-friendly Regulations:
2016 also experienced regulatory bodies like RBI and SEBI setting up policies to enable use of digital technology for financial services. As an example, Aadhaar based eKYC now allowed by SEBI allows KYC to be done digitally for mutual funds investments in just a few minutes, as compared to physical paperwork that often takes a few days to complete.
Growing Shift to Cashless Transactions:
Adoption for electronic payment services saw a huge upswing in 2016. Mobile wallets like PayTM, FreeCharge and Mobikwik grew significantly driven by massive investments by both mobile wallet companies and banks, with several banks launching their own wallet solutions like PayZapp from HDFC, State Bank Buddy and so on. Demonetization towards the year end has offered a new catalyst to cashless transactions.
Opportunities for Fintech in 2017
Wallets and electronic payments will serve as a great entry point for the large number of unbanked users to formal financial products. Wallet users will over time get more comfortable with using other financial service products like wealth management, insurance and lending products offered by Fintech firms. From that perspective wallets are creating the market for other fintech products.
While we saw significant growth in 2016 in mobile payments, I believe 2017 will see emergence of two new growth areas for the Fintech space.
This is one of the most under-penetrated segments in the financial services space in India.
We have almost 7x more money sitting in people’s bank accounts and FDs than in Mutual Funds in India.
In a survey at Money View, we found less than 15% of professionals under the age of 35 years investing in mutual funds. A large majority still save in FDs even though FDs provide 2-3% lower annual returns than debt mutual funds (low risk – higher return investment instrument).
A big reason for investment services being largely un-tapped is reliance on physical distribution channels relying on bank relationship managers and brokers. They prefer to only approach higher income investors due to high customer acquisition and servicing costs. With the progress we have seen in digital platforms and government policies as explained above, I believe this segment is slated for massive growth in the next 2-3 years.
To quote my own experience, we launched Green Account in mid 2016, an investment option for Money View users. Using this option a user can open a new investment account and put money in mutual funds – all this within 1-2 minutes using a completely digital process from within the Money View app. In a short period since launch, we have already seen the investor base spreading across more than 80 cities in India. This was only possible through use of technology to make such products accessible, simple to try and convenient to use.
We saw a few start-ups like Lendingkart, Capital Float, etc. innovating and making good inroads in the small-business lending space in 2016. However, one area that remains largely underserved is the consumer loans space.
As per World Bank Findex 2014, 46% of adults in India took a loan in the last 1 year, however only 15% of them took a loan from a bank or another formal financial company. The remaining 85% of these borrowers had to rely on informal channels like money lenders, friends or family – often paying ridiculously high interest rates.
A large part of the reason banks are unable to extend loans to these people is the lack of mechanisms for them to access creditworthiness of these borrowers. Fintech companies are ready to change this is by using different models for assessment of creditworthiness based on transactions, social interactions etc. They can then use risk-based pricing to present the right offer to the borrower based on his/her financial capability and risk.
Also the loan approval time by a traditional financial institution varies from a few days to months while a fintech company can approve a loan in minutes using automated models and digital technology. This makes them attractive to loan seekers.
Expect to see some big innovations in the consumer lending space in the next 12-18 months.
Challenges and The Road Ahead
India’s fintech segment has a great disruptive potential to offer faster, easier and more convenient financial services to the end user taking advantages of the rapid spread of technology, mobile and digitization in the country. Yet, the biggest challenge is to build the trust factor. Indians have been traditionally conservative especially when it comes to trusting their money with an entity that does not have a track record that a traditional bank or NBFC has.
This is an opportunity for fintech companies to build awareness and trust and supplement that with offering services that are useful and easy to avail of.
2017 will carry forward the good work of last year for fintech.
One thing is for certain, the consumer will be spoilt for choices in the coming year.
Puneet Agarwal is the Co-founder of Money View.