INDIA FINTECH MARKET

KEY FINDINGS

• Indian FinTech is one of the top three markets by value of capital funding and investments in the sector (behind USA and UK) with nearly USD 3.1 Billion of funding in 2019.
• The announcement of demonetization in 2016, revolutionized India’s digital payment landscape as liquidity crunch arose. Technologies such as AI, blockchain, IoTs were introduced and since then Indian fintech market is growing rapidly with rate of approximately 100 % from USD 1.8 Billion in 2018.
• COVID19 is also considered as another landmark in fintech industry. In early covid period, it disrupted the business models of many FinTech, but throughout the year it has jumpstarted the digital or contactless payments and neo banks again. Between January and July 2020, fintech investments reached $1.47 billion which is approximately a 60% jump when compared to 2019.
• Online brokerages were gaining traction, encouraging investors to buy equities, IPOs, ETFs, mutual funds; UPI payments were skyrocketing; more and more people turned to online banking to socially separate themselves and keep themselves safe; and insurance transactions grew.
• Key industry players such as Zerodha, Paytm, PhonePe, and Groww, among others, witnessed growth in activity and users as people turned to digital solutions for investing, banking, and contactless payments.
• Partnerships with banks and fintech are going to bring new dynamics in the industry. They will take advantage of recent developments in the behaviour of customers and use of technology and capitalize on the higher levels of trust people have in tech to provide services that effectively engage with consumers. 2021 will also see hybrid banking become more mainstream. In a hybrid banking model, financial institutions combine the brick-and-mortar physical banking approach with virtual banking
• The recent government initiative of establishing Fintech hubs and an allocation of INR 15 billion to boost digital payments will further immunize the industry in the coming years.

INTRODUCTION

Technology has been a great enabler in the growth of a digital economy. Over the years, Indian banks and financial services providers have gradually adopted technology to improve reach, customer service and operational effectiveness with evolving market and technological advances.

The amalgamation of finance and technology which is known as “Fintech” is driving a financial inclusion revolution in the country to bring a change in the quality of life of underbanked or unbanked communities that accounts for around 80 % of the Indian population.

INDIA FINTECH MARKET DYNAMICS

Indian FinTech is one of top three markets by value of capital funding and investments in the sector (behind USA and UK) with nearly USD 3.1 Billion of funding in 2019 registering a growth rate of approximately 100 % from USD 1.8 Billion in 2018 and have a global adoption rate of 87% which is higher than the global average of 64 %.

Payments have been at the forefront of India’s digital revolution, with digital payment transaction volumes (worth USD 3.5 trillion) touching approximately 24.13 billion in 2018.

The demonetisation drive launched in November 2016 and lucrative returns on mobile wallets and UPI transactions (which led to their widespread adoption) have been key to driving exponential growth in digital transactions. In addition, the rise of digital commerce, innovation in payments technology using AI, blockchain, the Internet of Things (IoT) and real-time payments; and the introduction of mobile point of sale (POS) devices have led to a reduction in the cost of acceptance infrastructure and also contributed to growth.

One Mobikwik Systems Ltd., which postponed an initial public offering, is in discussions with investors to raise up to $100 million in equity to finance corporate expansion.

The Gurugram-based fintech company, which became profitable for the first time in the quarter ended December 31, said in an interview that it would use the money for marketing, to add staff, and to make acquisitions. The company still intends to proceed with the IPO at a suitable moment.

In response to a collapse in the shares of bigger rival Paytm, which went public in November, the company postponed the IPO planned for last year.

According to information from investment portals that permit trading in private companies, unlisted shares of Mobikwik had borne the brunt of the IT sector catastrophe.

One of the biggest providers of buy now, pay later services in India, the company counts American Express Co. and Sequoia Capital among its investors. 

It has more than 100 million users that have enrolled, and it wants to grow the business quickly. When Mobikwik raised money from the Abu Dhabi Investment Authority last year, it was valued at roughly $700 million; however, the valuation for the latest funding has not yet been determined.

Government-led Initiatives: The Indian payments landscape has been revolutionized by the regulators and the central bank’s proactive initiatives, e.g., India Stack and UPI. India has emerged as one of the most exciting markets for digital payments across the world. Last year, home-grown payment networks (Ru Pay and UPI) took the lion’s share of the total digital transactions, i.e., 65%, showcasing how their efforts have been in the right direction for achieving targets.

Innovations in Digital Payments

• National Common Mobility Card (NCMC): ‘One nation, one card’

The Indian Government recently launched the NCMC, also labelled as ‘one nation, one card’. This interoperable, contactless transport card enables consumers to make multiple payments, including transit to toll and retail shopping, and also allows for money withdrawal. With the Government’s emphasis on smart city projects, the transit sector is set to witness rapid growth. These cards would then play a key role in driving the adoption of digital payments in this sector.

• Merchants are increasingly leaning towards solutions which make payments processing passive.

They want the payments to happen instantly, invisibly and conveniently for consumers. Behind this evolution is the constant endeavour to make the purchase process fast and frictionless, and thus reduce shopping cart abandonment. Examples of this trend are Visa Checkout ,American Express eze Click, LoopPay, Apple Pay or Apple Watch, etc.

• The Internet of Things (IoT) and emergence of cryptocurrencies and blockchain

IOT brings consequences and opportunities for consumer payments andnew commerce.  By 2025 there are likely to be around 30 billion connected devices. The "things" that can be interconnected range from thermostats to automobiles to refrigerators to lightbulbs. For instance, cars can talk to each other, and the refrigerator can by itself place groceries orders.

Cryptocurrency and blockchain technology would act as a game changer in the field of money transfer ,consumer payments  and e-commerce in India  after Supreme court revoked the ban on use of cryptocurrency that was imposed by RBI.

• Tokenisation – A method to secure digital payments

Tokenisation is the process of replacing sensitive information like card/account details with a random value that is provided by the bank in the form of a token. During the transaction, it is the value on the token that is exchanged and not the user data. This ensures that merchants cannot store customer data, thus reducing the chances of fraud. With the RBI releasing a circular permitting its use in select use cases, tokenisation is set to play a crucial role in securing payments in the country.

EVOLUTION OF FINTECH IN INDIA

1991-2000

The Indian Government began to liberalise the Indian Banking Industry with the introduction of technologically savvy banks. Various payment technology was pushed such as MICR, electronic

2000-2005

funds transfer to boost the banking sector but most of them were government driven and lacked financial innovation.

FinTech’s began to dominate the US and UK landscape, they started penetrating in the Indian banking Industry by offering various consumer centric services. FinoPay Tech and EKO India were the two major start-ups that built their model around the banking correspondent model (BC Model) which was used to increase penetration in rural areas at lower cost using basic technology with the help of agents.

2005-2010

This period witnessed the emergence of  major fintech start-ups such as Oxigen,Paytm, Free charge, Mobikwik in the field of mobile wallets-bill payment and mobile recharge services

2010-2014

From 2010, there have been multiple fintech start-ups that have mushroomed in different segments such as lending (100+),personal finance management (40+) and investment management (90+) start-ups.

2014-2019

Demonetisation introduced in November 2016  is considered as the biggest boost to Fintech in India and Introduction of India stack (Aadhaar / eKYC / UPI / eSign etc) simplified as well as disrupted Payment, Lending, Insurance and Wealth business. While wallets collapsed due to UPI, Lending FinTech’s/InsurTech prospered. Wealth business went through challenges due to Direct plans of Mutual Funds.

2019-till date

India stack continues to positively impact FinTech’s with newer services. NeoBanks have emerged as a segment of choice for investors. Neo-Entrants are introducing “Fintech as a service line” in their current business models by either developing it organically or buying out fintech’s. Lending start-ups are going through the evolution phase. Complex areas like Trade Finance and B2B start-ups are getting support in the new wave.

COVID IMPACT ON INDIA FINTECH MARKET

• Similar to 2016 demonetisation, Covid-19 pandemic is another landmark development for the fintech firms. It has jumpstarted the digital or contactless payments again after the reported slowdown due to the virus impact.
• The lending companies have been severely impacted because of COVID-19. While pandemic has accelerated Indian customers’ adoption of digital financial products, the new account openings for neobanks were already above pre-Covid levels.
• Significant investments are being made by established banks and insurance companies, which led to acquisition and more investments from investors in 2020. In 2021, there will be increased momentum in partnerships between fintechs and banks as Finance Minister urged banks to use a Co-origination model. The announcement reflected the acceptance of fintech firms by the large format traditional financial institutions.
• Challenges for Fintech startups during mid of COVID19:
  • The pandemic has disrupted the business models of many FinTechs
  • FinTechs are likely to face a prolonged period of softened demand as consumption decreases across India
  • Due to travel restrictions, startups are struggling with new business origination
• Strategies taken by most of the fintech firms:
  • Launched new products
  • Improved/optimized existing products
  • Identified and targeted new customer segments
  • More customer centric approach
• It is expected that by the fourth quarter 2021, companies will start witnessing GNPA levels touching 3 to 4 times of pre-pandemic level and there could be some spill over even into the next fiscal year. (CNBCTV18).
• With the expected liquidity squeeze in the initial part of the year, cooperation in the space of co-lending may be a major theme for the coming years. Many players can look for large partners in the banking space to achieve pre COVID-19 volume levels in Q4 and then subsequent growth, but their collection efficiencies and performance during these test times will be the determining factor.
• In theUnion Budget 2021, government of India announced the setting up of a FinTech hub in Gujarat International Finance Tec (GIFT City). The FinTech Hub will help create around 150,000 jobs and accelerate the use of artificial intelligence, machine learning, etc. It will drive tech-enabled tax functioning which will illuminate the increased importance of digitisation.
• The budget 2021 also allocated INR 15 billion to support and boost digital payments. Creating a ‘bad bank’ is also an interesting move, aimed at moving bad assets of banks to an asset reconstruction company (ARC) and an allied structure to buy out and turn around stressed assets, particularly of public sector banks (PSBs).

TECHNICAL ADVANCEMENT

Artificial Intelligence (AI) and Machine Learning (ML): Indian fintech companies are using these technologies more and more to improve their services. Chatbots with artificial intelligence (AI) capabilities offer customer service, virtual assistants make tailored financial suggestions, and ML algorithms mine huge datasets for risk analysis, fraud detection, and credit scoring.

Blockchain Technology: The Indian fintech sector has seen a rise in the use of blockchain technology.It provides transparent and secure transaction records, enhancing productivity and cutting expenses.Blockchain is being investigated for a number of use cases, including supply chain financing, cross-border remittances, and digital identity management.

Biometric Authentication: To improve security and speed client authentication procedures, fintech organizations are integrating biometric authentication techniques like fingerprint scanning and facial recognition. Users may access their financial accounts and approve transactions in a simple and safe way with biometric authentication.

Big Data Analytics: The Indian fintech industry has adopted big data analytics as a result of the abundance of data.Fintech businesses use data analytics technologies to gather information, spot trends, and make fact-based decisions.These information support building focused marketing tactics, enhancing consumer experiences, and determining creditworthiness.

Robotic process automation: To automate routine and rule-based processes, fintech organizations are embracing RPA.RPA makes it possible for operations like customer onboarding, data entry, and regulatory compliance to be completed more quickly and accurately, freeing up human resources to work on tasks that are more difficult and offer value.

Internet of Things and Wearables: To provide individualized and context-aware financial services, IoT gadgets and wearables are being integrated into fintech solutions.Financial management can be made easier with the help of IoT-enabled devices, which can monitor spending trends, deliver real-time transaction notifications, and enable frictionless payments through linked devices.

Cloud Computing: To securely store and handle massive volumes of data, fintech organizations are increasingly using cloud computing platforms. Fintech organizations are able to extend their operations and provide cutting-edge services thanks to cloud infrastructure, which offers scalability, cost-efficiency, and simple access to computing resources.

Application Programming Interfaces Integration: APIs are essential for integrating different fintech services and systems. APIs facilitate easy data sharing, enabling fintech companies to work with banks, payment processors, and other third parties to deliver a full range of financial services.

COMPETITIVE LANDSCAPE

India has ~2,200 fintech start-ups. Bengaluru and Mumbai lead the momentum in FinTech, and together, these cities represent 42% of the start-up headquarters. Apart from the top five FinTech destinations, which include Mumbai, Bangalore, New Delhi, Gurugram, and Hyderabad, the rest of India accounts for 738 FinTech start-ups.

City Wise Breakup (Top Ten Cities )

Between January and July 2020, fintech investments reached $1.47 billion which is approximately a 60% jump when compared to 2019. The last 4-5 years have been golden for the fintech business and India is definitely on a path of thriving success in the following years.

NEW LAUNCH IN INDIA FINTECH MARKET

FreoSave, a digital savings account app developed by Freo and Equitas SFB, allows clients to access and manage digital and physical credit cards, as well as use an in-app QR scanner.

Freo Save offers to provide easy finance and shopping. Freo Save, in collaboration with Equitas SFB, would provide consumers up to 7% interest on savings balances of Rs 5 lakhs to Rs 2 crores. The app will be available in numerous vernacular languages, including English, Hindi, Tamil, and others.

Freosave's Free Pay, a QR Scanner-enabled, pay later offering, will make it simple to pay for everyday consumer needs. MoneyTap, a personal credit line app, guarantees access to credit ranging from Rs 10,000 to Rs 5 lakhs, with interest only levied on what they use.

FreoSave also offers a virtual and actual debit card that can be handled entirely through the app.

The introduction of Freo Save, in collaboration with Equitas Small Finance Bank, is a critical step toward our goal of providing end-to-end financial products to the country's youth, both digitally and through the app.

FUTURE OUTLOOK OF INDIA FINTECH MARKET

The next five years hold immense potential for both Fin Techs and incumbents to revolutionise the Financial services landscape and uplift India’s economy by driving the consumption story. However, success in this digital economy would be dictated by an organisation’s capacity to innovate, along with its ability to manage partnerships across both Financial Services and non-Financial services players to provide financial solutions at the point of consumption and increase its adoption.

Increasing geopolitical tensions between USA and China and the pandemic can act as cornerstone that can help the Indian Fintech ecosystem to grow at an exponential rate as the country stands as in a direct benefit in attracting companies to migrate and grow in an ecosystem that is robust, dynamic and immune to economic and political setbacks.

COMPANIES PROFILED

• PolicyBazaar
• Zerodha 
• LendingKart
• Paytm
• Billdesk
• Pine Labs
• RazorPay
• Mobikwik
• CoverFox
• Cred
• Clear tax
• Groww
• Bharatpe
• DigitInsurance
• Zest Money