INTRODUCTION
Fintech is a combination of Finance and Technology. It is a new generation of businesses that provide financial solutions using technology and are more effective and efficient than those offered by conventional financial institutions. It is a product of the evolution of the banking sector, rather than an alternative to traditional financial services.
Nowadays, banking services are made more convenient with technology. It is aided due to the availability of data, machine learning, and artificial intelligence, and hence are quickly replacing the conventional banking processes. Fintech is totally altering the corporate landscape across numerous industries, backed by such a powerful armory.
Fintech in India has advanced rapidly in the payments sector over the past few years because of the Unified Payment Interface (hereinafter referred to as “UPI”). The amount of UPI monthly transactions has risen to over $135 billion (as of June 22, 2022), which is nine times the value of credit cards being used in India for over 40 years.
Fintechs are expected to be crucial in boosting financial inclusion and the use of digital technology. With roughly $35 billion spent across various sectors thus far, India has seen a tremendous increase in fintech investment, more than tripling its share of global fintech funding since 2016. In the year 2021-22, 18 new fintech unicorns were formed and over than $19 billion was invested in the sector.
Fintech Market in India
There are more than 2100 Fintech businesses in India, and more than 67 percent of those were founded in the last five years. In 2021, investments amounting to over $8 billion were made at various phases of the investment process.
As of September 2021, India had significant growth in the area of digital payments, with a monthly volume (total digital transactions) of over 5.7 billion transactions totaling almost $2 trillion.
The Big Tech companies like Google, Amazon and WhatsApp are also offering the fintech services like Google Pay, Amazon Pay, and WhatsApp in India. On the same platform, an integrated e-commerce, value-added services for merchants, and consumer internet services (such as gaming and entertainment), financial service products and services, including payment, lending, investment, and insurance, etc are provided.
DIFFERENT FINTECH SEGMENTS IN INDIA
The Fintech sector in India focuses on lending for both consumers and the Ministry of Micro, Small & Medium Enterprises. This industry includes conventional financial services like insurance, personal finance, and gold lending.
- Pay Tech – This segment operates for the purpose of payments. Third-party application providers, prepaid cards/wallets, bill payment, QR code payment, payment aggregators, and point of sale few of the consumer-focused services available in this segment. The utilization of services like payment gateways, card networks, application programming interfaces /White label solutions, as well as payment security, is how fintech is incorporated into this market. The leading companies are Paytm, PhonePe, MobiKwik, and Google Pay.
- Lend Tech – This segment operates for lending or borrowing money. Buy now pay later (BNPL), personal loans, salary loans, gold loans, vehicle loans, school loans, and P2P lending are among the services provided in this segment. Collections management, credit bureau, alternative credit scoring, lending as a service, loan origination system (LOS), and loan management system (LMS) are among the fintech services used in this market area. Leading lending platforms for customers and businesses are emerging, including Google Pay, M-Swipe, and Razor Pay.
- Digital Banking – This segment makes use of technology by establishing retail neobanks, small and medium company neobanks, and digital subsidiaries of banks. Neobanks are essentially corporate banks’ digital platforms. Some of the Fintech services utilized in digital banking include Application Programming Interface (hereinafter referred to as the “API”) providers and aggregators, banks with open APIs, banking as a service, and core banking. Some of the big companies with a focus on digital banking are Yono, Kahatabook, and Crazybee.
- Wealth Tech – In this segment, Robo advisors, discount brokers, mutual fund investment platforms, research platforms, and alternative investment platforms can all be used to deliver services relating to wealth and expense management. White-label Robo advisers, portfolio management software, and CapTable management are examples of Fintech services that are suitable in this market. Leading companies in this market are Zerodha and Small case.
- Finance Tech – Under this segment, various services are provided like Accounting (provided at the level of enterprises, SMEs, and micro-size businesses), Procure to pay, Quote to cash, Taxation, Reconciliation, etc.
- Regulation Tech – In the financial services industry, the technology is also being used to comply with legal and regulatory requirements for KYC, digital onboarding, fraud detection, Anti-Money Laundering (AML), as well as risk management solutions.
REGULATORY BODIES IN INDIA’S FINTECH SECTOR
Reserve Bank of India (hereinafter referred to as the “RBI”), oversees the payments and settlement activities and is the major regulator of the fintech industry in India. The RBI also regulates cross-border and foreign exchange transactions. Moreover, it supervises the Credit Information Companies and other financial players in the ecosystem, including banks, Non-Banking Financial Companies, etc.
There are other regulators, like the Securities and Exchange Board of India, the Insurance Regulatory and Development Authority, the Ministry of Electronics and Information Technology, and the Ministry of Finance, that govern and regulate the respective and relevant areas of fintech.
FINTECH REVOLUTION IN INFIA
The growth of Fintech in India is driven by various factors:
i. Government Initiatives
Government support has been essential, both in terms of regulation and in terms of offering vital enabling support. Whether it is digital literacy and financial programs or broadband infrastructure to improve internet access in rural regions, numerous government initiatives have propelled the expansion of the Fintech business in India. These include the National Common Mobility Card (NCMC), Startup India, Digital India program, India Stack, E-RUPI, licenses for payments banks, Jan Dhan Yojana, recognition of peer-to-peer lenders as NBFCs, etc.
A Joint Working Group on Fintech was established bilaterally between India and UK and also between India and Singapore to promote fintech solutions and payment linkages. The government has also established a number of other mechanisms to help the growth of fintech in India.
ii. Investment in India’s Fintech Sector
India ranks among the largest and fastest-growing Fintech markets in the world due to the country’s recent rapid expansion of its Fintech ecosystem. The total volume of Fintech funding was US$20.8 billion up till June 2021, with US$8.6 billion, or 36% of the total, raised in the previous two years.
India topped amongst Asia-Pacific (APAC) nations in Fintech investment in 2020 with 121 deals, despite disruptions in the financial sector caused by COVID-19.
iii. Demographic opportunities in India
According to data from the Telecom Regulatory Authority of India, the total number of internet users in India increased from 795.18 million at the end of December 2020 to 825.30 million at the end of March 2021, with a growth rate of 3.79 percent.
According to the estimates, the Indian Fintech Market will add 140 million middle-income and 21 million high-income households by the year 2030.
iv. Technological advancements
The Fintech Industry is driven by three major technological elements like talent pools, more bank-Fintech collaboration, and technical advancements..
The technology is used to improve efficiency in procedures including payments, claims processing, and savings marketplaces through e-KYC, video KYC, digital signatures, etc. Additionally, these technological developments secure the transactions by use of biometric identification verification methods like voice, face, and iris scanning etc.
FUTURE OF FINTECH IN INDIA
Major initiatives like credit on UPI and card on file tokenization are set to have a significant impact on digital payments and the fintech landscape. The fintech companies offer to create financial services ecosystems to achieve profitability in the crowded private fintech payments market as RBI and National Payments Corporation of Inida (hereinafter referred to as the “NPCI”) aim to build on consumer data privacy and open banking. With NPCI’s current discussions for RuPay and UPI with 30 nations, the success of the payments sector has catapulted the Indian Fintech field into the international spotlight.
The transparency and personalization made possible by technology are expected to lessen fear and increase the need for insurance. Distribution by bundling with other services will be a key source for identifying consumer insurance needs, increasing awareness of insurance goods, and increasing sales of insurance products.
AMLEGALS REMAKRS
Fintech companies have provided the Indian banking sector with access to a broader market at a lesser cost. The country has successfully established a fintech-friendly environment. With every step forward in the Fintech, the world moves closer to financial inclusion for all. The basic financial services are being made available to the unbanked and under-banked populations, revolutionizing their savings habits and pulling them out of poverty.
Emerging financial technology has transformed and revolutionized the financial system in developing countries like India. The country faces common challenges that slow down the adoption of fintech, including a lack of digital financial literacy and weak data privacy and security regulations. The fintech startups must optimize the opportunities to foster innovation, attract and channel talent, and catalyze economic growth. Hence, once the development and revolution of the fintech sector starts, it would lead to better opportunities for all and financial inclusion for all.
– Team AMLEGALS assisted by Ms. Shreya Verma (Intern)
For any queries or feedback, please feel free to get in touch with himanshi.patwa@amlegals.com or tanmay.banthia@amlegals.com.
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