72% of Indian consumers are using digital technology to make payments and transfer cash. Government policies have led financial inclusion to grow up to 78% in 2017. Currently, FinTech software market in India reaches $ 1.2 billion and is estimated to touch double at a CAGR of 22% by 2020.
- Definition / Scope
- Market Overview
- Market Risks
- Top Market Opportunities
- Market Drivers
- Market Restraints
- Industry Challenges
- Technology Trends
- Pricing Trends
- Regulatory Trends
- Other Key Market Trends
- Market Size and Forecast
- Market Outlook
- Technology Roadmap
- Distribution Chain Analysis
- Competitive Landscape
- Competitive Factors
- Key Market Players
- Strategic Conclusion
Definition / Scope
Globally, technology is leveraging a wave of disruption in finance that is changing the value chain and how services are offered. Fintech is a relatively new industry in India, but its rapid growth and potential impact both on the financial sector and on the general population mean that it has garnered a lot of attention.
“Fintech,” stands for financial technology, or technology used for the financial sector, and comprises of multiple things – use of technology such as: artificial intelligence, blockchain, virtual reality, machine learning, cloud-based software – which are enabling financial institutions to redefine their value propositions and allowing them to expand their reach without having to incur significant costs.
In India especially, Fintech is a startup trend that is upsetting the structured format of traditional financial companies such as banks, mobile payments, money transfers, and asset management.
According to Financial Stability Board (FSB), of the BIS, “FinTech is technologically enabled financial innovation that could result in new business models, applications, processes, or products with an associated material effect on financial markets and institutions and the provision of financial services”.
Companies like Infosys, Wipro, and TCS are the major players in the supply side to provide back-end services to banking institutions. FinTech sector is divided into B2C and B2B. B2C platforms like Paytm, clearTax, bankbazaar, policy bazaar, mobiKwik, etc. are mainly providing personal finance, lending, insurance, and payment service while companies like Lenddo, Unocoin, FIXNIX, etc. are serving into the B2B platform.
FinTech Sub-domains: Technology adoption in India has increased tremendously over the last two years. According to EY’s FinTech Adoption Index 2017, 72% of India consumers are using digital technology for money transfer and payments comparing only 50% of global consumers adopt financial technology for this service.
Similarly, 20% of Indian consumers are adopting FinTech for financial planning while globally consumers using such service represent only a half comparing to India. This is exactly the same case when it comes to borrowing activity. For insurance-related service, only 20% of consumers adopt technology globally but the number is just double in India.
Payment is the foremost adoption of FinTech with the ease of mobile internet at an affordable cost. Initially, FinTech companies entered in a niche market as a system lock-in ( e.g. Paytm with Uber, AirtelMoney for phone bills). Now they are covering the most of financial service value chain. Within the payment domain, BharatQR and UPI are driving interoperability and real-time processing.
Offers and loyalty at PoS are helping align customers towards digital payments. Financial services are provided through digital channels by leveraging technology replacing the need for a financial manager. FinTech-led financial planning and advisory in India is still at a nascent stage but has tremendous potential for growth, fueled by its discovery of new customer segments and product/service offerings. Previously planning software used to act as advisor calculator but presently it is acting as a collaboration tool.
Saving and Investment, third domain though form a core business for traditional financial companies, startups are disrupting this space to capture the pie. Paytm, for instance, in partnership with MMTC-PAMP, launched an offering in April 2017 allowing customers to convert their surplus balances into digital gold assets, with a choice to get the digital gold in the account converted to minted coins and delivered at their doorstep. It is also planning to offer swipe in /swipe out facilities to liquid money market funds from a customer’s savings account
Finally, the LendingTech and InsuranceTech companies primarily have been acquiring customers by providing information on awareness, product comparison, and somewhat allowing to purchase policies online. They are heavily investing in AI/Machine Learning techniques to make their tools automatic and full-fledged.
Cybersecurity: As the financial institutions are innovating towards digitization from their conventional system, there arises the risk of identity fraud. New identities are being created using fabricated data attacking the privacy of the person and loss to the institution as well. The challenge will be balancing safety with customer convenience.
FinTech driving new business model: Based on a research conducted by PwC, up to 28% of Banking and Payment Businesses and up to 22% Insurance, Asset Management, and Wealth Management businesses will be on the brink of risk by 2020 as new business models are transforming these businesses.
Before the disruption in financial services for a long time, new market entrants were facing it difficult to get into the financial service industry. Only the incumbents had competencies in size, network, and experience. But this has come to an end as FinTech startups have been attacking some of the key elements in its value chain damaging the business of incumbents.
Top Market Opportunities
There is a huge opportunity for fintech to improve the delivery of financial services to the consumers. Demand is there at every level of consumer for better, cheaper, varied and more accessible financial services. Demand spectrum presented below shows the scope of FinTech in India.
40% of India’s population is yet to be covered under financial, and as an emerging nation witnessing high growth in digital penetration, it makes India an exciting global space for Fintech. Government policies such as “Pradhan Mantri Jan Dhan Yojana” (PMJDY) have boosted financial inclusion that grew from 54% to 78% in between 2014 to 2017.
In addition to PMJDY, the Indian government has enacted initiatives to expand the quality and delivery of Digital Financial Services (DFS) through Aadhaar biometric identification. Aadhaar cards are linked to mobile phones, SIM cards, and financial service accounts to improve delivery of government schemes and benefits.
Numerous factors can be attributed towards the growth in demand for fintech in India – these include rapidly expanding internet and mobile penetration, emergence of a younger, wealthier and digital-savvy generation, large gaps and inefficiencies in the financial sector that technology can help to fill, and a regulatory and academic environment which is supportive of the growth of the sector.
Lower cost of providing services to underbanked and unbanked customers is a major opportunity for FinTech companies. In the backdrop of diverse demographics in terms of literacy, age and region in India, FinTechs with focus on user experience can provide the impetus for financial inclusion.
Increasing Investments: Investments in FinTech tripled in 2014 globally, reaching $12 billion. In contrast, banking institutions spent $215 billion on IT infrastructure worldwide.
Firstly, the absence of broad-based financial transaction infrastructure, which has been a major challenge as several Indians in rural parts of India does not have bank accounts, credit score, and home ownership details.
This has played a vital role in the lack of financial services penetration. Due to the lack of relevant financial data, the risk of lending to millions of undocumented and unverifiable Indians is very high even though they satisfy the income sufficiency test.
Secondly, as the native digital and financially literate population are low, the current set of financial products and services do not cater to the vast majority of Indians and are only designed for the top 40 million of the population. There are about 400 million Indians who earn between USD 3,000 to USD 15,000 a year and their needs have not been addressed yet.
Risk Management: There is equal challenge of risk management to fintech companies as that of financial service providers. Fintech firms though tend to equip better tools and skills, but lack the armies of professional risk managers that big financial institutions employ.
Fintech customers expect real-time response which means that risk management must be able to assess risk automatically. There is no doubt that intelligence is revolutionizing the process, risk management will be the key to their success.
- Banks are using Deep Learning; component of Machine Learning for targeting customers by analyzing digital footprints of their interests and recent online purchases.
- Predictive analytics platform can provide a 360-degree view of clients and related parties, ensuring reuse of existing due diligence and consistent treatment across jurisdictions and lines of business.
- Government is promoting every aspect of digital payment to achieve financial inclusion while FinTech companies are disrupting towards discontinuous innovation.
Major Technology Trends
Instant Payment: UPI (Unified Payment Interface) has changed the way people make payment in India. It is an initiative launched by the Government of India where anyone registered on UPI and having a valid UPI ID can now make payments on any e-commerce applications. National Payment Corporation of India (NPCI) has considered UPI as a game- changer in India.
NPCI is an umbrella organization for all payments in India operating UPI platform as well. BHIM (Bharat Interface for Money) is another new product development by NPCI that is built on UPI platform. UPI 2.0 is an upgraded version of older UPI that is currently being used by most of the banks in India.
Some of the UPI apps are Axis Pay, SBI Pay, Tez App, BHIM App, and Phonepe App.
Mobile Wallets: With demonetization in India saw a rise in the use of mobile wallets for cashless transactions and proved to be the best innovation in the field of technology. When it comes to mobile wallet ranking Paytm tops the list. Paytm recorded unprecedented growth of 435 % at a time spurred by demonetization.
PoS machines: Use of PoS (point of sale) machines is growing as the government and retail companies are pushing for less-cash payments. As PoS machines are cheap, banks are pushing them in comparison to ATMs, which require large investments.
Artificial Intelligence: AI (artificial intelligence) is making transactions more convenient and secure. AI can take digital payments to the next level. Experts believe that with the integration of all payment applications and the use of AI and machine learning, the digital payments landscape will undergo a paradigm shift in the next few years.
Indian customers mostly price sensitive. For the price-sensitive Indian market, InsureTech players are helping develop usage-based as well as performance-based pricing models.
For example, there is mobility as well as telematics sensor-based solutions that capture driver behavior, vehicle location, and status in real time. These data sets can then be analyzed to predict a driver’s behavior, insurance price, customer retention and cargo safety, allowing insurers to model and price risk effectively.
To meet the objective of financial inclusion and considering India’s geographical spread and the challenges inherent in creating physical (financial services) infrastructure, the regulatory bodies like Reserve Bank of India and Insurance Regulatory Development of India (IRDAI) have been pushing the use of digital modes of transaction.
The Government of India launched the Pradhan Mantri Jan Dhan Yojna14 in 2015 with the aim of opening basic bank accounts for every Indian. The scheme envisages providing an overdraft facility after six months, as well as a debit card with inbuilt accident insurance.
Over the past five years, NPCI has led the substantial effort and investment in developing the national payments infrastructure and technology platforms such as UPI, Unstructured Supplementary Service Data (USSD), Bharat Interface for Money (BHIM), Bharat QR, and Aadhaar Enabled Payments System (AEPS) to strengthen interoperability among banks.
RBI also has liberalized the Know Your Customer (KYC) requirements for low-value wallets and customer authorization mechanism for low-value retail payments, thus keeping intact the core proposition of ease and simplicity.
A new set of differentiated banking licenses (payments banks) have been issued to a host of players from diverse areas such as wallets (Paytm) / pre-paid instruments, telecom players (Vodafone, Airtel) as well as India Post, to democratize payments for economies of scale.
India Stack Through the introduction of India Stack, the government has provided a world-class technological framework to entrepreneurs, innovators, and corporations, allowing for the accelerated growth of FinTech ventures.
Jan Dhan Yojana Financial inclusion in the country has grown significantly due to initiatives like the Pradhan Mantri Jan Dhan Yojana (PMJDY), regarded as the world’s biggest financial inclusion program, with an aim to facilitate the creation of bank accounts for large underserved or unserved sections of India’s billion-plus population.
Regulations to promote a cashless economy and curb fraud Key Highlights:
- The regulatory framework will focus on protecting consumer interests and addressing issues related to consumer grievances and liabilities in case of frauds through e-channels.
- Previously in 2012, the RBI had released a ‘Payment System Vision Document 2012-15′ with a vision to “proactively encourage electronic payment systems for ushering in a less-cash society in India”. The document proposed several “ways and means of ensuring that payment and settlement systems in the country are safe, efficient, interoperable, authorized, accessible, inclusive and compliant with international standards”.
- A white paper had also been put up for comments in 2013 to reduce incentives for using cheques beyond a certain limit.
The launch of central KYC system and simplification of KYC norms34
A common Know Your Customer (KYC) form has been introduced for availing all types of products and services offered by all financial services providers under the jurisdiction of RBI, SEBI, and IRDAI. The customer needs to fill up this form only once, after which he/she is assigned a 14-digit identifier to be used while availing more products and services of the same or other providers.
The financial service providers are expected to upload the data from this common form with a central agency called the Central Registry of Securitisation Asset Reconstruction and Security Interest of India (CERSAI).
The RBI has simplified KYC norms significantly including Single document for proof of identity and proof of address, no separate proof of address required for current address
The RBI regulates the mobile and online payment sector under the Payments and Settlement Act of 2007 and the Payment and Regulations Act, 2008.
Other Key Market Trends
Previously, FinTech companies were mostly tapping into the banking industry. But nowadays, new start-ups are innovating and creating a value proposition that caters the need of various industry.
Start-ups such as Paytm, Phonepay, FreeCharge, etc. are operating as digital payments platform whereas Policybazaar, Walnut, Paisabazaar, etc. are simplifying and managing financial activities not limited to banking transactions.
Mobile Bank: Paytm now has transformed completely into diversification as banking on phone for a convenient service. This massive innovation in digital banking is the outcome of growing adoption in a mobile experience.
Market Size and Forecast
Indian FinTech software market is forecasted to touch $2.4 billion by 2020 from a current $1.2 billion, as per NASSCOM study.
Mobile wallet market is forecast to reach $4.4 billion by 2022 with a compound annual growth rate of more than 148%.
Steadily rising at a Compound Annual Growth Rate (CAGR) of 7.1%, the global FinTch market will hit USD 45 billion by 2020.
In relative terms, FinTech is a new industry in India. Around 64% of companies in the sector have been in business for a period close to 36 months only, with median employee strength of 14. Besides, 61% of founders of these companies are below the age of 40. As of FY2016, Indian FinTech startups were valued at USD 1.2 billion and are projected to be double the value by 2020.
According to NASSCOM, the Indian fintech market is expected to grow at a CAGR of 22 percent for the next five years. Another KPMG report states that the transaction value for the Indian fintech sector was estimated to be approximately $33 billion in 2016 and is expected to reach $73 billion by 2020.
The payment landscape is undergoing unprecedented transformation and companies are altering their archive systems with a strong focus on data analytics.
Firstly, one of the most innovative initiatives to come out of India is Aadhaar, which acts as the core for India Stack initiative. ‘India Stack’ is a term used to explain a set of public APIs targeted at customer verification, digitizing identity, payments and secure personal digital content. It is led by iSPIRT, a non-profit industry body working with various volunteer 21 technology leaders, regulators and government agencies.
The very base of India stack is Aadhaar – the national digital ID program. Aadhaar extends to a billion Indians a powerful biometric database that can be accessed by any service provider. This is a huge milestone for India as until recently millions of Indians had no formal government identification.
The second innovative initiative is the Unified Payments Interface (UPI) with the aim to transform payments. It is an open API that banks can deploy to allow phone-to-phone payment transfers directly from bank accounts.
Distribution Chain Analysis
Indian FinTech ecosystem is growing mainly driven by mutual growth among various players. Mainly investors and start-ups are triggering the vibrant digital ecosystem in India.
Start-ups are aggregating products from the bank in a disruptive way while investors are funding money to expand their horizon. In addition, government and regulatory bodies have been launching various initiatives to support the companies in this sector.
Furthermore, the government is offering strong infrastructure for FinTech start-ups towards financial inclusion and enablement. Moreover, FinTech incubators and accelerators like Alibaba and PayPal are providing inducing environment for innovation and mentorship as well.
Finally comes the human resource part of the ecosystem. India offers a large fresh talent pool for Fintech companies from engineering background that has an estimated average of 850,000 graduate and post-graduate students from various fields of engineering in India.
Engineers from institutions such as the Indian Institute of Technology (IIT) and other world-class institutes constitute approximately 3.8% of the total Engineering graduates that are available for Fintech companies to hire.
In 2015, around 12,000 FinTech came up globally making up the total investment of $19 billion. It is expected that by 2020, the global investment by FinTech will be $45 billion, which is a steep rise of 7.1%. According to the NASSCOM reports, India has around 400 FinTech companies with the investment of around $ 1.7 billion till 2017.
A. Customer Intelligence: Financial service providers are feeding on data to examine behavioral attributes that lead to customer decisions. Hyper-connectivity also referred as Inter of Things (IoT) is giving companies key competency to be a market leader.
As a result, successful disruptors typically offer a better customer experience and greater convenience at a much lower price. This will intensify price competition and pressure on cost.
B. Advances in robotics and AI: Financial institutions are already using artificial intelligence (AI) to experiment with service that is far more personalized. Banks are piloting AI-based client advisors, where the AI engine is primed with the entire product manual, past call history, policy and procedures guidelines, and more, to provide context-based service to their customers.
AI, machine learning, and customer analytics are becoming the driver of client engagement over the next decade. Smart businesses will develop new forms of virtual engagement capable of integrating themselves into customers’ lives. They will stick because they will be personally informed by intelligence gathered from data about consumer behaviors, choices, and volunteered preferences.
C. Payment The payment space is the most competitive segment and provides a strong growth potential. The competitive payment space in India ranges from telecom companies, banks, wallet companies, e-commerce, and technology firms and is highly likely to include payment banks in the future.
Key Market Players
Here is the list of top 20 FinTech companies in India based on the money they have raised from investors;
1. Paytm Paytm is an e-commerce payment system created for online shoppers and digital wallet. It was founded in 2010 and recently diversified into digital banking and raised US$ 2.4 billion till 2018.
2. Policybaaar Policybazaar is a portal to compare insurance schemes from all major insurance companies. Since founded in 2008, it has raised US$ 277 million from various investors.
3. Pine Labs It is a retail POS (Point of Sale) solution company founded in 1998 that basically accepts card payment for merchants from its customers at POS through its device. Till 2018, it has raised US$ 207 million.
4. PhonePe PhonePe is a mobile payment app allowing users to hassle-freely transfer money and pays bills online without a burden of visiting a respective office. It is a newbie in Indian market founded in 2015 but raised huge investment up to US$ 184.1 million in a short span of time.
5. Lendingkart Technologies It offers tools leveraging on big data analysis to evaluate borrowers’ creditworthiness so that it could provide the risk-hedged loan to potential customers. It has acquired US$ 128.7 million money in just 4 years since started in 2014. 6. FreeCharge It is India’s digital payment platform especially for utility service payments and raised US$ 80.6 million till date.
FinTech is enabling the entire financial institution value chain to deliver a better value proposition in the Indian market. There are numerous start-ups rising across multiple business segments both B2B and B2C, predominantly in payment and lending space.
Blockchain though premature in India since its acknowledgment by RBI there is a significant opportunity of its application in the field of remittances, micro-transactions, financial inclusions, etc.
Consumer pattern is changing when it comes to payment patterns. Mobile payment and wallet industry is growing continuously. Start-ups are coming up with a seamless way to transfer money in a single click from Smartphone. UPI system initiated by the government is enabling customers to interoperate transactions with any vendors through their linked bank accounts.
In India, rapidly growing penetration of smartphones and internet has led to the emergence of multiple technologies for replacing cash, providing credit information for screening, enabling online lending and purchasing of financial products through digital means to cover entire population under the vision financial inclusion whereby at present only 145 million households have access to banking service.
The adoption of biometrics in banking is rapidly increasing to ensure proof of identity and prepare for potential cyber-attacks. Government and regulatory bodies have developed a strong financial infrastructure that is being leveraged for Fintech innovation. Also, there have been multiple policies and initiatives aimed at promoting financial inclusion and innovative banking services.
For the success of FinTech ecosystem, Government should work towards building digital infrastructure. Moreover, Government and Universities should build a strong technological and entrepreneurial talent pool by engaging incubators and academic bodies.
India provides a vast user base to startups as the population is rapidly adopting digital technology and hence, the scope for digital services is set to increase and the FinTech startups are likely to reduce costs and improve the quality of financial services.
- FSB- Financial Stability Board
- CAGR- Cumulative Annual Growth Rate
- KYC- Know Your Customer