[Yojana April Summary] Fintech Revolution – Explained, pointwise

Introduction

India’s Fintech sector has evolved at a remarkable pace in the past decade, and at present, India is in the middle of the Fintech Revolution. The once fully cash-dependant Indian economy has been transformed by the convenience and efficiency of digital services. As India moves ahead into the tech-decade —‘techade‘, that is inclusive of technologies, innovation ecosystem, human-centricity, and progressive policies, it will establish India’s fintech revolution for the world. Today, India is anchoring itself as a global hub for technology and innovation in the digital economy. In just two decades, the evolution of India’s fintech ecosystem has been extraordinary, and the outlook for the future is promising.

What is the meaning of Financial technology or Fintech?

Financial technologies (Fintech) include new technologies that seek to improve and automate the delivery and use of financial services.

Utility: To help companies, business owners and consumers better manage their financial operations, processes, and lives by utilizing specialized software and algorithms that are used on computers and smartphones. ​​​

Coverage: Fintech includes various sectors and industries such as education, retail banking, fundraising and nonprofit, and investment management, etc. Notably, Fintech also includes the development and use of crypto-currencies such as bitcoin.

What is the status of India’s fintech revolution?

India’s fintech revolution is at a population scale, exceeding those of most countries globally. For instance,

– BHIM UPI clocked over 3.2 billion transactions in July 2021, marking a game-changing penetration of digital payments in India. Similarly, UMANG App has witnessed cumulate 1.7 billion transactions.

-India is the 3rd largest FinTech ecosystem. Further, India has the highest Fintech adoption rate globally (87%).

-India is amongst the fastest growing Fintech markets in the world. Of the 2,100+ FinTechs existing in India today, over 67% have been set up in the last 5 years.

-The Fintech sector has 1,860 startups. As of December 2021, India has over 17 Fintech companies, which have gained ‘Unicorn Status’ with a valuation of over US$ 1 billion. A few important ones include Acko, Bharatpe, Mobikwik, etc.

-India is ahead of the US, UK and China combined when it comes to real-time online transactions, with 25.5 billion real-time payments recorded in 2020.

Overall, digital payments have grown 160x in India since 2003, and by 2025 Fintech sector is expected to add 26 lakh jobs and Rs 2.8 lakh crores in economic value.

Phases of India’s Fintech Revolution

Digital Payments 1.0 (Prior to 2010s): This was a period defined by the shift from cash to e-transfers. Cards and Real-Time Gross Settlement (RTGS) were the most popular means of payment.

By 2010, all digital payments combined saw an over 2x increase that was primarily driven by business transactions.

Limitations: a) Digital payments were limited to premium retail and B2B segments, b) lack of education for individual customers, and c) mobile and internet penetration was still in their early stages.

Note: RTGS was introduced around the year 2003-04 and recorded only 100 transactions in that year.

Digital Payments 2.0 (Between 2011-2016): This is the indicative phase of Indian
consumers’ ability to respond to the innovations in banking, Financial Services, and Insurance (BFSI).

During this period, the focus invariably shifted to the use of digital payments by individual consumers, and mobile banking. Credit and debit cards, new mobile banking applications, and greater digital transformation for the front, back and middle offices were witnessed enormous growth.

By 2013, digital wallets alone registered 3.3 crore transactions, and by 2016, mobile transactions overall grew 10x.

Digital Payments 3.0 (After 2016): With the demonetisation in late 2016, 86% of all cash in India was withdrawn from circulation. This disruption acted as a catalyst for further evolution.

This phase can be best described with technology and ecosystem advancement converging to push the next stage of exponential growth.

During this era, India started exporting fintech solutions, rural internet use outgrew urban usage, there was a record-high number of Person-to-Merchant (P2M) transactions, and fintech entered the mobile-commerce age. Hence, this phase is also called as ‘network effect’ era.

Upcoming phase, Digital Payments 4.0: This phase will focus on reaching the masses with low-cost solutions. In India, the volume of digital payments is expected to reach 54,800 crores by 2025, a 16x rise in just five years (since 2020). This will be driven by growth in digital commerce, personalised solutions, digital convergence, and regulatory innovation.

What are the contributing factors for India’s Fintech revolution?

(1) Surge in e-commerce and smartphone penetration; (2) Integrated ecosystem: All participants such as government agencies, financial and research institutions, and technology experts discussed the ideas and turn the market’s latent potential of fintech for business and economic growth; (3) Indian innovations: The Additional Factor of Authentication (AFA) through a PIN or OTP has been recognised globally as an Indian innovation responsible for relatively lowering the incidence of fraud; (4) Government’s philosophy of inclusion and innovation: The Government policies and regulations in the Fintech sector have followed the philosophy of inclusion and innovation. These include, (a) Jan-Dhan Yojana: The world’s largest financial inclusion initiative; (b) e-RUPI: for cashless payments; (c) India Stack: Public digital infrastructure based on open APIs; (d) FASTag: Online toll collection; (e) International Financial Services Centre Authority (IFSCA): – In the Union Budget 2021-22 the government has announced its support for the development of a world-class Fintech Hub at the GIFT – IFSC; (f) Multiple initiatives for financial literacy: Such as the government’s National Centre for Financial Education and RBI’s Centre for Financial Literacy project; (g) Infinity Forum: The forum will focus on how technology and innovation can be leveraged by the FinTech industry.

What are the challenges faced by the Fintech firms?

The threat of Data security: Data is the backbone of FinTech. Automation of processes and digitization of data make fintech systems vulnerable to attacks from hackers.

Data Privacy Issue: The most important questions for consumers pertain to the misuse of personal information and important financial data.

Challenges in regulation: The Fintech sector covers a wide diversity of offerings. Hence, it is difficult to formulate a single and comprehensive approach to regulate the entire Fintech sector. For this reason, In most countries, they are unregulated and have become fertile ground for scams and frauds.

Industry-Related Complexities: Fintechs are designed to work with a sophisticated working model. This makes it difficult for them to maintain a smooth relationship with other financial institutions like banks. Banks, on the other hand, have fear working with Fintechs as they are risking reputation loss.

Other challenges: (a) Despite immense scope for innovation, cross-border payments are still unchartered territory for FinTechs; (b) Inequality of access to FinTech services.

What can be done to facilitate the Fintech revolution further?

Implementing the recommendations of the steering committee: The Government of India has constituted a steering committee on fintech-related issues. The committee submitted its report in 2019. Few major recommendations include,

-Framing a comprehensive legal framework for consumer protection as there is a rise of fintech and digital services.

-Adopting regulation technology (or RegTech) by all financial-sector regulators for making compliance with regulations easier, quicker, and effective.

Policy support in the area of data security and fraud management: The use of new technologies like Blockchain, geo-fencing or geotagging, or the implementation of a framework to prevent QR-code-based phishing attacks can be a step forward in ensuring a secure and stable digital financial ecosystem.

Greater customer awareness: Awareness should be created, and digital literacy must be improved to understand and analyse the pros and cons of fintech services. It will help customers to make informed choices.

Protect the data: With rising fintech platforms, there is a requirement for a strong data protection framework in India. The government must pass the personal data protection bill to protect the data.

Promote further financial inclusion: India needs to continue building the payments infrastructure and facilitate offline payments, inclusive for cities that fall into the categories Tier 3 and below.

Other reforms: These include a) Simplify the KYC policy for merchants and customers, b) Creating a coordinated response to facilitate a high degree of interoperability amongst startups and c) Catering to market demand and changing attitudes in the Fintech space.

In the last seven and half decades, India has made a tremendous leap to become a robust digital economy. Winning the techade, India must build on its digital advantage and pivot towards a more data-driven structure of governance to create a more inclusive, sustainable, and impact-led innovation in the Fintech sector.