The Evolving Fintech Ecosystem in India
Home to more than 2,100 fintech companies, India is one of the world’s largest fintech markets, after the US, China and the UK. India’s fintech industry valuation is estimated to go beyond $150-160 billion by 2025, according to Economic Times.
With an explosive boom especially in the last 5-6 years, fintech has now started to be an indispensable part of people’s lives. The shift from traditional transactions to digital transactions has opened a plethora of opportunities for businesses, small borrowers, financial institutions, and SMEs alike.
As of today, the Salient points about Fintech Ecosystem in India are
With an explosive boom especially in the last 5-6 years, fintech has now started to be an indispensable part of people’s lives. The shift from traditional transactions to digital transactions has opened a plethora of opportunities for businesses, small borrowers, financial institutions, and SMEs alike.
As of today, the Salient points about Fintech Ecosystem in India are
- FinTech industry valued at $50-60b in FY20
- Raised funds of $10b+ over the past 5 years
- There are ~2100 FinTechs in India with 67% being set up in last five years
- India saw the 3rd/5th largest FinTech Investments in the word in FY19/20
- India saw FinTech investment of ~$10.7b with ~56% in payment space;
- FY21-25 to see investments worth ~25b with other segments being major contributors
Predominant Growth Drivers
India has seen phenomenal growth in new startups across Payments, Lending, Wealth and
Others which can be primarily attributed to the following factors:
Others which can be primarily attributed to the following factors:
- Demonetization in 2016
- Solving for identity in the form of Aadhaar (UID) for formalization
- Getting everyone a bank account or equivalents (PMJDY) to store money
- Building scalable platform(s) to move money (IMPS, UPI, BBPS, etc.) and
- Allowing banks and FinTech companies and wealth/insurance/ lending players also to access platforms like UPI, GSTIN & Digi locker to innovate.
Lending (1/2)
Lending can be broadly divided into two key subsegments – digital lending and intermediaries. Both the segment use data and technologies like artificial intelligence and machine learning for screening and advancing loans and providing aggregation services.
i) Digital Lenders
a) Retail Lending (Direct to Consumer FinTechs): The retail lending segment generally involves a suite of services like personal loan, loan against salary/pay day loans, gold loans amongst others.
b) Merchant Lending (Direct to Businesses FinTechs): FinTechs generally tend to focus on fulfilling the credit needs of the underserved and untapped segment. According to a news article, only 16 per cent of MSMEs in India receive formal credit leaving more than 80 per cent of these companies under-financed or financed through informal sources
ii) Intermediaries
a) P2P Platforms: P2P platform aggregates lenders and borrowers, facilitates matching of lenders with borrowers. The lenders earn an interest rate based on the profile of borrower.
b) Aggregators: Aggregators list all the lenders and allows borrower to compare and find the most suitable lender according to their
requirement.
i) Digital Lenders
a) Retail Lending (Direct to Consumer FinTechs): The retail lending segment generally involves a suite of services like personal loan, loan against salary/pay day loans, gold loans amongst others.
b) Merchant Lending (Direct to Businesses FinTechs): FinTechs generally tend to focus on fulfilling the credit needs of the underserved and untapped segment. According to a news article, only 16 per cent of MSMEs in India receive formal credit leaving more than 80 per cent of these companies under-financed or financed through informal sources
ii) Intermediaries
a) P2P Platforms: P2P platform aggregates lenders and borrowers, facilitates matching of lenders with borrowers. The lenders earn an interest rate based on the profile of borrower.
b) Aggregators: Aggregators list all the lenders and allows borrower to compare and find the most suitable lender according to their
requirement.
Lending (2/2)
Regulations governing the Lending FinTechs in India
Digital Lenders
P2P Lenders
Trends in Lending Segment:
Today the digital lending segment is focusing on needs of underserved and underfunded businesses and individuals. As per BCG estimates the total market size for FinTech lending is estimated to be US$ 1 Tn (INR 72 Tn) by 2023. The FinTechs in the lending segments are focusing on reduction of delinquencies in the loan books, raising funds at lower costs, targeting/screening customers using AI and ML to determine their credit worthiness. Some likely trends that are and may emerge within this industry are as follows:
Digital Lenders
- Nodal Authority: RBI
- Compliance: Compliance with set of Master directions & circulars governing NBFC licensing and service in India
- FDI: 100% Allowed
- Minimum Capital : NA
P2P Lenders
- Nodal Authority: RBI
- Compliance: Compliance with ‘Master Directions - Non-Banking Financial Company – Peer to Peer Lending Platform (Reserve Bank) Directions, 2017’ (“P2P Directions”)
- FDI: 100% Allowed
- Minimum Capital : INR 2Cr
- Deposit and Lending Restrictions: P2P lender cannot raise deposit or loans; cannot lend on unsecured basis.
- Exposure Limits on the Platform - Same lender and borrower - INR 50,000; Lender or borrower across all P2P lending platforms - INR 10 lacs
Trends in Lending Segment:
Today the digital lending segment is focusing on needs of underserved and underfunded businesses and individuals. As per BCG estimates the total market size for FinTech lending is estimated to be US$ 1 Tn (INR 72 Tn) by 2023. The FinTechs in the lending segments are focusing on reduction of delinquencies in the loan books, raising funds at lower costs, targeting/screening customers using AI and ML to determine their credit worthiness. Some likely trends that are and may emerge within this industry are as follows:
- Increasing Partnership between Lending FinTechs and Large Banks or NBFC
- Technology adoption fuelling financial inclusion at a greater pace
- Increase in use of data analytics with the help of AI and Machine learning will enable the lending companies with predictive capability
- Emergence of trusted independent platform for credit underwriting
Payments (1/2)
Digital payments FinTech have been the most funded and torch bearer of FinTech revolution in India. Innovations like UPI, biometric payments, e-wallets are a testimony of forward thinking of the RBI and the governments which has led to the payments revolution in India.
Factors such as cut in merchant discount rates, adoption of NFC payments which enables transaction with a tap and UPI 2.0 with features like linking of overdraft, invoice in the inbox and others have led to faster adoption of digital payments by merchants and users.
i) Prepaid Payment Instruments:
Accordingly, the FinTech landscape consists of semi-closed and open system PPIs only.
ii) Mobile and Digital wallets (Payment Aggregators): Digital Wallets are like a virtual Pre-Paid Card where you can store value the money for usage. It also allows access to link your bank account, Credit card or Debit Card to make transactions in an easy, effortless manner
iii) Payment gateway: Payment gateways are a platform which allows an entity to receive payments on their website. Some start-ups are further integrating their core payment gateway business with a suite of cash management services and other banking services to help their small and medium enterprise (SME) customers.
iv) Payments Bank: Payments banks is an Indian new model of banks. These banks can accept a restricted deposit but cannot issue loans or credit cards. Payments bank provide online and mobile banking.
v) Innovative and proximity payment solutions providers: These payment platforms are enabling payments through sound waves, scanning, tapping like NFC payments, Tap payments on credit and debit cards, etc. This allows for contactless payments services.
vi) Peer to Peer (P2P): Enables direct transfer of funds between two people without having to store money in a digital wallet thereby enabling quicker transactions
Factors such as cut in merchant discount rates, adoption of NFC payments which enables transaction with a tap and UPI 2.0 with features like linking of overdraft, invoice in the inbox and others have led to faster adoption of digital payments by merchants and users.
i) Prepaid Payment Instruments:
- Closed System PPIs: These are PPIs issued by an entity for facilitating the purchase of goods and services from that entity only. No cash withdrawals are permitted. These instruments cannot be used for payment or settlement for third party services. The issuance and operation of such instruments is not classified as a payment system and does not require approval / authorisation from the RBI.
- Semi-closed System PPIs: These are PPIs issued by banks (approved by RBI) and non-banks (authorised by RBI) for purchase of goods and services, including financial services, remittance facilities, etc., for use at a group of clearly identified merchant locations / establishments which have a specific contract with the issuer (or contract through a payment aggregator / payment gateway) to accept the PPIs as payment instruments. These instruments do not also permit cash withdrawal, irrespective of whether they are issued by banks or non-banks.
- Open System PPIs: These are PPIs issued by banks (approved by RBI) for use at any merchant for purchase of goods and services, including financial servic es, remittance facilities, etc. C ash withdrawal at ATMs / Points of Sale ( oS) terminals / Business Correspondents (BCs) is also allowed through these PPIs.
Accordingly, the FinTech landscape consists of semi-closed and open system PPIs only.
ii) Mobile and Digital wallets (Payment Aggregators): Digital Wallets are like a virtual Pre-Paid Card where you can store value the money for usage. It also allows access to link your bank account, Credit card or Debit Card to make transactions in an easy, effortless manner
iii) Payment gateway: Payment gateways are a platform which allows an entity to receive payments on their website. Some start-ups are further integrating their core payment gateway business with a suite of cash management services and other banking services to help their small and medium enterprise (SME) customers.
iv) Payments Bank: Payments banks is an Indian new model of banks. These banks can accept a restricted deposit but cannot issue loans or credit cards. Payments bank provide online and mobile banking.
v) Innovative and proximity payment solutions providers: These payment platforms are enabling payments through sound waves, scanning, tapping like NFC payments, Tap payments on credit and debit cards, etc. This allows for contactless payments services.
vi) Peer to Peer (P2P): Enables direct transfer of funds between two people without having to store money in a digital wallet thereby enabling quicker transactions
Payments (2/2)
Key Players in the Indian payment Industry are
Regulations Governing Payments in India:
The Payment system in India is regulated by the Payment and Settlement Systems Act, 2007 (“P&SS Act”). The P&SS Act has designated the RBI to act as an enabler to regulate and supervise the payments system in India. A “payment system” is defined to mean a system that enables payment to be effected between a payer and a beneficiary, involving clearing, payment or settlement service or all of them, but does not include a stock exchange. Systems enabling the operation of credit or debits cards, smart cards, prepaid payment instruments qualify as payment systems.
The Digital payment FinTechs have been the flag bearer in the Indian FinTech space despite India being a cash preferring society. A major push in digital payments is caused due to proactive government measures. While Demonetization is a thing of the past, the government is focusing on systematic reduction of cash payments. The government has introduced Radio Frequency Identification (RFID) based Fastag system which enables toll payments directly from the prepaid or savings account linked to it or directly toll owner.
- Mobile Wallets: Paytm, Mobikwik, Freecharge
- Payments Gateway: CCAvenue, Razorpay, PayUmoney
- Payments Solutions Providers: BharatPe, Ezetap
- P2P: PhonePe, GooglePay, WhatsappPay, AmazonPay
- Payments Bank: Airtel Payments Bank, Paytm Payments Bank
Regulations Governing Payments in India:
The Payment system in India is regulated by the Payment and Settlement Systems Act, 2007 (“P&SS Act”). The P&SS Act has designated the RBI to act as an enabler to regulate and supervise the payments system in India. A “payment system” is defined to mean a system that enables payment to be effected between a payer and a beneficiary, involving clearing, payment or settlement service or all of them, but does not include a stock exchange. Systems enabling the operation of credit or debits cards, smart cards, prepaid payment instruments qualify as payment systems.
The Digital payment FinTechs have been the flag bearer in the Indian FinTech space despite India being a cash preferring society. A major push in digital payments is caused due to proactive government measures. While Demonetization is a thing of the past, the government is focusing on systematic reduction of cash payments. The government has introduced Radio Frequency Identification (RFID) based Fastag system which enables toll payments directly from the prepaid or savings account linked to it or directly toll owner.
IsureTech
InsurTech landscape is quite nascent in India at this stage. The current insurance penetration is quite low, i.e. 2.76% in life insurance and 0.93% in non-life insurance compared to the global average of 6.5%.
The key trends in InsurTech entails the following:
Digital Insurance Advisors : Theses are aggregator platforms that enable customers to search, compare, find and buy insurance products at affordable premiums from multiple carriers. As per IRDAI, the number of web aggregator platforms has increased from 11 in 2013 to over 25 in 2019. PolicyBazaar, Coverfox are major players in this domain
The Digital Insurers: They are adopting the practice of offering insurance policies to customers on the point of purchase of a product or services thereby gaining access to large ecommerce consumers. Further they are not only focusing on issuance of policies but also claim initiation and settlement digitally which enhances overall customer satisfaction. Certain startups focus on developing platforms that digitalize claims process using technology that provides quicker Payouts. Digit ad Acko are major Players as Digital Insurers.
Regulations: the IRDAI has issued Insurance Regulatory and Development Authority of India (Insurance Web Aggregators) Regulations, 2017 (“Web Aggregators Regulations”) with the objective to supervise and monitor Web Aggregator as an insurance intermediary who maintains a website for providing interface to the insurance prospects for The Web Aggregators Regulations lay down the eligibility criteria for registration as Insurance Web Aggregator, Minimum Capital and Networth requirements, Activities to be undertaken, Remuneration and other directives as required.
InsurTech is changing the entire landscape of insurance industry. InsurTech not only focuses on issuance of policy digitally but also on aggregation of details of various insurance policy providers, claim settlement and also the new age context based insurance policy (Sachet insurances) which enables policy holder to be protected against a specific situation. To maintain profitable growth and to make sure that the products reach the target audience, insurers and intermediaries to maintain profitable growth and to make sure that the products reach the target audience, insurers and intermediaries have started partnering with service providers to form mutually beneficial relationships and design the products for mass appeal with customizations.
The key trends in InsurTech entails the following:
Digital Insurance Advisors : Theses are aggregator platforms that enable customers to search, compare, find and buy insurance products at affordable premiums from multiple carriers. As per IRDAI, the number of web aggregator platforms has increased from 11 in 2013 to over 25 in 2019. PolicyBazaar, Coverfox are major players in this domain
The Digital Insurers: They are adopting the practice of offering insurance policies to customers on the point of purchase of a product or services thereby gaining access to large ecommerce consumers. Further they are not only focusing on issuance of policies but also claim initiation and settlement digitally which enhances overall customer satisfaction. Certain startups focus on developing platforms that digitalize claims process using technology that provides quicker Payouts. Digit ad Acko are major Players as Digital Insurers.
Regulations: the IRDAI has issued Insurance Regulatory and Development Authority of India (Insurance Web Aggregators) Regulations, 2017 (“Web Aggregators Regulations”) with the objective to supervise and monitor Web Aggregator as an insurance intermediary who maintains a website for providing interface to the insurance prospects for The Web Aggregators Regulations lay down the eligibility criteria for registration as Insurance Web Aggregator, Minimum Capital and Networth requirements, Activities to be undertaken, Remuneration and other directives as required.
InsurTech is changing the entire landscape of insurance industry. InsurTech not only focuses on issuance of policy digitally but also on aggregation of details of various insurance policy providers, claim settlement and also the new age context based insurance policy (Sachet insurances) which enables policy holder to be protected against a specific situation. To maintain profitable growth and to make sure that the products reach the target audience, insurers and intermediaries to maintain profitable growth and to make sure that the products reach the target audience, insurers and intermediaries have started partnering with service providers to form mutually beneficial relationships and design the products for mass appeal with customizations.
WealthTech
WealthTech is categorised as products and services offerings ranging from financial services software, investment platforms, online investing tools and robo-advisors to digital brokerages. WealthTech players leverage advanced technologies such as AI and analytics to transform traditional investment and wealth management services. India has over the years witnessed a rise in working and wealthy population and accordingly has seen massive advancements in the WealthTech space.
The WealthTech Segment majorly includes the following:
The SEBI has undertaken various initiatives to ensure that Wealthtech as a sector in India flourishes under regulatory watch. These initiatives include:
These steps, coupled with various other initiatives undertaken by the Government, is aimed at ensuring ease of doing business by the Wealthtech firms within the regulatory framework, while trying to reach to the vastly penetrated Indian Wealth Management Market.
As per recent reports, the Indian WealthTech market is expected to grow to about US$ 63 Bn by 2025 from currently US$ 20 Bn. Wealthtech is not only enabling digital and hassle free onboarding but it is also providing increased visual insights, providing informative analysis and a transparent operating system which is leading to quicker adoption of this technology.
The WealthTech Segment majorly includes the following:
- Investment Platform: These are digital platforms that are designed to invoke investments/interest from retail investors. They enable users in their investing activities without the intervention of a broker or other middlemen. Examples: ET Money, Paytm Money
- Robo Advisor: Robo-advisors are automated services that offer users advice on investment options based on risk appetite, requirements and goals. The platform is enabled by machine learning and artificial intelligence. Examples: Kuvera, Scrip box
- Thematic investing: An increased participation of retail investors in the financial markets have led to start-ups that focus on enabling retail investors with tools and data that allow them to create customized baskets of stocks reflecting their strategy and views on the market. Example: Tredlyne
- Digital discount brokers: Start-ups have created tech-first, low-cost brokerage offerings to empower retail investors and traders with the right tools for investing. Examples: Zerodha, Upstox, Groww
The SEBI has undertaken various initiatives to ensure that Wealthtech as a sector in India flourishes under regulatory watch. These initiatives include:
- Regulatory Sandbox for WealthTech firms to experiment on pilot basis
- Allowing e-commerce entities to sell Mutual funds from their platforms
- Permitting investments into Mutual Funds through payment FinTechs, albeit with a cap on the investment amount
These steps, coupled with various other initiatives undertaken by the Government, is aimed at ensuring ease of doing business by the Wealthtech firms within the regulatory framework, while trying to reach to the vastly penetrated Indian Wealth Management Market.
As per recent reports, the Indian WealthTech market is expected to grow to about US$ 63 Bn by 2025 from currently US$ 20 Bn. Wealthtech is not only enabling digital and hassle free onboarding but it is also providing increased visual insights, providing informative analysis and a transparent operating system which is leading to quicker adoption of this technology.
Section - 9
We have reimagined the ways how the process of new age policy making would be.
Over the last decade, the government has taken a more professional approach to policy making.There has been a movement away from policy advice by generalists to one informed by concepts of risk, management, and delivery of services.
Our approach to policy advisory incorporates the perspectives of ministers as well as civil servants, since policy is the responsibility of both parties, and a product of their joint efforts. Bureaucrats, members of standing committees, joint parliamentary committees and opinion leaders can be persuaded to take a more proactive and participatory role in the emerging grey areas in policy dialogues.
Over the last decade, the government has taken a more professional approach to policy making.There has been a movement away from policy advice by generalists to one informed by concepts of risk, management, and delivery of services.
Our approach to policy advisory incorporates the perspectives of ministers as well as civil servants, since policy is the responsibility of both parties, and a product of their joint efforts. Bureaucrats, members of standing committees, joint parliamentary committees and opinion leaders can be persuaded to take a more proactive and participatory role in the emerging grey areas in policy dialogues.
Section -10
India remains a complex market. It is best to view India not as a single market, but as a series of interconnected regional markets where the regulatory and investment climate changes from one state to another.
Many states have created investment cells to attract business and have framed policies around them but the lack of coherence between the launch of new policy initiatives and policy stewardship leaves a lot to be desired. While most of the state civil servants acknowledge that they have to be innovative in their approach, there is a lack of clarity over what this means in practice. The ensuing implementation of reform policies is therefore likely to be heavily shaped by the culture. It has been the case that few states in India, receive the new policy ideas like Smart City Mission and Ayushman Bharat very attractive and scalable yet difficult to implement due to logistical and legacy issues.
To correct such perceptual anomalies and resistance, policy discussion needs to be tailored to the culture and existing economic opportunity present in the state.
Many states have created investment cells to attract business and have framed policies around them but the lack of coherence between the launch of new policy initiatives and policy stewardship leaves a lot to be desired. While most of the state civil servants acknowledge that they have to be innovative in their approach, there is a lack of clarity over what this means in practice. The ensuing implementation of reform policies is therefore likely to be heavily shaped by the culture. It has been the case that few states in India, receive the new policy ideas like Smart City Mission and Ayushman Bharat very attractive and scalable yet difficult to implement due to logistical and legacy issues.
To correct such perceptual anomalies and resistance, policy discussion needs to be tailored to the culture and existing economic opportunity present in the state.
