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Why India is on the Cusp of a New Fintech Revolution

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India has emerged as one of the fastest-growing fintech hubs in recent years. Concepts like paperless lending, mobile-first banking, secure payment gateways, mobile wallets, etc. are no longer a distant dream, it’s already happening. Thanks to fintech companies for understanding consumer requirements, pain points and serving them more seamlessly than ever before.

A recent report by Boston Consulting Group (BCG) and Ficci that stated India will realize a fintech sector valuation of USD 150-160 billion by 2025, further reinstates the country’s strong growth potential in the coming years.

The report, titled ‘India FinTech: A USD 100 Billion opportunity’, noted that over the past five years, Indian fintech companies have raised about USD 10 billion from investors all over the world, catapulting the sector’s total valuation to an estimated USD 50-60 billion. However, the study also brought to light that to meet this ambition, India’s fintech sector will need investments of USD 20-25 billion over the next five years,” it added.

The rise and rise of fintech startups

India has seen a sharp rise in the number of fintech firms – that too in a short span of time. Of the over 2,100 fintech firms existing in India currently, 67% have been set up in the past five years.

India’s FinTech ecosystem continues to be aided by strong customer demand, the country’s diverse capital flows, strong tech talent and enabling policy frameworks.

To an extent, it can be majorly attributed to government moves like the introduction of demonetization and GST, and the payment stack, creating a significant growth opportunity for fintech startups, and more importantly, transform financial services for consumers. The COVID-19 has further accelerated the pace of digitization across categories.

While Indian fintechs have cumulatively raised more than USD 10 billion since 2016, eight fintech companies have reached the ‘billion-dollar-valuation’ milestone (unicorns) and an additional 44 are valued at over USD 100 million as of date, the report said, adding that while certain fintech segments (for example, lending) may see a blip in the near term, largely it enabled fintech players to innovate their offerings and make their solutions more digital and mobile-friendly.

Between March 2020 and January 2021, UPI payments (by value) have risen to 3x of their pre-pandemic value, with three new unicorns (Pine Labs, Razorpay and Digit Insurance) and five new ‘Soonicorns’ (about to become unicorns) being created since January 2020, the report said.

Similar acceleration has also been seen in online broking, where the share of active clients with fintech discount brokers (Zerodha, Upstox, 5paisa) grew from 43 % to 57 % in the same time frame.

“We believe that India’s fintechs are at the precipice of a significant value-creation of USD 100 billion over the next five years. To actualise this potential, the industry would require additional investments to the tune of USD 20-25 billion,” BCG Managing Director and Partner Prateek Roongta said.

Consequently, the number of Indian fintech unicorns will more than double by 2025, he added.

While fintech is becoming the lifeblood of an economy, Injeti Srinivas, Chairman, IFSCA agreed that despite enormous potential in India only a fraction of the economic transactions happens digitally.

The government’s Direct Benefit Transfer scheme, Digital India, Start-up India, UPI initiatives however can be a great trigger to this process combined with the talent at the grassroots level that made use of this opportunity, said Srinivas.

A new report from Deloitte India also noted that Fintech companies have grown a staggering 13x to 70x over the last two years. The aggregated revenue of the top 10 companies has gone up from about USD 20 million to approx to USD 70 million between the 2018 to 2020 period.

According to Deloitte India, this year has also seen a diverse sectoral representation with several companies across data analytics, digital transformation, digital marketing, and other emerging sectors which are likely to see continued growth over the near term.

Bengaluru continued to be a key hub for the startup ecosystem, while being the most-represented city in Deloitte India’s rankings. Close to 18 of the total 50 fastest growing startups were from Bengaluru. Close to 12 companies on the list were based in Delhi NCR region.

Fintech-Bank collaboration  

 Despite the pandemic-affecting venture capital funding in the first half of last year, the fintech sector has still managed to attract closer to USD 2.7 billion in equity funding, according to a recent report from management consultancy KPMG.

The fact that fintech players seem to be foraying into other domains such as insurance, and wealth management also show how they can be even more versatile in the long run. Needless to say, the advent of fintech players have also made banks a little bit conventional.

On the contrary a new report from Accenture noted that despite the significant increase in the adoption of digital technologies over the past few years, there is a continued lack of technology expertise and digital fluency in the boardrooms of the world’s largest banks and India of course is no exception to the rule.

According to the report, Accenture recommends that 25% of banks’ board directors should have technology experience. While the world’s largest banks have made progress on adding technology experience in the boardroom that progress has been slow. That gets reflected in their way of dealing with customers and other stakeholders as well.

On the brighter side, several banks are now joining forces with fintech startups to upgrade their existing systems and enabling smoother operations to deliver a better experience for consumers. Similarly, by leveraging data analytics, fintechs have encouraged collaboration between numerous financial service providers and enabled them to deliver products and services through an open architecture.

As Sanjay Doshi, Partner and Head of Financial Services Advisory, KPMG in India, commented, “Many of the banks in India are now going down the path of digital. They are really looking at tech and fintech companies that can help them move their digital activities forward, either investing in them directly or using them as service providers. That is going to be a big growth area for investment here in India — banking-as-a-service platforms.”

The fintech future is optimistic

The future of Fintech in India will continue to see both vertical and horizontal growth, noted a McKinsey report. The horizontal growth will involve existing technologies becoming more accessible to a greater number of people. The vertical growth will see the emergence of entirely new financial technologies that give people new tools to trade, invest, save money, and restructure their finances. Both these forms of growth will take India forward on its journey to financial maturity, and unlock a lot of economic growth on the way, it said.

To achieve sustainable success however, fintechs will need to clearly identify their strategic plays and embrace product innovation, elevate user-experience and build deep-tech capabilities to ‘master the core’. The way, experts believe, the country will also see emergence of ecosystem orchestrators and an increasing number of fintechs establishing an international footprint in the coming years.

 

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Sohini Bagchi
Sohini Bagchi is Editor at CXOToday, a published author and a storyteller. She can be reached at sohini.bagchi@trivone.com