The traditional sectors in India like the banking sector, insurance sector, stock trading and such are undergoing massive disruption. The rise of tech firms in such sectors has given the bigger players a run for their money, they have been challenging the dominance of the traditional companies in more than one ways and are looking to entirely change the way these sectors have been working in the past. Fintech companies broadly comprise of technology based companies working in traditional sectors, competing against or collaborating with existing institutions.
With a range of options like digital wallets, lending, insurance, there is a variety of services provided in this sector, and have changed the way customers carry out transactions. Fintech ecosystem in India is especially advantageous since the country has a highly youth demographics. Moreover, internet penetration has given a platform for such an ecosystem to thrive. The financial services market in India is majorly underserved, with 40% of the population having no access to the traditional banking, and more than 80% of the transactions being carried out in cash. This represents an opportunity for Fintech start-ups to massively grow in different segments.
Despite enjoying one of the highest GDP growth rates in the world; India ranks abysmally low in terms of household debt to GDP Ratio. It is a very credit deprived country. A massive opportunity exists in filling this credit gap.
Market need:
- The World Bank estimates a credit demand-supply gap of US$ 380 billion in India
- According to a recent report by International Financial Corporation (IFC), small businesses in developing economies need more than US$ 2 trillion to fulfil their working and growth capital requirements
- India is a very credit deprived country and there exists a massive opportunity to fill this gap
Financial fintech firms are Digital Lending Platforms targeting underserved, creditworthy customers.
Banking sector has been the one with the most disruption. Traditional banks have been working the same way since forever, they give out loans to end consumers and companies based on their credit history and their current earnings against a collateral to secure the loans, be it consumer loans or loans to companies. But in the wake of recent events, like the downfall of DHFL (Dewan Housing Finance Corporation) and ILFS (Infrastructure Leasing and Financial Services), banks have started to record high levels of NPAs, and thus have become wary of giving out loans. Moreover, India has demographics wherein the majority of population works in unorganized sectors, without access to proper paperwork to avail loan facilities. For example, an auto driver would never be able to access loan facilities by a bank, even though he would earn INR 15,000 a month, or more: Enter Fintechs.
Fintech firms operate very differently when compared to traditional companies / banks. A fintech company would typically give out small loans, to minimize the risk, to a volume of customers. Financial fintech firms are mostly working in the domain of payday / personal loans, which are limited to a small time and small amounts, generally up to INR 100,000 for a period ranging from 7days to 15days.
Traditional sector is inefficient due to the following reasons:
- Traditional credit assessment techniques typically work on stringent norms including CIBIL score, age, employer categories, geographies and salaries and do not incorporate cross-platform intelligence available on customers
- High operations and underwriting costs, making it difficult for banks and NBFCs to serve a large segment of creditworthy customers
- Constrained in expanding the scale of operations due to high costs and resources needed to spend on customer acquisitions
- Branch led customer acquisition model with minimal digital reach
- Banks typically offer large ticket loans (typically more than INR 400,000) while significant unmet demand exists for smaller ticket loans
- Small and medium enterprises provide employment to more than 110Mn individuals, i.e. about 40% of working population in India. Banks are unable to service a large segment of creditworthy customers (from 900,000 SME employers).
Features of fintech firms:
- Focus on digital infrastructure
- Scoring based on data across multiple platforms
- Augment credit bureaus with surrogate data, demographic, income, mandate bureau quality and submission
- Partnerships with account aggregators to ensure real time bank statement verification
- External partners such as CIBIL enable to conduct real time credit check and become a key driver for providing approval to the customer
- Chat-bot, co-browsing of application form during customer on-boarding process
- Answering client queries and service requests on a prompt basis
- Effective use of details captured across social media platforms, mobile handsets, government databases, e-commerce apps and financial institutions
With such features being offered, fintech firms are able to capture the market from traditional sectors easily, thus taking advantage of the huge market opportunity.
These days, many foreign firms with robust tech platforms are entering India to take advantage of this opportunity. We see a massive flow of capital from countries like China and Japan to serve the loan market in India. These companies are operating in the pay day loan market and expanding into personal, car and auto, and such small ticket loans. The pay day loan market is especially attractive, with these firms charging up to 1% interest rate per day. These companies, lacking the NBFC license from RBI (Reserve bank of India mandates that a company disbursing consumer loans has to get a Non-Banking Financial Company license to regulate the market), are partnering with local NBFC companies to disburse consumer loans, thus providing an impetus to the fintech firms.
The government’s push for financial inclusion has helped in the growth of fintech start-ups as well. The scheme Jan Dhan Yojana aims to provide a bank account to every citizen of India. The Fintech firms are capitalising on such opportunities by offering simplified transactions. The government’s biometric identification database, Aadhar card, contains information of over 1 billion citizens, this minimises the effort required for first-level verification of customers by Fintechs. Moreover, to provide an impetus to cashless transactions, the government introduced the cash demonetization, the scheme was targeted at curbing black money, but also helped in the rise of cashless transactions. The government has introduced tax rebates for traders accepting more than 50% as electronic payment.
Many large banks, like Deutsche Bank and such, are partnering with upcoming fintech firms to give out loans to the mass market, relying on the technical expertise of these start-ups. These kinds of partnerships are fruitful to the whole ecosystem as the fintech firms get capital to disburse, banks get a reliable platform to give out loans, and customers get access to the banking system at a push of a button on their smart phones.
Moreover, many other sectors like insurance and stock broking, are being disrupted by the rise of fintech firms, cutting out the middleman and providing the services directly to the consumers. For example, Zerodha, an online stock broking firm, charges no commission on the stock trades, unlike traditional stock broking firms. The transactions are very transparent, the customer has access to all his transactions on a simple yet efficient app on their smartphone. Another company called Ria Insurance aims at disrupting the insurance industry. They collect data of an individual, and according to their fitness levels and daily habits, offer a customized insurance plan. Unlike one size fits all insurance policies, they offer discounts to people who are into fitness and have less probability of availing an insurance claim. In this way, they are providing an incentive to get fit along with providing customized insurance plans. Simpler tech insurance firms like Policy Bazaar are cutting out the middleman, making it simpler for customers to compare insurances available in the market online and choose the one best suited to their needs.
Significant growth in investments in such fintech firms, suitable government policies and a changing consumer mind-set make Fintech an emerging industry. The industry is likely to witness a spike with continued participation from banks and regulatory bodies. The transaction value for the Indian Fintech sector is likely to touch US$ 73Bn in 2020.
