FinTech for expanding Banking for the Unbanked

FinTech or Financial Technology is an economic industry composed of companies that use new technology and innovation with available resources to make financial services more efficient. They compete in the marketplace of traditional financial institutions and intermediaries in the delivery of financial services. Financial technology companies consist of both startups and established financial and technology companies that are disrupting incumbent financial systems and corporations that rely less on software. India is transitioning into a dynamic ecosystem offering fintech start-ups a platform to potentially grow into billion dollar unicorns. A unicorn is a startup company valued at over $1 billion. From tapping new segments to exploring foreign markets, fintech start-ups in India are pursuing multiple aspirations. India being a huge fintech opportunity this may be a challenge to the existing Indian banking system specially the public sector banks.

Government of India is aggressively moving towards cashless digital economy and supporting the ambition of the Indian economy to emerge as a strong fintech ecosystem via both funding and promotional initiatives. India has adopted multi-pronged approach to enable penetration of the digitally enabled financial platforms to the institutional and public communities as under:

• Pradhan Mantri Jan – Dhan Yojana has added 28.63 crore unbanked individual into the banking sector and  the aggregate balance in beneficiary accounts is Rs. 64364.91 crore as on 17 May, 2017.
• Aadhar has been extended for pension, provident fund and the Jan Dhan Yojana.
• A dedicated portal to provide ease in registration to start-ups has been launched by the government
• Start-Up India initiative launched by the Government of India in January 2016 includes USD 1.5 billion fund for Start-ups.
• IP facilitation support: Startups get support from the government in expenses of facilitators for their patents filing, trademark and other design work.
• Income Tax Exemption for start-ups for first three years
• Patent Costs for start-ups granted 80 percent rebates
• Capital Gains Tax exemption for investments in unlisted companies for longer than 24 months. It was 36 months earlier.
• Surcharge on online and card payments for availing of government services withdrawn
• Tax Rebates for merchants accepting more than 50 percent of their transactions digitally
• Digital India and Smart Cities initiatives have been launched to promote digital infrastructure development in the country as well as attract foreign investments.

RBI has been instrumental in enabling the development of fintech sector and espousing a cautious approach in addressing concerns around consumer protection and law enforcement. The key objective of RBI has been around creating an environment for unhindered innovations by fintech, expanding the reach of banking services for unbanked population, regulating an efficient electronic payment and providing alternative options to the consumers, such as:

• Introduction of Unified Payment Interface (UPI) with NPCI (National Payments Corporation of India; an umbrella organization for all retail payments in India), which holds the potential to revolutionize digital payments and take India closer to objective of LessCash society
• Approval to 11 entities for setting up Payments Bank
• Approval to 10 entities for setting up Small Finance Banks that can significantly run in favour of cause for Financial Inclusion.

Primarily triggered by a surge in e-commerce, and smartphone penetration, the traditionally cash-driven Indian economy has responded well to the fintech opportunity. The transaction value for the Indian fintech sector is forecasted to reach USD 73 billion in 2020 from USD 33 billion in 2016, growing at a five-year CAGR of 22 per cent. The Indian fintech software market is forecasted to touch USD 2.4 billion by 2020 from a current USD 1.2 billion.

If we look at fintech investments in 2016, it was split between China and the US which accounted for 80% of global fintech Venture Capital investments. India’s growth wave as such may still not be of the scale when viewed against its global counterparts, but it is stacked well, largely due to a strong talent pipeline of easy-to-hire and inexpensive tech workforce.

From wallets to lending to insurance, the services of fintech have redefined the way in which businesses and consumers carry out routine transactions. The increasing adoption of these trends is positioning India as an attractive market worldwide.

 FinTech in India has the potential to catch up with its global counterparts as the various ecosystem players come together to orchestrate a much needed change in the industry. The key for success will be the ready adoption by the big banks.