Fintech: A sector of high activity

Increasing emphasis on digitization is leading to a surge in the fintech sector, evidenced by estimates that today over 3 million merchants accept card payments, double the number witnessed barely a year ago

December 20, 2018

According to Credit Suisse Group AG, cashless transactions are expected to reach US$1 trillion annually by 2023 from US$200 billion at present

Government of India’s Digital India mission and its commitment towards greater national financial inclusion has given the fintech sector a big push

Indian market’s prospect has contributed to growth of online payment platforms such as Paytm, FreeCharge, MobiKwik, PayUMoney and Oxigen

Fintech is not limited to just digital payment companies alone. There are platforms which offer credit, mutual fund and even tax payment advice

The Government of India’s Digital India mission and its commitment towards greater financial inclusion has given the fintech sector the initial push, which today has exploded into a high activity space attracting investor and corporate interest from around the world. Increasing emphasis on digitization is leading to a surge in the fintech sector, evidenced by estimates that today over 3 million merchants readily accept card payments, double the number witnessed barely a year ago. With digital payment modes becoming the currency of choice, new players have been quick to enter the market, much to the convenience of the consumers.

Complementing the effort is the improved connectivity and the boost to e-commerce. According to Credit Suisse Group AG, cashless transactions are expected to reach US$1 trillion annually by 2023 from US$200 billion at present as mass adoption of e-payments and a thriving fintech sector propel the country into a leading position in the global payments landscape. Aiding this sentiment is the growth in smartphone users with the number expected to double to 500 million by 2020, even as affordable devices and data lead to an uptrend in digital transactions. There is a visible explosion in consumer services via mobile internet taking the capability of digital transactions into rural and semi-urban areas.

Early start of fintech support

The Government of India’s Digital India mission and its commitment towards greater financial inclusion gave the fintech sector the initial push, which today has exploded into a high-activity space attracting investor and corporate interest from around the world.

Riding on the proliferation of e-commerce, players like Paytm, FreeCharge, MobiKwik, PayUMoney and Oxigen have, in fact, successfully popularized adoption of digital payment modes. The process, of course, had been set in motion with the launch of the state-promoted Unified Payments Interface (UPI) in August 2016. UPI has seen rapid adoption. Till April this year, more than 190 million transactions had taken place on the platform. UPI, which facilitates instant fund transfer between two bank accounts using mobile phones, is used by over 97 banks.

According to ACI Worldwide and AGS Transact Technologies (AGSTTL), India, engaged in real-time electronic payment and banking solutions, by 2025 four out of five transactions would be undertaken digitally with UPI being the key driver of greater financial inclusion. They say that the user base for digital transactions in India would triple to 300 million by 2020 from the current 90 million. Other players in the space include banks, Indian postal service and large conglomerates like Reliance Industries.

Innovative fintech platforms

Fintech, incidentally, is not limited to digital payment companies alone. There are platforms which offer credit, mutual fund and even tax payment advice. Flipkart’s PhonePe, for example, is offering a range of services, including bus ticket bookings and food ordering, through tie-ups with service providers, starting with RedBus. Others like CreditMantri help consumers take charge of their credit health besides assisting them in making better borrowing decisions. Fintech leverages data and technology to transform the way credit is delivered.

Innovative use of the digital transactions has made consumer lending the biggest constituent with young professionals beating their cash crunch by merely downloading an app

Significantly, Flipkart which committed US$500 million for PhonePe, has already invested half the amount while Credit Mantri is set to raise US$20 million to fund its growth target. Paytm Mall, meanwhile, received the final tranche of its US$445 million funding from SoftBank and Alibaba, a move that will give the online shopping venture of Paytm more financial muscle to take on giants like Flipkart and Amazon.

Innovative use of the digital transactions has made consumer lending the biggest constituent with young professionals beating their cash crunch by merely downloading an app. Over the last seven years, according to the Boston Consulting Group, nearly 1,000 fintech start-ups have been launched in India, raising over US$2.5 billion. Consumer lending start-ups like Early Salary and MoneyTap, for example, have seen their apps being downloaded over 600 million times with nearly 3.5 lakh loans being disbursed. Thousands of customers get added every month, the average age of the customers ranging between 26 and 30 years with most in their first jobs.

About 40 per cent of these borrowers invariably do not get bank loans either because they are too young or their credit scores have not matured. As the demand for credit is huge, the fintech startups obviously do not want to lose a good market. Now with Google Pay and WhatsApp also entering the e-payments space, this segment could become extremely competitive. Experts believe that the fintech boom could see almost 400 million joining the digital bandwagon in the next two years, implying greater financial inclusion.

Interestingly, despite the reach already attained through financial inclusion and the growth in digital payments, cash still accounts for 70 per cent of all transactions by value, adds Credit Suisse, emphasizing the scale of opportunities and the need for further adaptation.

Policy boost for fintech

The government’s efforts started in 2014 and the national mission for financial inclusion ensured access to affordable financial services for large sections, enrolling within months over 260 million of the unbanked population largely from rural areas into the banking system. Around the same time, the Reserve Bank of India (RBI) issued licenses to 11 companies to operate as payment banks of which Airtel and Paytm have already started operations. More recently, state-run India Post, too, got the nod to operate as a payment bank, all with the objective of providing basic banking benefits to the rural areas via mobile phones.

This development would not have been possible without the creation of an ecosystem for providing startups an opportunity to grow. The central government is supporting fintech companies through initiatives like the Startup India besides providing tax incentives and a credit guarantee scheme through debt funding.

The states, too, have not lagged behind. Karnataka, for example, is inviting startups to register in the state, even setting up a corpus of US$40 million to back them. Over 5,000 startups have already registered under the policy. Similarly, the Andhra Pradesh government too has launched a mobile platform, e-Rythu (e-farmer in Telugu) to help small-scale farmers to market their produce at reasonable prices. Developed by Mastercard, it seeks to digitize agriculture marketplaces, payments and workflows, providing farmers an easy and secure way to buy, sell and receive payments via their feature phones.