India's Fintech Ecosystem Is Under The Intense Spotlight For Its Immense Growth Potential And Innovative Products

Authored Article by Priyank Kothari, Director, Arvog

We are at our most creative when also facing the most constraints. Interestingly, this sums up best what we’re currently witnessing in India’s fintech sector: the rise of a whole new category. It has an almost endless bevy of solutions that are aimed at financial inclusion. 

The Fintech sector has 1,860 startups. As of December 2021, India has over 17 Fintech companies which have gained ‘Unicorn Status’ with a valuation of over $1 bn. This is fantastic because over 67% of these companies have been launched in the last five years. That explains the government’s focus on creating a dedicated fintech hub at Gift City in Gandhinagar, Gujarat. 

It would not be an exaggeration to say that fintech is also creating a wave of innovation – rather, finnovation. Companies are riding on the strong shoulders of increasingly intuitive technologies to provide solutions across lending and payments, WealthTech, Personal Finance Management, Insurance Technology (InsurTech), Regulation Technology (RegTech), and more. 

So, has fintech arrived? It seems so, if the numbers are to be believed: India’s fintech adoption rate is 87%, versus the global average of 64%. The fintech transaction value size is set to grow at a CAGR of 20% - from US$ 66 Bn in 2019 to US$ 138 Bn in 2023. 

Still, take one look at the innovation pipeline of most startup players and you know that the best is yet to come. And, when it does, we’ll be looking at a whole lot of historically troublesome problems – chief of these being low percentage financial inclusion and accountability – in the rear-view mirror.  

It is about time and India seems raring to go. After all, I expect the growth of the fintech sector over the next five years to have a significant impact on the country’s economy as did the 90’s reforms, leading to the liberalization of the economy. It set our country on a growth path then and so will this in the near future. If you’re a start-up investor or a solution provider in this space, this is your chance to capitalize on your opportunities. 

What are the key reasons for such a strong belief in fintech’s prospects?

• Trust in digital technologies – The launch of the Digital India movement came at an opportune moment in our history. Mobile data penetration plays a key role in making technology accessible. It significantly improved last mile connectivity and brought people in touch with formal systems of finance. Which, then, worked its magic. Entrepreneurs discovered large tracts of data along with hitherto underserved customer segments; leading to the birth of numerous solutions driven by technology. Moreover, technology has drastically lowered entry barriers in a highly regulated ecosystem, helping to spawn customised solutions. 
• Favorable policymaking stance – Policymakers’ focus on facilitating financial inclusion is commendable. The fintech industry has lately enjoyed a host of incentives, including the creation of a dedicated fintech hub and more. The fintech hub was mentioned at length in the Union Budget 2022. It is set to spur innovation while keeping the costs low. Ultimately, it helps free flow of capital, which creates a strong impetus for the growth and development of the industry overall. The reduced dependence on foreign cash flows also helps to strengthen the domestic market

• Changing demography – Today, the average customer feels at home with new technologies and is eager to try out solutions that provide transparency and ease of use. It’s a generation that is far more aware as a result of increasing access to internet data; unafraid to move away from traditional modes of accessing and managing money. 

Thus, a moment in history when we’re witnessing category creation at the scale that India’s fintech industry is doing is a moment to step back and take in the beauty of the scene. Let’s look at some of the key factors that we expect will drive innovations in the sector:

AI-driven lending and payments: Today, fintech companies are using AI to determine the creditworthiness of their clients using their consumer data to disburse loans within 3 days’ time through a process that is entirely digital. In the 5G future, these technologies will give way to smarter, more seamless solutions driving towards decentralization through blockchain technology and more. 

Open ecosystem:  Institutions are using API-based services to scale their offerings and provide inter-operability for the ultimate ease of their customers. This is leading to the rise of Banking-as-a-service as provided by a large number of players. 

Neobanking solutions: Neobanks are digital-only banks that partner with traditional banks for only a small segment of their offerings. This enables them to keep their costs significantly lower than market rates. Neo-banks are an emerging pillar of support for small businesses in India.