India’s Fintech and Payments Ecosystem — Part 1: Headwinds and Tailwinds
The headwinds and tailwinds shaping India’s payments ecosystem…explained! Part 1 in a two-part series on India’s payments ecosystem.
As we walk into a store, we are usually greeted by a multitude of QR codes at the billing area. We typically have at least one payments app on our phones and a lot of us have been inducted into the world of trading and financial markets through apps like Zerodha and Groww. Many other homegrown fintech platforms are playing pivotal roles in redefining our approach to finance and are democratising financial access. The fintech space is becoming ubiquitous and is witnessing tremendous growth. Mumbai, Bangalore, Delhi-NCR and Hyderabad are emerging as fintech hubs, with 437, 447, 208 and 133 fintech startups respectively as of June 2020.
‘Fintech’ is a gargantuan umbrella encompassing numerous services including insurance, lending, payments, investments and trading. Factors contributing to the growth of this space are plenty.
Industry Tailwinds
Attractive Market Opportunity: A sizeable percentage of India’s population is unbanked, comprising those who are not part of the traditional banking ecosystem. Financial access, in the traditional sense, is quite limited to them. On the other hand, internet and smartphone accessibility is briskly rising, with the country housing the cheapest data plans in the world. These factors offer lucrative opportunities for fintech players.
Strong Consumer Demand: Financial services is an industry where trust is imperative. As more and more people use a service and promulgate the good word, trust in the service develops and this helps sustain growth. Demonetisation, the e-commerce revolution and the pandemic are some key phenomena that have offered stimuli to shift to digital financial services and consumer demand is consistently rising. The ease of use and comfort associated with payment platforms is undeniable. The assortment of offerings proffered by trading platforms, which have indeed democratised stock market investments, enhanced information availability and ease of comparison are factors building the popularity of fintech apps, especially among millennials.
Bank Collaborations: Banks and traditional financial institutions are embracing fintech players and outsourcing tech-heavy functions to various fintech partners. Symbiotic partnerships are serving as shots in the arm to the industry.
The MSME Factor: MSMEs are actively welcoming digital technologies and bringing fintech platforms into their activities. Payments, account keeping and lending are some areas where their adoption is creating ripples. MSMEs have been driving growth for quite some time now but, there is a dearth of credit lines for such entrepreneurs. Fintech players are filling that gap through credit offerings, small-ticket loans and alternative funding.
Investment Environment: In addition to the lucrative market dynamics, fintech players have been witnessing an increasingly conducive environment for product development and growth. Fintech accelerators and incubators are on the rise, investment interest in fintech startups is promising and the Aatmanirbhar sentiment is serving as an added boost. The first half of 2020 saw a 60% rise in fintech investments in the country in comparison to the same period last year.
Government Support: The Government has been encouraging the shift to digital payment modes for years now and financial inclusion of the population is very much on their radar. Initiatives like the Jan-Dhan programme and startup-friendly policies are complementing the fintech boom.
Industry Headwinds
While digital adoption is, overall, on the rise, there are some inefficiencies. Smartphone and internet access might be improving, but internet quality is yet to pick up in many areas. Awareness regarding fintech needs improvement. Further, there is some reluctance in conducting financial activities online. It’s quite disruptive and new, and trusting apps for finance isn’t first nature, given the stakes involved. Issues around cybersecurity breaches, data privacy and frauds serve as deterrents to industry growth.
On the regulatory front, while the environment is becoming more conducive, fintech-specific regulations are still to be framed. The recent announcement to cap the maximum market share of a UPI player to 30%, the abolition of Payment Service Provider (PSP) fees and Merchant Discount Rates (MDR), lack of cogency around cryptocurrency frameworks among others are dampening the sentiment. When it comes to investments, while overall funding to the fintech space seems to be on the rise, early-stage investments are still relatively hard to come by, and this places barriers to entry for startups.
In India, the payments revolution is quite extraordinary. Billions of transactions occur via digital platforms. Some key entities and systems shaping this include the NPCI, UPI and, with a futuristic lens, NUEs. More on that in the next piece…
