Fintech has been thriving in India for the last few years. However, unlike more developed markets in Europe and North America, India’s recent emergence as an economic powerhouse renders comparisons to these markets more difficult. This part aims at defining what makes Fintech in India unique by firstly drawing the proper comparison to other global Fintech hubs. It will then proceed to talk about the most active segments in Indian Fintech – payments and lending – and ultimately offer an overview of the leading innovations and challenges present in the current market.
Fintech in India is unique because it is young, growing quickly, and is powered by a large market base. With internet penetration and mobile usage expected to rise rapidly from 53% in 2014 to 64% by 2018, India gives an attractive market for technology startups. The financial services market in India is largely untapped – 40% of the population is presently not connected to banks and more than 80% of the remittances in India are still made by cash. This untapped Indian Fintech market typically provides a robust opportunity to significantly increase demand in almost every category – consumer lending, insurance, trade finance, digital payments and many more. In each of these specific areas, innovative Fintech solutions can support the market to develop significantly.
However, some areas are more strongly represented in the Indian Fintech market.
With the United States, Hong Kong, Singapore and the United Kingdom blooming as global hubs for Fintech, India has only recently come out as a key player. However, India holds a lot of promise as it provides the proper mix of technical skills, government support, regulatory policies and the business environment for innovative startups to flourish. For example, UPI in India is unlike anything available in the United States or the United Kingdom.
Some of the key features of the Indian market that make it exciting and interesting for successful Fintech startups are:
• India is the only Fintech hub that brings ample opportunity to target a large unbanked people. Coupled with the growing young people who completely accept innovative technologies, India makes an attractive destination for Fintech startups.
• The difficult exercise to change consumer behavior towards accepting Fintech solutions is already underway.
• The broad level of technical education gives India a strong talent pipeline of a comparatively cost-efficient and easy-to-hire tech workforce.
• India has the second biggest startup ecosystem in APAC after China measured in dealing with size and number of deals.
Overall, India is confidently moving up the Fintech ladder and provides plenty of unique opportunities for Fintech startups to enter the diversified market and be successfully provided a careful solution-customer match and a strong go-to-market strategy is in place. The two huge segments where Fintech is most active in India are payments and lending. Out of the more than 600 Fintech startups currently active in India, around 40% are payments and lending startups.
The payment space represents the most competitive segment and gives strong growth possibilities: In the last 3–4 years, India has witnessed robust activities in payments. As such, the number of prepaid instrument transactions in 2015 to 2016 is almost twice of mobile banking transactions. The competitive payment space in India ranges from telecom companies, banks, wallet companies, e-commerce, and technology firms and is highly likely to include payment banks in the future.
Between 2009 and 2010, RBI issued 26 prepaid payment instrument (PPI) licenses. Two types of PPI exist in India now: Mobile Wallets and Prepaid Cards.
• Mobile Wallets are app-based stored-value accounts, funded through credit/debit cards or through net banking. Paytm, Freecharge, MobiKwik, and Citrus (acquired by PayU) are some of the leading Fintech firms operating in this space. Currently, these wallets are majorly used for mobile recharges, bill payments and online commerce. They are backed by VC funding and are spending heavily on customer acquisition through marketing initiatives. They are also expanding their services through tie-ups with cab services, retail stores, educational institutions, and fuel stations to increase the reach and usage of their wallet services. The wallet companies are also reaching the unbanked and underbanked through innovative solutions such as MobiKwik cash pick up service and Paytm tie-up with ICICI Bank for cash loading. Wallets are growing in popularity, and several companies have applied for licenses with the total number of PPI licenses growing to 46 in 2016.
• Prepaid cards, on the other hand, have been promoted by startups including Oxigen, ItzCash, Suvidhaa, and others, which provide solutions with an agent-assisted offering to consumers who are not digitally well equipped. The primary usage of prepaid cards is for spending management, remittances, and railway booking. Other technology firms and startups have also penetrated the PPI competitive space by acquisitions to provide in-house wallet or payment solutions. Examples include Snapdeal acquiring Freecharge, Flipkart’s acquisition of FxMart to offer Flipkart money and Amazon acquired Emvantage.
Apart from PPIs, another exciting development in the payments space is the so-called Payment Banks – new, stripped-down versions of banks conceptualized by the RBI. These banks are required to reach their customers via digital channels and provide transaction services for the migrant labor market in India. The scope of activities these entities are permitted to undertake to include accepting of demand deposits up to USD 1,700 (INR 100,000) per customer, issuance of debit cards, offering payment and remittance services, acting as a business correspondent to other banks, distribution of mutual funds, insurance and more. They cannot undertake any lending activities, issue credit cards, accept NRI deposits or be a virtual bank. Payment Banks face the challenge of their inability to earn lending revenues and high rates of interest on floats due to the regulation of investing deposits in government securities.
As it would be economically inefficient for banks to spread branches in every village, Payment Banks are expected to provide a digital alternative for the large unbanked population. This is expected to drive India’s journey into a cashless economy and is being compared to the success of Vodafone’s M-Pesa in Kenya where an estimated 70% of the population uses M-Pesa for domestic remittances and low-value purchases. Payment banks could also play a crucial role in implementing government benefit transfer schemes. In 2015, RBI provided in-principal approval to 11 entities to set up Payment Banks. Entities that received these licenses are Airtel, Vodafone, Reliance Jio, Uninor, Idea, Mahindra Finance, Cholamandalam, Paytm, NSDL, FinoPayTech and India Post. Cholamandalam, Uninor, and Mahindra have already returned their in-principle license to RBI. However, companies with a long-term vision, existing infrastructure and capital in place are looking at this solution as a major strategic bet and have laid down the road map for their operations. Paytm plans to start its operations by the end of 2016 and India Post has received 51 applications from all over the globe for partnerships in setting up their payments bank and has stated that they would start operations by early 2017.
In summary, there are a large number of Fintech startups focused on payments. The above examples illustrate that they are rapidly evolving given changing use cases, customer propositions, and business models. With the support of a favorable regulatory environment combined with the young demographic willing to try and test new technologies, the Indian payments industry is a great place for Fintech startups to explore.
Another strong section in Fintech space in India is Alternative Lending. The major block of lending in India is still held in the form of community finance where family and community members, as well as offline lenders, dominate the space. Some experts feel that community finance is as big as the traditional bank consumer lending. The average annual market rate for such offline and unsecured loans is about 30%, which is almost 2–2.5 times the rate of an average personal loan charged by banks. Community lending has been thriving due to it being largely unregulated and a commonly accepted scheme of functioning among the unbanked and underbanked. However, with increasing financial inclusion and digital penetration, there has been an increasing number of startups that are looking at targeting this lending mechanism. Eight alternative lending startups feature among India’s 50 most well-funded Fintech startups.
Unsecured consumer lending as of today has largely been confined to the metros. There have been innovative technology-savvy solutions that have been targeted towards the urban crowd who are looking at alternative credit due to two reasons, for ease of access to funds where the technological procedure does not require huge documentation and large wait times which have been common requirements for bank lending and the other reason is lack of credit scoring where the growing young population of the country has largely been away from loans and hence, lacks any existing credit record. As a result, this segment does not have credit scores from Credit Information Bureau India Limited, which collects and maintains records of an individual’s payments pertaining to loans and credit cards.
More recently, P2P (peer to peer) and segment-based lending have been gaining prominence. Fintech startups have developed solutions that give superior customer experience and faster processing times for lending. P2P lending platforms act as an aggregator for lenders and borrowers to enable creating a match between both the parties. Faircent and i-lend are two of the prominent players in the P2P lending space.
Any of the startups have been involved in the activity of targeting microfinance with the goal of creating a social impact and providing easier access to credit to small entrepreneurs. For example, players like crowdfunding platforms Milaap and Rang De have used the social chord in order to develop their platform as well to have an impact on farmers and the rural population.
Segment-based lending, on the other hand, includes key players like EarlySalary that focus on the younger working population for providing loans. They give out loans from USD 150 to US $1500 (INR 10,000 up to INR 100,000) based on the borrower’s salary for a tenure of 7 to 30 days. Such segment-focused startups are at an early stage and could be an extremely attractive segment for innovative Fintech solutions.
However, as talked about earlier, a major chunk of these solutions are currently being targeted at the urban audience, leaving behind the rural and unbanked sector where the maximum potential lies. One key reason for such ignorance of Indian rural users has been the difficulty in gathering data around the unorganized Indian rural segment. There is a growing interest in solutions that can incorporate these unorganized data pointers, largely qualitative, to give a comprehensive understanding of the tier-II and tier-III market. Traditional Non-Banking Financial Companies such as IFMR Holdings and agent-based new-age financing players such as Equitas Holdings and Ujjivan Financial Services, which caters to unbanked urban poor, have made big strides in this space. These key players have created strong algorithms that have been improved iteratively with the addition of multiple data pointers gathered not only from technology but also from on-field agents.
The traditional business lending segment is yet to witness major disruptions in the Indian context. The huge financing requirements and decades of trust and relationship among financial institutions and businesses have been tough to crack. However, the SME sector and the emerging digital business sector have started to take the alternative lending approach. Solutions such as receivables financing, equipment finance and to a certain extent mortgage finance have seen traction among the startups.
In spite of the pivotal role it plays in the country’s economy, the SME sector suffers on account of inadequate financial access with an estimated USD 50 billion gap in SME credit. Fintech startups are allowing SMEs to focus on building their business by taking care of the gaps in SMEs capital requirements. The credit risk analysis is performed digitally so that loans are provided in less than 48 hours. Startups in SME financing like IndiaLends, Lendingkart, and Faircent have gained a lot of attention from the investor community. Invoice financing startups such as KredX is into an invoice discounting to solve the problems of working capital of micro, small and medium enterprises by releasing the cash tied up in customer invoices that would otherwise be paid in 30 to 90 days. Another example is Instakash, a mobile data analytics company applying AI and machine learning to create financial products, focused on consumers and SMBs, to simplify financial access for next-generation users. They are leveraging the overall growth of new-age startups and have developed dedicated loan products to meet those demands and have specific car loan products to finance Uber, Ola, and other taxi-hailing service drivers.
Bank technology solutions startups aim to partner with banks to enhance loan origination and servicing capabilities. These include startups that typically provide digital on-boarding, underwriting technology, and loan servicing capabilities. This key segment has noted widespread development in markets like the US and the UK but is yet to take off in the Indian market, providing a major opportunity for Fintech startups.
Overall, Swiss startups looking to enter the alternative lending market in India can take a cue from the above examples and incorporate a mix of online and offline models to cater to the services of this still largely unpenetrated market. Startups can build solutions to provide an easy-to-use, low-cost, and better alternative lending for the borrowers and an alternative investment vehicle for retail and institutional investors.