Unleashing the Financial Frontier: Rise and Revolution of Fintech in India

In the vast landscape of technological advancements, one sector has experienced a meteoric rise, revolutionising the way financial services are accessed, delivered, and experienced: FINTECH. Nowhere has this revolution been more prominent than in the vibrant and rapidly evolving economy of India. The industry has experienced remarkable growth, with over 2000+ fintech startups operating in India. The market size is projected to surge to an astounding USD 150 billion by 2025. The figure shows the rise of fintech, a force that would unleash the untapped potential of millions, transforming the very fabric of India's financial landscape. 

In the span of a mere decade, fintech had stormed into the lives of everyday Indians, disrupting age-old norms, challenging established giants, and placing the power of financial freedom firmly in the hands of the people. India has surpassed the global average with an impressive 87% adoption rate in the race to embrace FinTech. With a perfect blend of innovative entrepreneurs, a burgeoning digital infrastructure, and a massive underserved population, India has become a hotbed for fintech innovation, reshaping the financial landscape and empowering millions with newfound financial freedom. 

As we navigate through this fintech revolution, we will delve deep into the fascinating journey of fintech in India, exploring the factors that fueled its rise, the challenges it encountered, and the impact it has had on the lives of millions. As fintech continues to evolve and mature, the potential for financial inclusion, economic growth, and innovation remains immense. We will also unravel the unique characteristics that set India's fintech landscape apart and the innovative solutions that have emerged as a result.

How is the Current Fintech Revolution Different from the Previous? 

Fintech adoption in India is experiencing unprecedented growth, surpassing most countries worldwide in terms of scale. This is evident in several key factors:

1. India ranks among the fastest-growing fintech markets globally, with more than 67% of the 2,100+ fintech companies established in the last five years.
2. As the third-largest fintech ecosystem, India boasts the highest fintech adoption rate globally, standing at an impressive 87%.
3. The penetration of digital payments in India is game-changing, as evidenced by the BHIM UPI recording over 3.2 billion transactions in July 2021 and the UMANG App witnessing a cumulative 1.7 billion transactions.
4. Projections indicate that India's fintech industry is set to achieve a throughput of $1 trillion and revenue of $200 billion by 2030, underscoring its immense potential.
5. The neo-banking sector in India has experienced a five-fold increase in funding in the past year alone, with expectations of reaching a significant milestone of $215 billion by 2030.

Moreover, what was once a sector dominated by startups is now attracting established companies as well as public and private sector banks. It is rapidly gaining momentum, outpacing global trends, and attracting widespread recognition. With a thriving ecosystem, increasing adoption rates, and a growing presence of established players, the industry is poised for remarkable growth and innovation in the years to come.

Mapping the Fintech Landscape through the Varied Segments in India's Fintech Industry

The fintech landscape in India encompasses various segments that are rapidly adopting digital-native solutions. It is driven by fintech startups and unicorns that aim to address user pain points and solve industry-specific issues. The major types of fintech startups in India can be categorised as follows:

PayTech

This segment offers consumer-centric payment services like third-party application providers, prepaid cards and wallets, bill payments, QR code payments, payment aggregators, and point of sale (POS) systems. Corporate cards, B2B payments, and invoice payments are examples of services geared towards businesses. Major players in this segment include Paytm, PhonePe, MobikWik, and Google Pay.

LendTech

Consumer-centric services in this segment include buy now, pay later, personal loans, salary loans, gold loans, auto loans, education loans, and peer-to-peer lending. Business-centric services include corporate cards, fixed-term finance, and trade finance. Fintech services employed here include collections management, credit bureaus, alternate credit scoring, lending as a service, and loan origination and management systems.

Digital Banking

This segment leverages technology through digital subsidiaries of banks, retail neobanks, and SME neobanks (digital platforms for business banks) to create digital alternatives or subsidiaries for traditional banking. Fintech services in digital banking include conversational platforms, account aggregators, API providers and aggregators, banks with open APIs, banking as a service, and core banking.

InsurTech

Insurtech companies use technology to provide services such as digital insurers, insurance comparison platforms, employee insurance, and electronic insurance. Fintech services in Insurtech include claims management, sales platforms, underwriting risk management, insurance infrastructure APIs, insurance product configurators, and policy administration systems.

WealthTech

Wealth and expense management services in this segment are facilitated through robo advisors, discount brokers, mutual fund investment platforms, research platforms, and alternative investment platforms. Fintech services applicable here include white-label robo advisors, portfolio management suites, and CapTable management.

Finance Fintech

This segment encompasses services related to accounting, procure-to-pay, quote-to-cash, taxation, and reconciliation. These services cater to enterprises, SMEs, and microbusinesses.

RegulationTech

Technology is utilised to meet compliance and regulatory requirements in the financial services sector, including KYC, digital onboarding, fraud detection, anti-money laundering (AML), and banking compliance and risk management solutions.

B2B payments

This segment primarily caters to vendor or employee payments and offers services such as digital accounting, procure-to-pay, quote-to-cash, taxation management, and reconciliation.

UPI: India’s Story of the Fintech Revolution

In a world where convenience and speed drive our daily lives, the emergence of the Unified Payments Interface (UPI) in 2016 has revolutionised the way we handle financial transactions. UPI, a groundbreaking payment system, has swiftly gained popularity, transforming the digital financial landscape in India. Over 68% of all payments are done using UPI which is a big milestone for a nation which was once highly cash dependent. 

The UPI Revolution: Empowering India's Digital Economy

UPI allows users to have seamless transactions by bridging the gap between traditional banking and digital convenience, empowering millions of Indians to transact securely and effortlessly.

Rapid User Adoption: Fueling the Growth of UPI

The adoption of UPI by users across India has witnessed an exponential growth trajectory. The simplicity of its registration process, coupled with the convenience it offers, has attracted a diverse user base. With the number of UPI transactions skyrocketing, it has become evident that UPI has captured the trust and preference of Indian users as their go-to digital payment method. 

The Current UPI Landscape: Evolving for Greater Financial Inclusion

Today, UPI has become the backbone of India's digital payments ecosystem. With various government initiatives promoting digital transactions, UPI has played a pivotal role in achieving financial inclusion. In India, 8.7 billion UPI transactions were recorded in March 2023 alone, and the financial year 2022–2023 saw an overall increase of 82 percent compared to the previous year. 

UPI's Future: India as the Global Leader in Digital Finance

Looking ahead, UPI's potential is not limited to India alone. Its remarkable success story has attracted attention worldwide, positioning India as a global leader in digital finance. The versatility and scalability of UPI make it an ideal model for other countries seeking to enhance their digital payment infrastructure.  

As UPI continues to evolve and expand its offerings, it has the potential to reshape financial ecosystems globally, driving financial inclusion and revolutionising the way we transact on a global scale. 

Digital Rupee: Future of Payments in India

The Reserve Bank of India (RBI) launched the digital rupee on December 1, 2022. The digital rupee is a central bank digital currency (CBDC), which means it is a digital version of the Indian rupee. According to RBI - “The use of e₹-W is expected to make the inter-bank market more efficient. Settlement in central bank money would reduce transaction costs by preempting the need for settlement guarantee infrastructure or collateral to mitigate settlement risk. Going forward, other wholesale transactions and cross-border payments will be the focus of future pilots, based on the learnings from this pilot.”

• Legal tender in India, backed by the RBI.
• Stored in a digital wallet
• Used to make payments online and offline.
• Interoperable with other digital currencies, such as Bitcoin and Ethereum. 

The launch of the digital rupee is a major step forward for India. It will help modernise the Indian economy and make it more competitive in the global economy. It will also help to improve the lives of millions of Indians by making it easier for them to access financial services. The trial programme for the digital rupee has begun in four Indian cities, including Mumbai, New Delhi, Bengaluru, and Bhubaneswar, and in the second phase, the digital rupee will be available in Ahmedabad, Gangtok, Guwahati, Hyderabad, Indore, Kochi, Lucknow, Patna, and Shimla, among other cities. The State Bank of India, ICICI Bank, Yes Bank, and IDFC First Bank were the four institutions that the RBI teamed up with for the initial testing and will later include the Bank of Baroda, Union Bank of India, HDFC Bank, and Kotak Mahindra Bank.

Here are some of the motives behind the launch of the digital rupee:

• To promote digital payments
• To reduce the use of cash
• To make it easier for people to access financial services
• To reduce the cost of processing payments 

The digital rupee is a major step forward for India. It is expected to have a positive impact on the Indian economy and improve the lives of millions of Indians.

Challenges Hindering Fintech Adoption in India

Before diving into investing in fintech startups, it is crucial to grasp the distinct risks that come with this dynamic sector. While fintech services and products may initially appear as enticing investment opportunities, understanding these risks is paramount for informed decision-making. This will help them capitalise on the transformative potential of fintech startups while mitigating potential challenges along the way.

Let's dig in:

Limited Financial Literacy

India faces challenges related to poor educational infrastructure and low internet penetration, which contribute to low levels of financial literacy. Despite government efforts to address the issue of financial literacy, the impact will take time to materialise. Presently, a considerable portion of the Indian population remains unbanked, relying on cash transactions. Improving financial literacy is vital for fostering fintech growth and encouraging widespread adoption of digital financial services.

Fintech Operator Fraud and Misconduct

Technology in investment banking, including fintech, carries an inherent risk of misconduct and fraudulent activities such as money laundering. Implementing safeguards and collaborative efforts within the fintech industry can help identify and address potential threats. Proactive measures to detect and prevent fraud and misconduct are crucial to safeguarding the company's reputation.

Transactional Speeds

The hallmark of fintech offerings is their rapid transactional services. However, investing in fintech necessitates a commitment to adopting the technology required to efficiently operate these financial products. Both fintech companies and the firms utilising their solutions must embrace the need for fast and seamless financial transactions to fully leverage the benefits of fintech.

Increased Risk of Product Unsuitability

Fintech, particularly in startup companies, faces the risk of developing products that are unsuitable for their target audience and end-users. It is vital to consider user friendliness and avoid overwhelming features that could hinder the user experience. Complex technologies may impede the rapid deployment of services, a key advantage of fintech.

Cross-Border Transactions

Implementing fintech technology for firms relying on cross-border transactions requires caution. Technology-based investment banking systems may not yield the same results across different countries. Varying regulatory frameworks and infrastructure can create challenges in security and tracking transactions, underscoring the need for proper safeguards and adaptation to local contexts.

Unfair Outcomes Due to Algorithmic Decision-Making

Fintech heavily relies on automation and machine learning, utilising algorithms to make business-related decisions. However, this dependence raises concerns about potential unfair or discriminatory outcomes. Regular audits of these algorithms are essential to identify and eliminate biases, ensuring fair practices in fintech services.

Technology Failures

Repeated technology failures can severely impact the reputation of fintech companies and the businesses relying on their solutions. A technology outage in the financial industry can restrict or even deny users access to critical services. In an era where economies operate around the clock, uninterrupted access to these services is crucial.

Regulatory Practises

Fintech companies often operate with less regulatory oversight compared to traditional investment banks, allowing for faster service delivery. However, this also exposes them to a higher risk of fraudulent activities. It is important to note that fintech regulation may become a reality in the future, potentially impacting the scope of services provided by fintech companies.

Positive Impacts of Embracing FinTech

The fintech industry in India has witnessed a significant transformation due to technological advancements, enabling the entry of fintech companies and the provision of innovative solutions on a smaller scale. This shift has led to the disaggregation of financial services, resulting in enhanced convenience and experience for consumers.

A prime example of this is the payment sector in India, where fintechs have played a crucial role. One of the key advantages of these companies is their ability to offer financial services that are comparable to those offered by traditional regulated entities but at a lower cost. This disruption is evident in India's brokerage industry, where FinTechs have made a notable impact.

Additionally, major technology companies, commonly known as Big Techs, have expanded their footprint in the financial services sector. Leveraging their extensive user base and network effects, these companies utilise data to provide contextualised or integrated financial products alongside their non-financial offerings. Big tech companies have successfully entered credit scoring, lending, and payment systems, diversifying their range of financial services.

Final Take 

The future of the fintech revolution in India is undoubtedly promising, presenting an exciting landscape of opportunities for continued development. Over the years, fintech companies have transformed the way financial services are delivered, making them more accessible, efficient, and inclusive for a large section of the population. The growth of the fintech industry in India has been fueled by the widespread adoption of digital payment systems. 

However, the fintech industry in India also faces its fair share of challenges. While urban areas and tech-savvy individuals have embraced fintech solutions, a significant portion of the population still lacks access. By overcoming the challenges, India's fintech industry can unlock its full potential, empowering millions of individuals and businesses with accessible, affordable, and inclusive financial services.