Point of View: FinTech insights December 2017

2017: The year of the customer

2017 proved to be a significant milestone in the growth of financial services in general and FinTech in particular in India. Demonetisation sowed the seeds for the rapid adoption of digital payments and banking. FinTechs have helped accelerate the growth immensely through innovative products and solutions. Investments into the FinTech space in India witnessed frenzied activity this year, with the total value of investments jumping by 388% from 383 million USD in 2016 to 1,868 million USD in the first three quarters of 2017^.1 Further impetus was provided by a number of favourable guidelines issued by the regulators in the consumer-facing space. Multiple events and activities in the FinTech space crystallised together, leading to a very interesting journey for consumers in 2017.

Better access to finance

With over 1 billion mobile phones, 325 million broadband connections and 306 million new bank accounts, India became a case study in digital financial inclusion, driven by Jan Dhan, Aadhaar and mobile (JAM), as reported by the Ministry of Communications. Such efforts brought more people into the formal banking ecosystem, and FinTech innovation has helped create solutions that can be customised for different strata of customers.² The alternative lending industry, focused on people without access to formal credit lines due to lack of sufficient credit history, continued to attract attention.

More than 225 alternative lending companies were founded in India in 2017 and the industry was the second most funded in India’s Fintech space.³ One of the biggest challenges for firms was the lack of regulatory support for new lines of business. The year marked a significant shift in this space as well, with RBI releasing guidelines for person-to-person (P2P) lending. The RBI directions were a significant step towards creating a differentiated and sustainable lending model in India and bringing more of the unbanked population into the formal economy.

¹ CB Insights
² NPCI
³ Tracxn

A seamless user experience

One of the roadblocks in user experience in the past was the inefficient, costly and broken verification processes at the time of customer registration. This is now history thanks to the advent of Aadhaar and India Stack. According to the National Payments Corporation of India (NPCI), eKYC verifications have jumped to almost 77% to 84 million from FY16–17 to FY 2017–18, speeding up the on-boarding process and reducing costs significantly. The next stage of evolution was the transacting environment. The growth story of Unified Payments Interface (UPI) was one of the key highlights of the year. As per official statistics from NPCI, UPI volumes stood at 105 million in November 2017, an exponential jump of more than 10 times in just six months. Quite a few firms have rolled out innovative solutions utilising UPI. Alongside, there were two other significant developments in the government’s push for digital payments - lowering of the merchant discount rate (MDR) for smaller merchants and, subsequently, the waiving of MDR for transactions up to 2,000 INR which will further boost the adoption of digital payments in India.

Many FinTech players are also contemplating offering EMI payments and direct debit options over UPI to consumers, potentially making the transaction ecosystem smoother and more frictionless.

In terms of boosting the digital experience, we saw many incumbent banks move to virtual assistance and chatbots powered by AI, and we can expect to see more localised and intuitive avatars in 2018. Watch out for the emergence of voice as the new interface.

Spoilt for choice by strategic partnerships

Over the last two years, traditional financial institutions started perceiving FinTechs as collaborators rather than competitors. With an uptake in FinTech activity, 2017 saw almost 46 strategic partnerships and deals between lenders, payment companies and FinTech innovators.

With many innovative partnerships over the last year, consumers definitely have more ‘one-stop’ mobile solutions to choose from, and this space is expected to get even more exciting.

Rise of the retail investor

The retail investment space has also seen a steep rise this year. According to data from industry regulator SEBI, mutual fund folios grew by over 95 lakh in the first eight months of the current fiscal year to an all-time high of 6.5 crore by November end. Apart from consumers looking at mutual funds as the preferred destination to park their money post demonetisation, this can also be attributed to a variety of factors, including better offerings by incumbents and the rise of robo-advisory platforms.⁴

⁴ SEBI

What to expect in 2018 and beyond

Along with the segments mentioned above, a few others could also emerge and will be exciting to watch. One of the areas with low digital penetration currently in India is insurance, but many new online insurers and marketplaces that seek to offer seamless and digital distribution models are coming up. Traditional insurance players are also looking to partner with such entities to expand their penetration and scouting for data partnerships with drone, wearable technology, IoT, telematics and other types of tech start-ups to augment their risk assessment and offerings.

The Second Payment Services Directive (PSD2) guidelines around open banking in Europe may see a positive impact in India as well, with banks and FinTechs further collaborating over innovative APIs to offer customised solutions.

Alternative data would be the key to unlock access to credit for new customers coming into the banking fold. Expect more data-related partnerships to be inked between incumbents/FinTechs and utilities/payments/telcos/ecommerce/retail players.

The blockchain is poised to enter the mainstream with use cases such as digital identity, cross-border payments, and trade finance powered by platforms from enterprise application providers.

Incumbents would focus attention on the application of FinTech and emerging technologies in the middle and back office to solve for regulatory compliance, faster audits, fraud/anomaly detection and better reconciliations.

In retail investing, discount brokerages and robo-advisory platforms will continue to fuel growth and low-cost investment options for consumers. On the other hand, cryptocurrencies and initial coin offerings (ICOs) are an emerging area across the globe, and have also seen interest from retail investors in India.

But most are treading with caution as it is a regulatory grey area. Overall, the picture looks promising for consumers, and they should continue to remain the king with FinTechs challenging and also working together with traditional financial institutions to provide a better, faster, larger and more secure catalogue of innovative services.