Most of us would agree that commuting has become much easier with the advent of Ola and Uber, flashing placards displaying Swiggy or FoodPanda outside fast food shops/ restaurants have become a common sight, the words ‘Paytm Karo’ have been engrained in the consumer’s mind and the Netflix revolution has completely transformed India’s consumption of digital entertainment. Digitisation has touched our lives subtly in so many ways and this trend is here to stay. The most important development is the emergence of fintech firms. They hold the potential to bring about a paradigm shift in the way financial services are delivered.
Despite rising interest rates, the possibility of a global slowdown, rising uncertainty owing to the US-China trade war and exchange rate volatility, the World Bank has pegged India’s growth projection at 7.3% for 2018-19 and 7.5% in 2019-20 (Mishra, 2019). The upswing in consumption will propel India’s growth. According to a report ‘Future of Consumption in Fast-Growth Consumer Markets: India by the World Economic Forum and Bain & Company, India’s consumption will increase four times by 2030 and it will still remain one of the youngest nations with over 1 billion active internet users. (Ojha & Ingilizian, 2019). The Indian populace has been very receptive to the trend of digitization as evident by the smartphone explosion, increasing digital payments, expanding e-commerce market, rising consumption of digital entertainment and use of food delivery apps etc. This will influence their buying behaviour as the internet becomes their biggest source of pre-purchase research.
This presents an ideal scenario for the growth of fintech firms in India. There are over 900 fintech firms in India. Digital lending which includes capital financing, peer to peer lending and SME lending constitutes 31% of the fintech industry followed by digital payments at 25% (NASSCOM & Zinnov, 2018). Many global firms like Google Pay, Amazon Pay have also entered the Indian fintech landscape. There are many reasons for the growth of fintech in India. Despite banks being omnipresent in urban areas, they are unable to meet the demands of the younger generation which does not want to wait in the queue in a bank branch and wants simple and quick procedures on a fully automated digital platform. This has provided e-commerce firms, the space to innovate and provide efficient financial services at lower costs.
Greater financial inclusion is one of the core objectives of India’s growth agenda and the inability to create functional banking infrastructure has been recognized as one of the impediments preventing rural-urban and regional convergence and the spread of financial services. Thus, the focus has shifted to digital modes for greater connectedness and to bridge this information divide. To support this, the government rolled out its flagship Jan Dhan Yojana scheme. The National Payments Corporation of India (NPCI) was set up jointly by the RBI and the Indian Banks’ Association in 2007 to revolutionize the settlement systems and retail payments in India. This has resulted in the evolution of national payments interface and technology platforms. This includes the Unified Payments Interface (UPI) which is an instant money transfer system, Bharat Interface for Money (BHIM) app which allows the transfer of funds between accounts of different banks with a single mobile wallet, Aadhar Enabled Payment System (AEPS) which makes payments using Aadhar number authenticated by the biometric scan (Shah & Et., 2017)
The number of fintech startups in India has exponentially increased driven mainly by venture capital funds and private equity investors. This coupled with the growing telecom industry, plummeting data costs and greater use of mobile internet services has allowed fintech firms to gain ground and have a higher outreach. This has acted as a disruption in the traditional financial services market. Fintech firms have definitely revolutionized the system of retail payments but its biggest impact has been felt on Micro, Small and Medium Enterprises lending.
MSMEs generate more employment compared to any other sector except agriculture and hold the key to make India a big manufacturing hub. But their contribution to the GDP remains below potential. Despite their heterogeneous character, they face the common challenge of lack of access to institutional credit. Based on research conducted by BCG and Omidyar network, report Credit Disrupted, 2018, MSME digital lending has the potential to grow 10-15 times larger by 2023. MSMEs are rapidly formalizing i.e. they are becoming government-licensed or government-registered businesses and digitizing i.e. they are adopting digital processes and practices (Omidyar Network & BCG, 2018). The Goods and Services Tax has propelled MSMEs to digitise. MSMEs have started using digital platforms to search for business information, use emails and WhatsApp for communication, make and receive payments and to sell their products. GST has allowed MSMEs to create a database of transactions, bank account statements and tax returns which has increased their creditworthiness. After the rollout of GST, the credit uptake of MSMEs has increased.
The majority of Indian MSMEs are Nano (annual revenue up to INR 10 Lakh) and Mini (annual revenue between INR 10 Lakh and INR 1 Crore). MSMEs are generally viewed as suboptimal borrowers by the traditional banking system due to incomplete financial statements, lack of any meaningful collateral and the high cost of lending. MSMEs find the long and tedious procedures, bureaucratic and opaque system, the lethargic and unhelpful attitude of bank employees, short loan tenure and complicated rules as the major factors discouraging them from availing formal credit. As a result, they largely rely on informal sources such as borrowing from friends, relatives, moneylenders etc.
One of the most obvious advantages of digital lending platforms is loan approval speed. Digital loans have significantly shorter turnaround times than traditional loans—especially for small-ticket loans, which are most common among new-to-credit MSMEs (i.e., first-time borrowers). The 3-1-0 model which implies three minutes to decide, one minute to transfer the money and zero human touch is increasingly being advertised. As bank account statements become more granular, digital lending firms are able to generate greater insights into the borrowing behaviour and use surrogate data such as telco and utility payments. Digital lending firms have leaner staff, efficient business models enabling them to enhance operational cost efficiency. Digital lending start-ups are using advanced tech like data analytics, artificial intelligence and blockchain to determine the creditworthiness of potential borrowers. Right now e-commerce digital aggregators are collaborating with banks and NBFCs to extend their services but they have the ability to become standalone players.
With the addition of 1200+ startups and 8 unicorns that is a privately held startup that has crossed $1 billion valuations in 2018, India’s startup ecosystem is becoming more sophisticated and expanding to tier II and tier III cities. The growth of incubators and accelerators like Microsoft accelerator and IIM Calcutta Innovation Park to provide mentorship to nascent startups, growing network of seed and angel investors, government initiatives like tax rebates and Fund of Funds for Startups programme, growing IT infrastructure and presence of good engineering and management colleges is giving startups the much - needed impetus. To prevent India’s demographic dividend from turning into a demographic curse, it is necessary to create a technologically abled workforce which holds a competitive advantage in the global labour markets. India’s information technology abilities already hold significant power in the world attracting foreign investment and due to the role of the Indian diaspora in Silicon Valley. Digitisation and formalisation hold the key to catapult India into the future.
Mishra, A. R. (2019, January 10). World Bank pegs India’s fiscal 2019 growth at 7.3%. Livemint.Retrieved from: https://www.livemint.com/Politics/NnjV6Sc0SSxfluBbEoKmLM/Indias-GDP-expected-to-grow-at-73-in-201819-World-Bank.html
NASSCOM and ZINNOV MANAGEMENT CONSULTING (2018). Indian Startup Ecosystem 2018 – Approaching escape velocity. NASSCOM.
Ojha, N.P. & Ingilizian, Z. (2019, January). How India will consume in 2030: 10 mega trends. World Economic Forum. Retrieved from: https://www.weforum.org/agenda/2019/01/10-mega-trends-for-india-in-2030-the-future-of-consumption-in-one-of-the-fastest-growing-consumer-markets/
Omidyar Network and The Boston Consultancy Group (2018, November 20). Credit Disrupted Digital MSME Lending in India. Omidyar Network.
Shah, R., Kayal, G.M., Chaudhury, R.R., Gurtoo, P., & Sreyasi, S. (October 2017). The battle for the Indian consumer- Fintech companies transform the financial services landscape in India.Ernst and Young.
Image credits – Shutterstock
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