While newspapers today have regular columns on startups, what is really making waves is the fintech startups that strive to change the way we handle our financial transactions. They are evolving and trending and they are here to stay:
Imagine a scenario where you can pay for a cup of coffee with your iPhone or solve a complex financial issue using an app. That’s the power of the fintech today. It has brought in major changes in every aspect of life, especially in handling one’s finances.
While technology has been, a factor causing disruptions in the financial services sector for nearly 15 years, especially with the development of core banking system, it has penetrated in an unprecedented manner in the last two years. Practically everything in banking is technology-based – fund transfers, payments, loan processing, disbursals and recovery, account opening and what not. What facilitated this strong prevalence of technology are the fintech startups and they are poised to create more disruptions. According to research studies, the number of fintech startups funded in the first half of 2016 equals the total number of startups funded in the sector in 2015. It is believed that as much as $1.2 billion is invested in fintech startups in the country in the last two years. Nasscom has estimated that at the global level fintech software and services sector will become a $45 billion opportunity by 2020, growing at a compounded annual growth rate of 7.1%.
In simple terms, fintech is business based on using software to provide financial services and most fintech companies are startups founded with the purpose of disrupting incumbent financial systems and corporations that rely less on software. These startups often work in partnership with research institutes, government agencies, technology enterprises and create an integrated ecosystem which assimilates the combined expertise, experience and technology provided by the entities involved.
A joint study by KPMG and Nasscom in June this year says: “India is transitioning into a dynamic ecosystem offering fintech startups a platform to potentially grow into billion-dollar unicorns. From tapping new segments to exploring foreign markets, fintech startups in India are pursuing multiple aspirations. The Indian fintech software market is forecasted to touch $2.4 billion by 2020 from a current $1.2 billion. The traditionally cash driven Indian economy has responded well to the fintech opportunity, primarily triggered by a surge in eCommerce, and smartphone penetration. The transaction value for the Indian fintech sector is estimated to be approximately $33 billion in 2016 and is forecasted to reach $73 billion in 2020 growing at a five-year CAGR of 22%. The investor attention has been concentrated towards hi-tech cities in 2015, with Bengaluru witnessing 11 VC-backed investment deals of $57 million, followed by Mumbai and Gurgaon with nine and six deals, respectively.”
The report claims that from wallets to lending to insurance, the services of fintech have redefined the way in which businesses and consumers carry out routine transactions. “The increasing adoption of these trends is positioning India as an attractive market worldwide,” it adds.
A similar report by Google and Boston Consultancy Group says prominent startups such as Mobikwik, Paytm, Freecharge, Itzcash, Momoe and Suvidha will usher in a payments revolution in India. “The Indian population is projected to make digital payments worth $500 billion in the next four years, resulting in non-cash overtaking cash transactions by 2023. These non-cash payments, which include cheques, demand drafts, net-banking and cards, currently account for 22% of all consumer payments in India and are projected to increase to 59% of all consumer payments by 2025.”
The report says “Over the last five years, digital transactions have shown steady growth of 50% yoy, followed by ATM transactions growing at 15%. It also predicts that India’s digital payments industry will grow to $500 billion by 2020; it will account for 15% of the country’s GDP; more than 50% of India’s internet users will use digital payments by 2020; the top 100 million users will drive 70% of the gross merchandise value (GMV) for these payments; and the country’s non-cash contribution (including cheques, demand drafts, net-banking, credit/debit cards, mobile wallets and UPI) in the consumer payments segment will double to 40% by 2020.
Among the factors that contribute to the massive increase in digitization of payments in the country, according to the report are: increased internet penetration and use of smartphones, entry of fintech startups, improved online to offline presence and policy incentives.
Fintechs have been able to create a huge impact on the banking and financial services in India. Some of the key areas where fintechs have brought in disruptive changes in the prevailing systems are:
Payment services where payments can be made and accepted over the web and on the mobile without needing any merchant accounts. Fund transfers are made directly to the bank account linked to the payee thereby securing the payment. Wallet companies belong to this category.
Companies that offer customized financial information and services to customers on issues like investment, savings, personal finance management and other advisories. There are startups like Scripbox, PolicyBazaar and BankBazaar which offer these services.
Peer-to-Peer (P2P) Lending is one area where technology has made a significant contribution. P2P companies have a totally different business model and they depend on data sources to provide faster and easier access to capital as well as offer investment opportunities. Lendbox, LenDen, Faircent and i2iFunding are P2P platforms.
Remittance Services is yet another area where startups have made a mark. Usually, these firms have foreign origins and they take care of the gaps in remittances and ensure almost realtime, seamless transactions. There are firms like Instarem and FX which tend to finish the monopoly organizations.
There are several other services that fintech companies are offering using cloud computing and technology solutions. In fact, fintech today is capable of even offering digital platforms to connect buyers and sellers as well as facilities like accounting software which can be online. These applications are so varied that they are of use in sectors ranging from agriculture to manufacturing to software development.
Crowdfunding platforms increasingly make use of technology so that an entrepreneur can be in direct touch with a venture capitalist.
Fintech is creating revolutionary tools for making use of big data and predictive analytics. These tools are able to offer actionable business insights. There are startups that offer specific solutions for advanced analytics and big data use.
While insurance industry in India has not seen disruptive innovations on a mass scale, in the US there are fintechs like Oscar, a health insurance startup that uses technology, data and design to improve health insurance experience and make it accessible to anyone.
Today, while fintech startups are constantly evolving, they cover a wide variety of technologies, audiences and services. Its contributions to business are going to be immense. While fintech provides different benefits to different customers, the most immediate benefit to all would be increased accessibility and speed. Using faster, always on internet connections, big data computing and mobile connectivity, businesses are able to buy in to complex, feature rich financial software suites and managed services that in the past would have involved huge costs by way of equipment, licenses and manpower. Better portrayal of information and realtime updates that are possible offer enterprises with hitherto not possible insights. They can make use of such information to update every strategy even as it is being evolved.
Kalle Radage, president of Canada based payments processing firm Payfirma was once quoted as saying fintechs are reducing friction to pay. He said frictionless payments and banking mean faster growth for businesses and better experiences for consumers. Yet another aspect of fintech is the transparency fintech could bring in. An example will be the blockchain technology, which provides a decentralized, transparent and more secure method of tracking exchange of assets, including cash. And the emergence of bitcoin is all poised to shake up the whole financial services domain.
In India, the disruption caused by fintechs is actually supplemented by some government initiatives like direct benefit transfer (DBT) payments, the Unified Payments Interface and the Bharat Bill Payments System. Besides, banks too are interested in having strategic tie-ups with fintech companies so that they can be of help in creating better customer relationships, prevent frauds, get customized tools for AI and anti-money laundering. For example, HDFC Bank, Axis Bank, ICICI Bank and State Bank of India are early movers in tying up with fintech start-ups in their digitization efforts.
Protagonists feel India has a large untapped market for financial service technology startups. They cite that as much as 40% of the population are unbanked and 87% of payments are made in cash. Mobile usage expected to reach a new peak and internet penetration will improve further. On the other side, it has been established that nearly 90% of small businesses do not depend on formal financing options. These glaring anomalies offer scope for fintechs to develop customized solutions.
What differentiates fintechs from traditional financial service institutions using technology?
Just for example, while banks, NBFCs and other financial institutions use technology to simply calculate interest rates or NAVs or facilitate transactions, fintechs use machine learning algorithms and alternative data points such as social media footprints, call records, shopping histories and payments to utility service providers to increase efficiency and provide greater access to credit. The TAT is also faster for the approval and disbursal of loans by fintech firms despite several banks digitizing and speeding up these processes. No doubt, the traditional financial services institutions can introduce digital products leveraging on the strengths of the fintechs thereby bringing in efficiency as well as in modernizing their product range, improving customer engagement and getting themselves ready for the changing needs of the customers. Some of the Indian banks have already taken up the challenge by way of introducing mobile apps that can do transactions and setting up partnerships with fintechs to develop innovative products. One distinct effort has been by Barclays in setting up and operationalizing its fifth global fintech innovation center that will be located in India. Another important development is the RBI setting up a multi-disciplinary committee to study the fintech business in the country. The aim is to understand the risks involved and emergence of new models, and assess how the banking system could then adapt and respond to them. It has also granted licenses to 11 fintech entities to establish payment banks that provide savings, deposit, and remittance services.
When we look at the global level, fintechs have attracted $31.6 billion of investment in the US alone and some $18.1 billion elsewhere in the world over the last five years. It has assumed the status of one of the hottest technology sectors. This market is not likely to get saturated soon. It is going to make trends in both payments and lending for a long time to come. For they are bound to flourish with more regulatory freedom, evolving technologies and innovative business models,
And with many fintech startups reaching maturity by 2020, it is an industry sector that is evolving and evolving in a definite and futuristic manner.
Top fintech startups in India
Involved in eCommerce, payment banks and wallets. Total funding raised: More than $728 million
Involved in mobile payments (wallets), recharges. Total funding raised: $120 million
Involved in mobile payments (wallet). Total funding raised: $85 million
Online marketplace for loans and insurance products. Total funding raised: $80 million
Online lending platform for SMEs. Total funding raised: $42 million
Online lending platform for SMEs. Total funding raised: $69 million
Online lending to SMEs. Total funding raised: $76 million
Digital lending platform for working capital finance for SMEs. Total funding raised: $42 million
Involved in financial inclusion efforts. Total funding raised: $27 million
Electronic Payments and Services
Involved in payments, outsourcing ATM services to large banks. Total funding raised $36 million
Involved in merchant acquiring operations and mobile POS solutions. Total funding raised $30 million
Citrus Pay (Acquired by global payment service provider PayU)
Provides mobile payments and payment gateway. Total funding raised: $32.5 million