“By seizing the opportunities that disruption presents and leveraging hard times into greater success through outworking/outinnovating/outthinking and outworking everyone around you, this just might be the richest time of your life so far” – Robin S. Sharma
The term financial technology (fintech) has been adapted to herald the digitalisation of the financial services sector and the emergence of innovative and disruptive technologies within and for financial services. Technological innovations focusing on the financial industry have led to a rapidly growing new fintech ecosystem. The fintech industry has transformed from a sluggish sector to a luminous sector. It is seeing a boom in investment activity as new technology and changing customer behaviour transform financial services. The financial services industry today is more focused on technology innovation than it has been at any other point in its history and hence the country is witnessing a major shift in financial services as it enters the digital age.
Just as smartphone messaging applications surpassed all telecom operators in scale, fintech is poised to become the next sector ripe for radical change and is being remodelled by entrepreneurs for entrepreneurs. Startups are addressing emerging fintech sectors including payments; mobile-wallets, trading and investing; online non-banking finance companies, customer engagement; personal financial planning and wealth management; banking and insurance; P2P lending and crowdfunding, innovations in financial literacy and education, retail banking, investment and more.
Backed by venture financing, many companies are causing a disruption in financial services. The business of fintech is less geographically concentrated than that of brick-and-mortar financial institutions. The benefits associated with new payment technologies, including multi-channel payment solutions, lower processing costs, reduced checkout times and better understanding of customer behaviour, have seen a number of investors and non-banks invest heavily in this segment.
Fintech startups have also enjoyed funding through various sources. State Bank of India recently announced a plan to set up a Rs 200-crore fund to back fintech startups and Axis Bank announced an innovation hub where it will tie up with fintech startups. While there are venture capital firms who have been focused on investing in fintech startups, there are big players who are increasingly focusing on this sector to make strategic investments.
Fintech core sub-sectors
Broadly, the fintech sector can be divided into four sub-sectors.
1. Payments (digital wallets and small finance bank): Payment banks, P2P lending
2. Investments (crowdfunding and personal finance management): Investment, empowered investors and process externalization, robo-advisory
3. Financing (micro-loans, credit facilities and remittance/SME financing): Lending, remittances, market platforms
4. Financial research and data analysis: Risk assessment, decision making, and credit score
Fintech in India is moving into every segment of the financial services ecosystem. While overall adoption levels vary, almost every segment is growing rapidly. India has a large and growing digital populace, Internet penetration has increased dramatically over the past five years and e-commerce is growing thanks to proliferation of mobile Internet.
Also, modern methods of data analysis, social media and the migration of data onto the cloud have created a hotspot moment for fintech companies looking to complement and challenge existing traditional financial services providers. The fintech startups are leveraging technology advancements to offer innovative and disruptive solutions for specific subsectors. In doing so, they are providing new products to service existing needs and disintermediate incumbent firms. Online lending marketplaces have emerged as an industry with players offering faster credit to various stakeholders.
The plethora of fintech startups entering the market is changing financial services as a vertical itself. Financial institutions’ direct competitors no longer represent the biggest challenge, as technological advancements, the emergence of disruptive products, changing consumer behaviour and the growing fragmentation of the sector are applying significant pressure. For traditional retail banks to work efficiently and enhance their business value in a disruptive environment, it is necessary that they proactively embrace the digital revolution.
The next set of cutting-edge technology to disrupt the fintech space could well be Artificial Intelligence, which can identify trends and classify customer profiles through automation. It could assess risk profile, map sales and advise a financial plan to customers on the basis of their risk appetite. Artificial Intelligence could influence the complete cycle from data to decisions for all financial services.
Initiatives by government and regulators
The fintech sector has seen various initiatives from the government and regulators: Unified Payments Interface, Bharat Bill Payments System, eKYC, Prepaid Payment Instruments, Jan Dhan Yojana, Digital India, mobile-based digital signature, Aadhaar number, digital locker, digital consent, payment banks and small finance banks. In combination, these real-time digital services will enable startups to digitise and simplify everything from bank account creation to security, from voting and subsidy distribution to tax filing and refunds across the world.
The implementation challenge
The fintech ecosystem provides services at speed, accuracy and convenience but there is threat to confidentiality of data. Fintech companies must maintain reasonable procedures to protect sensitive information of the stakeholders. The steps taken to pre-empt privacy and data security threats are of paramount importance in establishing the legal compliance. The determination of data security is highly sector specific, and depends on the nature and size of the fintech sector.
To conclude, globally, fintech is considered a threat to the formal banking systems’ profitability. A digital revolution will definitely affect certain financial products, as fintech drives prices down and erodes lenders’ margins. Fintech companies have the potential to add tremendous value to the financial services ecosystem. The success for the financial services sector will be in in collaboration with fintech and not in competition.
Reserve Bank of India deputy governor SS Mundra indicated as much recently. “The way technology is developing, nothing is impossible. Technology is both a disruptor and an enabler, and banks will have to leverage it to their advantage,” he said.
Clearly, this is a unique opportunity for traditional financial institutions to partner with disruptive players and introduce services and products ensuring efficient delivery of all the services.
Considering the positive environment with respect to fintech companies followed by the thrust on building the fintech ecosystem, a lot of activity can be expected in coming years and is likely to intensify the investment in the sector.
Vinayak Burman is founder partner at boutique law firm Vertices Partners. With inputs from Vishal Mehta, associate manager, Vertices Partners.