Since 2017, fintech players such as Paytm, PhonePe, MobiKwik have constantly evolved their business models to meet market trends
From neobanks to open banking standards, the banking and fintech industry is looking to add future-ready business models to their operations
Among the major trends, the use of automation and AI are expected to create new fintech business models
Mahatma Gandhi once said, “Every worthwhile accomplishment, big or little, has its stages of drudgery and triumph: a beginning, a struggle and a victory.” The same can be said about the fintech market in India today, which is slowly climbing the growth curve. While at the beginning of 2017, the frontrunners of the digital race were fintech players like Paytm, PhonePe, MobiKwik, among others. Thanks to government-backed initiatives such as UPI, BHIM, Aadhaar payments and BharatQR between 2017 and 2019, many new business models are constantly knocking on the doors of the Indian fintech ecosystem.
How The Fintech Growth Curve Began?
But well before that, circa 2005-2006, 97% of transactions in India were done in cash and only 3% were digital. This was largely because credit cards were the only option to pay digitally, while debit cards were still not all that prevalent. The first signs of change in the Indian payment ecosystem were seen after the formal commencement of operations of National Payment Corporation of India (NPCI) in 2009.
Fast forward to 2015, a healthy fraction of users started utilising digital payment instruments like credit/debit cards, IMPS, USSD, RTGS, NEFT, and digital wallets.
Post the November 2016 demonetisation drive, fintech gained greater prominence among the rising entrepreneurial class of the country. The continuous government support put thrust on innovation and encouraged the banking and finance industry to build and support new business models based on modern technologies.
What Are The Existing Fintech Business Models In India?
There are a number of fintech business models which are already popular among consumers, banks, SMEs and corporates among others. The list includes:
- Payment Gateways
- Digital Wallets
- Digital Insurance/ InsurTech
- Digital lending
- Payments banks
- Tech companies in financial services
- Transaction delivery
- Neo banking
- Alternative credit scoring
- Alternative insurance underwriting
- API-based bank-as-a-service platforms
Let’s dive into the details.
What Are Payment Gateways?
From money transfer to making payments through mobile or for international money transfers and payments, payment gateways are enabling safe and secure transactions across businesses in many domains. Apart from the in-house payment gateway services offered by individual banks, a few leading new-age players in the list include:
- ATOM technologies
- DirecPay, among others
What Is A Digital Wallet?
A digital wallet is a system that securely stores payment information and passwords for numerous payment methods and websites. By using a digital wallet, users can complete purchases easily and quickly with near-field communications technology or through online transfers.
Digital wallets can be used in conjunction with mobile payment systems, which allow customers to pay for purchases with their smartphones. A digital wallet can also be used to store loyalty card information and digital coupons. A few examples of digital wallets are Paytm, PhonePe, Ezetap, Freecharge, JioMoney, JusPay among others.
What Is Digital Insurance Or Insurtech?
Digital insurance is basically an insurance business model that relies heavily upon digital technology for internal processes and customer-facing operations. This space is currently dominated by nascent startups which operate across various facets of the insurance life cycle—that is, lead management, underwriting, sales and distribution, claims and renewal.
For instance, Digit Insurance is using blockchain-based systems at the backend to speed up claims processing. PolicyBazaar, Acko, Coverfox, Turtlemint, OneAssist, RenewBuy are other new-age players which are providing a digital platform to compare and buy insurance for the consumers.
Apart from this, traditional insurance companies are using technologies such as AI, data analytics, blockchain to help agents sell the right policy, set up virtual branches and help process claims faster and more efficiently. Reliance General Insurance, Bajaj Allianz Life, Max Life Insurance, ICICI Lombard are a few such traditional players that are improving their back-end processes through technology.
Besides insurance providers, underwriters are now adopting advanced technologies such as predictive analytics, AI, machine learning, IoT, social media data, telematics, chatbots and drones. Not only these technologies help in predicting consumer behaviour, and identify risk of fraud, but they are also helping companies automate claim processing and enabling entirely new customer experiences.
What Is Digital Lending?
Digital lending is basically the process of loan disbursement which is done through electronic means. It is much faster and far simpler than the conventional means and loans can be disbursed within 24 hours. The fintech business models in this category are of diverse nature and offer both short and long term products.
Digital lending includes business models such as:
- Loan Marketplaces: These platforms allow a customer to compare the available loan options from banks and non-bank entities.BankBazaar, Paisabazaar, are a few such platforms.
- P2P Lending: P2P lending, is the practice of lending money to individuals or businesses through online services that match lenders with borrowers. Peer-to-peer lending companies often offer their services online and attempt to operate with lower overhead and provide their services more cheaply than traditional financial institutions. Faircent, i2iFunding, LenDen Club, Lendbox, are few such players.
- Line Of Credit: A line of credit is a revolving account that let borrowers draw, repay and redraw from available funds. For instance, MoneyTap offers the option of taking multiple loans through a single line of credit from a bank or financial institution.
- The average rate of interest charged is anywhere between 15% to 17%. The loans can be as small as INR 2,000 to a maximum of INR 5 Lakh. The minimum tenure for a line of credit is two months going up to 36 months.
- Small Personal Loans / Instant Credit: The platforms are now offering small personal, customised and flexible loan options to the consumers to fulfil their short-term credit needs. For instance, LoanTap offers wedding loans, holiday loans, and Early Salary offers advance salary loans. Then there is PayU’s LazyPay which offers instant credit on online purchases. It works as a buy now, pay later option and offers a one-click checkout, without worrying about adding your card details, or waiting for an OTP to complete the transaction.
- SME Lending: SME loans are specially created loans for small businesses. These are designed to be in tune with unique requirements which small businesses encounter during various phases of their business. Typical business requirements include new product launch, warehousing needs, expansion to new locations, entering new product categories, hiring new employees, marketing and many more such business-related needs. Agri-lending, supply chain financing are a few other niches in this segment. A few leading platforms here are PSBLoansIn59Minutes, Farmart, SLCM, FlexiLoans, CredAble, Aye Finance among others.
- Invoice Financing: Invoice financing is a short-term working capital facility extended by lenders for MSMEs based on the unpaid customer invoices. It is often used to meet the short-term liquidity requirements of MSMEs, enabling them to accelerate their accounts receivables.
- Crowdfunding: Crowdfunding involves raising external finance from a large group of lenders through a platform wherein investees showcase their business ideas, funding requirements, business cases and potential. Investors can view investees’ communication, interact with them and find the best option to meet their needs. Each participant (investor) provides a small portion of the requested funding and the pooled funding is used by the requestor (investee) for the declared cause(s).
- Alternative Credit Scoring: It helps with a broad-based credit scoring mechanism. It goes beyond the traditional parameters employed by agencies like CIBIL. This model uses technology to assess various factors like data around the payment history (e.g. utility bill payment), bank balance, ecommerce shopping, travel size, and spending patterns of the loan seeker. For instance, Mumbai-based ePayLater uses real-time microservices to gather data in real-time leveraging data science and algorithms. Another player NeoGrowth uses digital payments data (notably card sales) while Lendingkart extracts up to 8,500 data points to assess the intent and ability of the customer using machine learning and other deeptech models. Aye Finance, RupeeCircle, Indifi Technologies are other popular startups in this domain.
- Digital Mortgage: These lenders fully digitise the traditional and cumbersome process for availing of mortgage loans from the application stage and credit underwriting to the delivery of mortgage loans via online channels to customers, thereby decreasing the turnaround time and improving customers’ experience.
- Supply Chain Financing: Direct lending NBFCs tie up with wholesale players and marketplaces to target large networks of merchants who source their products there. These platforms contain huge volumes of data on the sales cycles of these merchants, which are then consumed by advanced analytical models for credit underwriting.
What Is A Point Of Sale Or PoS?
The point of sale (POS) or point of purchase (POP) is the time and place where a retail transaction is completed. A digital retail point of sale system typically includes a POS terminal that can read debit/credit cards and enable payments through a swipe. Service providers that provide both POS hardware and software solutions are called POS companies.
Some of the notable POS terminal providers here are Ezetap, Mswipe, Pine Labs, Innoviti, Mosambee, Payswiff (earlier known as Paynear), among others. A similar startup is ToneTag, the first solution provider to enable contactless payment acceptance on EDC machines using sound waves. It is a secured sound wave technology platform which enables payments and proximity customer engagement services on any device, independent of the instrument or infrastructure.
Additionally, these players finance ecommerce shoppers’ purchases through tie-ups with FS lenders. Apart from utilising conventional data like bank account statements for underwriting, these players also utilise AI models to assess consumer behaviour based on their transaction history, product purchase behaviour and other data points, to create a sharper customer risk profile
What Are Payments Banks?
Payments banks are a new fintech business model of digital banks conceptualised by the Reserve Bank of India (RBI). These banks can accept a restricted deposit, which is currently limited to INR 100,000 per customer and may be increased further.
These banks cannot issue loans and credit cards. Both the current account and savings accounts can be operated by such banks. Payments banks can issue services like ATM cards, debit cards, net-banking and mobile banking. Bharti Airtel set up India’s first live payments bank in March 2017.
Of the 41 applicants, RBI approved for provisional payments bank licenses are:
- Aditya Birla Nuvo Limited
- Airtel M Commerce Services Limited
- Cholamandalam Distribution Services Limited
- India Department of Posts
- Fino PayTech Limited
- National Securities Depository Limited
- Reliance Industries Limited
- Shri Dilip Shantilal Shanghvi
- Paytm Payments Bank Limited
- Tech Mahindra Limited
- Vodafone m-pesa Limited
The following is the list of active payments banks:
- Airtel Payments Bank
- India Post Payments Bank
- Fino Payments Bank
- Jio Payments Bank
- Paytm Payments Bank
- NSDL Payments Bank
Cholamandalam Distribution Services, Sun Pharmaceuticals and Tech Mahindra have surrendered their licenses. Aditya Birla has discontinued their services from July 26, 2019.
How Are Tech Companies Using Fintech Business Models?
With the rise in adoption of cashless payments, ecommerce players such as Flipkart have also rolled out different fintech business models. For instance, during the sale, consumers are offered ‘buy now, pay later’ options. Also, Flipkart has introduced insurance on mobile phones under its Complete Mobile Protection programme. Apart from this, it has also come up with a UPI-compliant digital wallet. Google, WhatsApp, and Amazon are a few other global players who are entering the payments market in India.
Fintech startups in the transaction delivery space are creating free products, such as expense management apps, in order to collect customer data and then cross-pollinate that data with the rest of the group to map the potential of the customer to pay premiums, invest in real estate, buy mutual funds, etc.
What Is Neo Banking?
Neobanking is a relatively new concept in India as compared to the West, and is still on a take-off mode. Being a digital-only platform, neobanks are fast, efficient, straightforward, adaptable and highly cost-effective. Different neobanks have a different focus – some help with managing online bank accounts, and with budgeting and saving tools. Others specialise in accounting to help automate finance, while some are assisting with the credit-underwriting process (which is the biggest choke point between banks and SMEs seeking credit). Some neobanks control the entire banking stack and offer varied services through their digital platform.
What Is Wealthtech?
Wealthtech players like Scripbox, Basis, CubeWealth, ETMONEY, Paytm Money among others are bringing in the small retail investor into mainstream wealth management, once considered to be dominated by only HNIs. Introduction of robo-advisory and technology-driven wealth and portfolio management tools, gamification of processes and sentiment analysis is helping the technology-led players to reach out to the mass segment. Also, as analysts suggest, the new trend demonstrates payment players moving into wealth management space with small value SIPs, having near-zero fees or commission.
What Are API-based Banking-As-A-Service Platforms?
The API-based bank-as-a-service platform serves as the back-end that hosts standalone independent fintech startups and integrates seamlessly with any existing back-office of traditional banks.
This allows non-banks to easily and cost-effectively launch additional financial products and expand into additional markets. The service is more popular in the West. In India, the rules regarding open banking are not yet formalised. A few players such as YES Bank, RBL Bank, DCB Bank, Kotak Bank and ICICI Bank have launched API platforms, but this does not have the same measure of interoperability as open banking in the UK. However, it has paved the way for neobanking startups in India.
Fintech Growth Depends On Innovative Models
According to the recently released World Retail Banking Report 2019 from Capgemini and Efma, banks cannot ignore raised expectations from younger generations and tech-savvy customers any longer as less than a third of customers believe their bank offers useful financial apps or timely and relevant product recommendations. This means fintech companies with their innovative business models can disrupt the traditional players and bring more value to the customer.
“Banks that identify their top capabilities and then seek partnerships with fintechs and other business sectors to enhance their offerings in other areas will be the most successful,” said Anirban Bose, CEO of Capgemini’s Financial Services Strategic Business Unit and Group Executive Board member.
To become an efficient experience-led service provider in the open banking era, banks need to become inventive banks by effectively collaborating with fintech startups and companies. The integration of these business models as an added layer to the traditional banking ecosystem can lead the Indian banking and financial services industry to global standards.