Fintech: Growth, And Not Just By Numbers Alone!

Getting people together, and making them work and live together is the aim of any decent economy. India’s fintech industry is doing just that. Well, trying to do this, with its chin up and feet running would be a more precise descriptor. This last year (2016) saw a rapid and huge contraction in the investment side of the business (funding in 2016 contracted to about $512 Mn from $1.4 Bn in 2015, as per the Digital industry tracker Tracxn).

However, with more than 400 companies including 200 startups, all in the fintech space this very same year, the domestic market was also seen to be a “quickly emerging” one, with more than 30% of this universe comprising mature firms with a pan-national presence (NASSCOM’s Indian Fin-tech Products — Innovation Driving Growth). In fact, size of the fintech software and services market is expected to grow 1.7 times by 2020, making it worth $8 Bn, as per the same report from NASSCOM.

A significant part of the worldwide market size of $42 Bn by the same year, up from around $33 Bn in 2015-16.

The Year That Was

The last year was also a decent one for enabling dynamics. The Aadhar Act, UPI, Jan Dhan programme, and of course, the demonetisation shake-up, all played key roles in taking the fintech industry to the next level. Regulation, which so often forms the bane of any growth plan worth a dime, has been beneficial this year.

The transaction value of the Indian fintech market is placed at $33 Mn in 2016, with the sector estimated to grow at 22%. Challenges, of course remain, particularly in the trading services and P2P sectors. These would surely be overcome, and it is hoped sooner rather than later, but the signs of sane and sound policy steps are already firmly in place.

The well-received and very welcome ‘Start-Up India’ initiative launched by the Government of India in January 2016 includes $1.5 Bn fund for startups with many of these already leveraging this advantage in the fintech world.  In fact, a ‘fund of funds’ of INR 10,000 crores for startups has been established and this will be managed by SIDBI.

The Jan Dhan Yojana has putatively moved in excess of over 20 Cr previously unbanked population to the banking fold, and the Aadhar programme has been extended to cover the pension, provident fund and the Jan Dhan Yojana initiatives. A year of inclusion, in spite of the Demonisation, as many naysayers may be inclined to claim.

Mobile Banking Saw An Upsurge

The other encouraging signs of the year gone by were the fast-developing Bank-in-a-Box or mobile banking uptake, encouraging P2P lending directions, security and biometrics, and robo-advisory technology. As we see these trends being rapidly adopted for the general customer, globally accepted digital trends such as blockchain have only just begun to emerge.

Just like the IT industry on the mid-90s, fintech will not prevail unless it goes mainstream and enables better business and better quality of life for the man on the street. Thankfully, retail services, digital marketplaces, peer lending, fulfillment services and the like, are all indicators of the maturing of the Indian fintech market over the last year.

The demonetisation announcement has given a big boost toe the fintech services industry by bringing to the fore two clear facets of the future: security and inclusion. By deploying all manner of financial services across the weft and weave of India, a palpable excitement over the potential of this market is easily discernible.

However, the flip side is as relevant and more critical: secure and efficient payment systems cannot be ignored. In fact, the rapid integration of cash-less systems across various banked and non-banked populations will increase the demand of the rigorous security systems, for instance pre-paid digital card eco-chains. According to a report of May 2016, “payment processing (that include transaction gateways and platforms, online/ mobile wallet, ATM & POS services, remittance and cash cards) and trading are key emerging segments in Indian Fin-tech landscape.”

Challenges

Many fintech players and investors are facing a few challenges. These lie mainly in the arena of Foreign Account Tax Compliance Act (FATCA) and Anti-Money Laundering (AML). Additionally, the lack of automation and integration across banking and regulatory systems hinder the expansion of the fintech sector as a whole.

The answer to this, simply, is tech. With mobile phones (smartphones, actually) increasing at a rapid clip, these institutions have to resort to technology to deal with the complexities in compliances and procedures.

Startups are more focussed around payment processing and trading solutions. Payment processing — including transaction gateways and platforms, online/mobile wallet, ATM and POS services, remittance, and cash cards — accounted for 34% of the Indian fintech landscape, followed by 32% by banking (accounting and treasury management, core banking software, risk management, mobile banking), and another 12% by the trading, public, and private markets, according to KPMG.

The sad fact that just about half of India’s population has bank accounts (52%) and only a fifth of these are card users is an issue which needs to be addressed. As a credit averse economy, the challenge of increasing card spends and providing security for these payment modes is paramount.

Future

With the rise in the Fed Rate and more increments expected in the future plus the high probability of the Union Budget in Feb 2017 being pro-spending and cash-enriching for the general population, the fintech industry could see the best time in the coming months and years.

The engines of growth for the economy: retail, healthcare, infrastructure, government, BFSI, and education and research, all need fintech to puff their sails and get them to be competitive on a global scale. The boom in Internet (462 Mn users or about 335 of the population, by 2016 end), explosion in mobile penetration (1.03 Bn), a push for a digital economy, and investors lining up ($1.2 Bn in funding already distributed among 174 companies), the forecast is meaty with very little chance of rain!

[The author of this post is Rajib Saha – President and CEO of Indepay.]

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