In recent times, technology has infiltrated into various areas of our lives. This explosion of technological innovations has even brought about significant changes in different sectors of the economy. Businesses too have been significantly impacted. But in the financial world, technological advancements have led to a remarkable shaping of the fintech industry.
Indian fintech market is one of the fastest growing markets in the world. Digital payments have been the flagbearers of the country’s fintech space. The total value of digital payments of $65 billion in 2019 is expected to grow at a CAGR of 20% raising it to $140 Bn by 2023 as per the 2020 McKinsey Global Payments Report.
Fintech In India – Current Scenario
Like every other industry, the Covid-19 pandemic has adversely affected the fintech industry as well. Though recovery will take time, fintech has nonetheless been witnessing an increase in business over the last few months.
The Indian fintech segment has grown immensely in the past few years. An example of this is the adoption of digital payment solutions such as AePS (Aadhaar-enabled Payment Systems), UPI, mobile wallets, etc. The global pandemic has been an event that has made it more important than ever for businesses to develop strong insights into their operations. As a result, many business owners are now taking a granular look at the data locked in their systems and supply chains. They are using this information to act and take swift decisions amid complex trading conditions.
Fintech solutions are providing this capability. For instance, underpinned by APIs, open banking is helping businesses better understand their current financial position. They are able to do this by acquiring more access to their own banking data.
Challenges In The Landscape
Each industry has its own set of challenges to navigate. Similarly, fintech has its own hurdles to overcome. With Covid-19 creating uncertainty, the fintech companies too are stressed on multiple fronts.
Despite technology permeating our daily financial transactions and processes, India still is predominantly a cash-based economy. A vast majority of Indian customers still use physical cash as against tech-driven alternatives such as UPI transfer, which are much easier to use. Fintech is trying to build a cashless economy and this preference for cash amongst the Indian population is a major obstacle it is tackling with.
Smooth internet services form the backbone of fintech. However, internet service providers in India are still struggling to provide faster speed and better bandwidth for secure and seamless data transfer. When it comes to India, its diverse geography and vast population make it a challenge to penetrate almost every corner of the country. Writing a successful fintech story requires that these basic shortcomings are addressed.
The changing nature of the relationship between fintech startups and traditional financial institutions poses a formidable challenge. Financial institutions are working in collaboration with fintech startups in different ways – partnership, incubation, and acquisition etc. But collaboration poses many hurdles as both the parties have their own rules pertaining to size, efficiency, and acceptance. Fintechs are primarily designed to operate with a sophisticated working model. Due to this reason, they are unable to maintain a smooth relationship with banks and other financial institutions. While banks fear working with fintechs as they risk losing their reputation.
Banking is a business that is heavily regulated, with inherently high operational and transactional costs, and constant business models. Thus, fintech companies in India require a full-fledged regulatory framework which has the ability to contain risks. We need policies to mitigate the potential risks. However, many existing laws inevitably end up slowing down fintech startups in the Indian financial markets. Along with being challenging to cope with, these regulations also make it difficult for fintech businesses to foray into the Indian markets. Fintech companies need to work with sophisticated working models but the stiff regulatory compliances limit their operations.
Fintech has helped improve the products and services offered by traditional financial services. But a central issue of the industry is the hidden risk of breach of cybersecurity. This mainly includes data breaches, malware risk, third-party security risk, cloud-based security threats and even digital identity risks. Also, phishing is a major cause of concern. In this, users are directed to share their personal information on a fake website which is made to match the look and feel of the legitimate website. Initiatives roping in celebrities to endorse customer awareness campaigns and safeguards like one-time passwords (OTPs) are some ways in which these frauds can be prevented. Equally important is building robust data security programs and frameworks for fraud detection which can help identify suspicious activities online.
FinTechs are the future. The disruptive potential of fintech can modernize the traditional finance sector. It can further reduce the costs involved. Fintech, with features like mobile wallets and UPI, can increase the size of the banking population. Despite government and private companies taking initiatives to use technology in financial services, percolation to every corner of the country will take time. However, Indians are fast adopting smartphones and internet. As a result, new ways of conducting financial processes digitally are being explored now. This paints a promising picture for the Indian fintech industry in the foreseeable future.