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Financial technology (Fintech) in India

Financial technology (Fintech) in India

What Is Financial Technology – Fintech?

  • Financial technology (Fintech) is used to describe new tech that seeks to improve and automate the delivery and use of financial services. ​​​
  • At its core, fintech is utilized to help companies, business owners and consumers better manage their financial operations, processes, and lives by utilizing specialized software and algorithms that are used on computers and, increasingly, smartphones. 
  • Fintech, the word, is a combination of “financial technology”.
  • When fintech emerged in the 21st Century, the term was initially applied to the technology employed at the back-end systems of established financial institutions. ​Since then, however, there has been a shift to more consumer-oriented services and therefore a more consumer-oriented definition. 
  • Fintech now includes different sectors and industries such as education, retail banking, fundraising and nonprofit, and investment management to name a few.
  • Fintech also includes the development and use of crypto-currencies such as bitcoin. 
  • That segment of fintech may see the most headlines, the big money still lies in the traditional global banking industry and its multi-trillion-dollar market capitalization

 Areas Of Fintech Innovation

  • Blockchain technology, including Ethereum, a distributed ledger technology (DLT) that maintain records on a network of computers, but has no central ledger.
  • Cryptocurrency and digital cash.
  • Insurtech, which seeks to use technology to simplify and streamline the insurance industry.
  • Smart contracts, which utilize computer programs (often utilizing the blockchain) to automatically execute contracts between buyers and sellers.
  • Robo-advisors, such as Betterment, utilize algorithms to automate investment advice to lower its cost and increase accessibility.
  • Open banking, a concept that leans on the blockchain and posits that third-parties should have access to bank data to build applications that create a connected network of financial institutions and third-party providers. An example is the all-in-one money management tool Mint.
  • Cybersecurity, given the proliferation of cybercrime and the decentralized storage of data, cybersecurity and fintech are intertwined.
  • Regtech, which seeks to help financial service firms meet industry compliance rules, especially those covering Anti-Money Laundering and Know Your Customer protocols which fight fraud.
  • Unbanked/underbanked, services that seek to serve disadvantaged or low-income individuals who are ignored or underserved by traditional banks or mainstream financial services companies.

What Is Financial Inclusion?  | Financial technology (Fintech) in India 

  • It is the process of making financial services (savings, payments, credits, and insurance) accessible and affordable to all persons and businesses. It aims at addressing and bringing solutions to the issues that exclude people from participating in the financial sector. 
  • The United Nations defines the goals of financial inclusion as follows 
    • Financial and institutional sustainability to guarantee continuity and certainty of investment. 
    • Access at a reasonable cost for all households to the entire range of financial services. 
    • Competition to ensure choice and affordability for clients.
    • Efficient and safe institutions governed by proper regulation and performance standards. 

Financial Inclusion In India

  • Despite India possessing economic growth higher than most developed countries in recent years, a majority of the country’s population still remains unbanked. Financial Inclusion refers to efforts for providing financial services and access to adequate credit at affordable costs to the excluded sections of the society and low-income households where traditional finance lacks its reach.
  • It became quite famous in the early 2000s when RBI highlighted the importance of financial inclusion in its annual policy statement.
  • The basic financial services with the introduction of 3-year FIP (Financial Inclusion Plans) and PMJDY (Pradhan Mantri Jan Dhan Yojna) became accessible to the public. With the introduction of said services and measuring its progress, India has improved its score in Global Findex (GFX) from 35 in 2011 to 80 in 2017 but still struggling to achieve last-mile connectivity as concerted efforts are needed to deepen access from all the involved bodies.

Most Prominent Fintech Startups In India  | Financial technology (Fintech) in India 

  • India’s fintech segment has expanded by leaps and bounds, and the data around this industry points to a strong growth potential going forward. 
  • The country’s adoption rate for fintech products stands at 59%, the second-highest pace worldwide, and significantly higher than the global average of 33%, as per analysis by DataLabs by Inc42.
  • Fintech startups have transformed commerce and payments in many ways in the India market.
  • Here are the top fintech startups in the country:
    • Paytm
    • Paytm Money
    • PhonePe
    • MobiKwik
    • PayU
    • ETMoney
    • PolicyBazaar
    • LendingKart
    • Freecharge
    • Mswipe
    • ezetap
    • LoanTap
    • Billdesk
    • FINO PayTech
    • Capital Float
    • Pine Labs

Collaboration Of Fintech Companies With Banks

  • India has many fintech companies that are constantly working towards simplifying the process of providing financial services to underserved people. 
  • Many a time, poor people are exploited by moneylenders and they may end up paying hefty interest rates to them.
  • In order to save poor people from such high expenses banks, NBFCs can collaborate with fintech companies to come up with simpler and quicker banking processes. 
  • The evolvement of such processes will help India towards financial inclusion.

Challenges With Fintech In India

  • Going digital for payments can be complicated in an economy like India’s which is dominated by micro, small and medium enterprises (MSMEs) as they cannot bear the costs.
  • Regulatory uncertainty in the fintech sector is making things complicated for both fintech service providers and consumers..
  • The adoption of fintech is skewed in India but because of lower margin per transaction, larger payment gateways target only handful of large retailers. MSMEs account for only about 5% of $12-14 billion spent.
  • The fintech sector is still regulated by banking regulations. Although RBI has allowed small banks and payment banks in the recent past, a lot of impediments still remain in the path of innovative fintech players. It’s like asking them to operate with one hand tied behind their backs.
  • Coming up with sustainable business models which does not overload consumers with extra charges is also one of the challenges.
  • There is a gap regarding people’s current ability, desire, and need for fintech services. Filling up the gap and making the ends meet is a task for fintech product providers.
  • Lack of clarity and legality among fintech companies about KYCs itself is another major challenge.
  • Knowledge of these digital payments platforms is restricted to the bigger cities of India while rural India struggles to make its way through.
  • Cyber security threats and lack of regulatory mechanisms comes as a major problem for the expansion of services.
  • Underdeveloped technology and venture capital ecosystems, shortage of skilled tech/finance entrepreneurs, small markets, limited revenue potential is also one of the major challenges.
  • Relatively weak infrastructure such as underdeveloped payment systems, lack of customer credit data, legal enforcement mechanisms for payment obligations, power, weak Internet coverage is also a drawback.
  • Cash dominance in transactions, informal credit and savings and lack of digital literacy is also a hindrance.

Way Forward  | Financial technology (Fintech) in India

  • Fintech providers have to consider the need of customers while developing a payment solution.
  • Fintech providers should work towards the last mile digitization of cash.
  • The availability of small change, which is often refused by banks owing to high storage and transportation costs, inevitably finds its way to small merchants and households, and is used for low-value transactions such as the daily purchase of milk. Payment gateways can address the issue taking it as an opportunity.
  • Awareness should be created and digital literacy must be improved to understand and analyse the pros and cons of these services. It will help customers to make choices.
  • Infrastructure development is the need of hour and it should be addressed for the expansion of services.
  • There is need to support the formulation of policies that foster the benefits of fintech and mitigate potential risks.
  • Fintechs should come up with sustainable business models. It is important not to impose further costs on the end customer or create a solution that merely pushes the consumer issues further down the value chain.
  • Government should set the platform for smooth operations of start-ups with favourable policies and tax incentives specific to the fintech sector.

 

Indian Economy

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