Fin-Tech start-up: Adding muscle to financial inclusion

The financial services landscape is changing fast in India, with new entrants and growing interest of global and domestic investors in this space

The Fin-Tech start-up space is gaining importance in India, driven by digital disruption, which is driving an unprecedented transformation of banking and financial services industry. Radical new technologies present promising opportunities for Fin-Tech start-ups as well as traditional firms to better serve their customers.

Global investments in the Fin-Tech sector are increasing at a rapid rate, with US$12 billion in 2014, up from US$4 billion a year ago. Similarly, Indian Fin-Tech companies have received over US$1.2 billion for 54 deals from January to September 2015, out of the total investment of US$6.4 billion in the Indian tech space, making it one of the hottest sectors for venture capitalists (VC) investments. 2016 could prove to be another good year for new and existing Fin-Tech start-ups to raise venture funding and increase their scale.

As customers move rapidly towards online route to financial services, it is creating an opportunity for a number of start-ups in payments to wealth management, and from peer-to-peer lending to crowdfunding. There are already around 1,100 companies operating worldwide in this sector, spanning areas such as financial research, cyber security, digital currency, exchanges, remittances and others.

According to a recent global survey by EY, 15.5% of digitally active consumers have used at least two FinTech products within the last six months. As awareness of the available products and services increases, adoption rates could double within the year. The survey highlights that areas like money transfer/payments, savings/investment, insurance and borrowing/lending areas will propel growth.

FinTech start-ups are rising given India’s market potential India is being looked at as a big market for FinTech companies, as around 60% of Indians are unbanked and 90% of small businesses have no access to financial institutions. But, with 32% of Indians expected to own a smartphone by 2017, it’s a mobile-first revolution unlike the Western countries where it was web-driven and then moved to mobile.

Some start-up mobile applications help users track their income & expenses and pay bills. Another start-up enables micro-merchants to offer payments and promotions to customers through a mobile-based platform. Looking at India’s high failure rate of card and net-banking transactions, which is as high as 30-40% on the web and nearly 50% on mobile devices, one of the recently funded start-up is focusing especially on mobile success rates where its technology would allow transactions to work at 2G speeds, perform auto-OTP reading and reduce the overall check-out time.

Start-ups are also emerging in the education sector which is helping students with easy access to finance their education. Some of them also provide loans to educational institutions for asset creation and infrastructure.

However, India has a unique set of challenges and the most affecting one is to have an access to an individual’s history. While western countries have a strong digital identity such as SSN in the US, which helps in tracking an individual’s credit history to criminal record information, this is lacking in India, posing a challenge for FinTech companies to obtain customer insights, as they have to collate data from multiple sources. Low banking and cards penetration also leads to limited availability of credit bureau information for most of the individuals.
FinTech disruptors are, therefore, looking for new and smarter ways of risk assessment by leveraging social media data sources. Apart from looking at traditional data sources such as CIBIL scores and bank statements, they are also pulling data from online footprints to assess creditworthiness of borrowers. A new-age online SME lending platform disburses loans within four hours of an application on the back of deep analytics. The ability to leverage analytics is becoming the most important differentiator to target the right set of customers with the right set of products/services.

Emerging categories in FinTech sector in India Mobile wallets, online lending platforms and institutional financing are emerging categories in the FinTech sector in India.

A number of mobile wallets have established themselves in India with discounts and offers to switch to the wallet. Some of the players have also received over US$100 million in funding. With the number of transactions on digital wallets surpassing the total mobile banking transactions in India, the digital wallets space has a huge potential to grow, as currently only 10-15% of total India’s banked population is using digital banking.

The number of lending platforms is also expected to rise, though this remains a relatively challenged market in a country like India. An online consumer funding start-up claims to have disbursed over US$20 million in loans since its launch in early 2015. Another one, putting faith in sharing economy concept has started a Peer to Peer lending site, which enables creditworthy borrowers lower their cost of loans and individual lenders/investors lend directly to their peers, thereby earning higher returns. Another online lending platform now provides loans based on a social score, without collateral or guarantor. With Payment banks coming into the picture soon, they are expected to significantly add to this space.

At a time when the Indian Government is focusing on financial inclusion through various schemes and payment bank licences, the institutional financing sector is adding to the growth plans of the country. New digital start-ups are assisting small businesses to grow by enabling access to institutional finance and providing insightful information about local business opportunities. These start-ups are addressing a unique market opportunity, as MSMEs contribute nearly 38% of India’s GDP, but suffer from US$380 billion formal debt financing gap.

Money transfer/payments is another area where there is a lot of activity globally and cross-border payments/remittances as well as foreign exchange services are being rendered through nonbanking channels. Research is underway to see how blockchain technology can help in secure, quick and decentralised money transfer and remittances. Who knows the use of virtual currencies might just spread to the real currencies soon.

Is it a threat or boon to traditional financial corporations?

Start-up FinTech firms are challenging the way financial services providers operate. Financial product aggregators in areas like consumer loans, credit cards, and insurance products are taking away customers from banks, insurance companies and asset management companies. Since these start-ups are Internet-based, they are operating at lower costs than established financial corporations.

While this transformation can be a threat for traditional financial services corporations, there is also an opportunity for innovation and collaboration with these start-ups to improve products and services, reduce costs and expand market share.

Innovative companies in the payments and Peer to Peer lending spaces have triggered significant M&A activity in the last few years as established market players target next-generation companies to integrate new technologies and products to their offerings. There have been close to 200 M&A deals worldwide for US$19 billion in the first half of 2015, with more than 50% of the largest deals in the payments segment.

Although traditional Indian financial services corporations have started adopting digital technologies in its day-to-day operations, with the large private sector banks as the front runners, traditional financial services companies still need to look at the impact of these disruptions and accordingly re-orient their business models, acquire new tools and capabilities through partnerships or acquisitions to stay intact in the long-run.

The financial services landscape is changing fast in India, with new entrants and growing interest of global and domestic investors in this space. With more Indians gaining Internet and smartphone access, it remains to be seen how the delivery of financial services will look like, say five years from now.

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One thought on “Fin-Tech start-up: Adding muscle to financial inclusion

  1. Great article! While the Fin-Tech space is currently working on a burn-subsidise-acquire model, it needs to be seen whether the value that is being currently created for the end users can create sufficient end user stickiness in a post “easy VC” world. Once the cash taps dry out and the start-ups need to start operating on positive cash flows, the burning, discounting and subsidising for customer acquisition would be in its sunset.

    The current model assumes that the payments banks will have enough sticky customers to be in a position to “earn” their revenue from the sellers and merchants by levy of fees and earning special discounts. This may not be sustainable, since, unlike in the western economies where the big banks were caught off guard, the conventional banks in India are sitting wide awake and are creating their own digital wallets and mobile payments.

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