Fintech is a relatively new term in the banking sector. Still, it managed to change the very definition of banking.
What Is Fintech?
Fintech combines two dynamic domains – finance and technology. It comprises various companies offering financial services with the help of digital technology.
Until a few years ago, the Indian fintech landscape was populated with homegrown startups like Paytm, which offered banking and financial services in collaboration with vendors. Global investment entered this space, and fintech has become a multi-billion-dollar industry now, with tremendous potential to grow. The best thing about fintech is that it is powered by startups that use technology and innovation to dominate, unlike other sectors that are dominated by large MNCs.
Fintech in India: The Evolution of Fintech Ecosystem
With the introduction of affordable smartphones and easy access to internet connectivity, majority of Indians use their mobile devices for banking services. The first major introduction of fintech was in the 90s when the country got acquainted withATM cards, EFT payments, and credit cards.
In India, the fintech market is expected to reach $31 billion in 2021. Some of the fintech startups that are responsible for this growth are Paytm, MoneyTap, PayU, PolicyBazaar, Lendingkart, etc.
How Fintech Handled the Limitations of the Traditional Financial System?
- Limitation #1: Traditional lending approach
Fintech solution:Fintech use the Alternative Lending Model
In the traditional approach, the credit approvals took a lot of time. With the help of technology, fintech managed to weed out the traditional approach and make lending easier.
With peer-to-peer lending (an alternative lending model), fintech has made the process very simple. In this process, a person can lend money to consumers and earn interest on it. This model is quite different from the traditional approach where the lenders have to receive deposits from customers so that they can lend money to other customers.
- Limitation #2:Non-availability of applicant’s data
Fintech solution: Data analytics to assess creditworthiness
Banks assess the creditworthiness of the applicant before lending the loans. Traditional banks collate and analyse the previous data to determine the creditworthiness. This is a time-consuming process. With fintech, all the consumer data is available at a click of a button.
- Limitation #3:Slow loan approvals
Fintech solution: Quick approvals and disbursals
Prior to fintech, loan processing and approval took a lot of time. But today, loans are processed, approved, and disbursed in less than 24 hours. With online personal loan applications, the process has become user-friendly and quick.
Factors Contributing to the Rapid Growth of Fintech in India
Following are the factors that have acted as a catalyst for massive growth of fintech services in India:
- Adoption of Technology: A recent study states that India has outpaced the US in the use of smartphones; it has 220 million active Smartphone users, making it the second-biggest smartphone market globally. Indians have adopted digital technology to a great extent, and hence they are better poised to embrace fintech services.
- Increase in Financial Inclusion: The Global Findex Report published by the World Bank in 2017 stated that India is experiencing a rapid increase in financial inclusion. The number of account holders increased from 35% in 2011 to over 80% in 2017. The RBI is planning to take these numbers up to 90% by 2021. This will help fintech lenders to target consumers who were earlier outside the traditional financial system.
- Internet Penetration: India boasts of robust internet connectivity with 4G data speeds accessible across the country. Internet availability,along with affordable smartphones,play a significant role in the growth of fintech services.
- Easier Access to Funds for SMEs: Small and medium enterprises have always found it challenging to get access to funds for their business growth. Fintech surpasses the bottlenecks in the traditional lending system and provides SMEs higher and easy access to funds and other financial activities.
- Young Working Population: The millennial and Gen-Z are dominating the workforce today. These generations have practically grown up with technology and therefore are open to technological disruptions that can help them manage their money better.
- Increase in Investments: Fintech has become a lucrative industry for investments. It has been attracting investment from private equity houses, Angel investors, venture capitalists and high-net-worth individuals. A recent report states that fintech investments in India has already crossed over $2 billion in 2018 and is expected to grow further.
- Government Policies: When demonetisation happened, digital payments sky-rocketed in a few months – a boon for the fintech sector. The government took other measures to ensure that the country successfully transitions from cash-oriented financial ecosystem to a digital one.
The Government Support
The government has been focusing on the financial technology sector for some years now and has taken a few initiatives to push the digital economy. This has led to an increase in the number of fintech startups. We are also beginning to see the entry of global fintech firms into India.
In the recent union budget, Finance Minister Nirmala Sitharaman emphasised on the importance of the digital economy. She announced that the government would establish an app-based invoice financing loan platform for MSMEs. The government’s push to widen the e-marketplace would be a win for both, the MSME companies and the fintech companies.
Digital-first financial services are progressive and have the power to lead the global economy’s transition to the Fourth Industrial Revolution. It also improves access to financial services drives global trade and opens opportunities for underserved consumers like poorer communities, marginalised citizens, and small businesses.