Could India be a major fintech innovator?

For a long time, traditional banks, primarily built on the premises of physical branches, struggled to capitalize on technology-enabled innovation. The highly regulated banking and finance industry focused on conservative ways to deliver services. Most consumers had to physically visit their banks for tasks such as opening an account, applying for loans, and submitting KYC details. Even with internet-based banking, banks could only harness the surface of digital capabilities.

The ecosystem has changed dramatically with the arrival of new-age fintech or financial technology firms. By leveraging state-of-the-art digital technologies such as artificial intelligence, analytics, machine learning, and blockchain, along with continually iterative processes, these tech-enabled enterprises are coming across as strong contestants to incumbent providers and catalyzing a turnaround.

Just in 2021, the country has so far produced 8 Fintech unicorns, attracting a massive number of investments. Even some of the leading banks and financial companies are also entering into unprecedented levels of collaborations with FinTech startups to launch their digital offerings and expand their customer base. The traditional banks have realized that it is challenging for them to grow and acquire new customers quickly without robust and agile digital banking solutions.

However, it would be interesting to see if these young and dynamic tech-driven apps can create a long-term impact on India’s banking and financial services sector.

Pandemic driven shift

With the arrival of the pandemic, the biggest challenge for conventional banks was to provide services in a contactless and convenient way to their customers. COVID is a contagious disease and could spread through touching paper and by coming in contact with people. The health crisis put severe pressure on conventional banks and their customers overnight with restricted physical access to the trusted bank branches.

This was when the demand for new fintech products and services started to witness a massive surge. According to ResearchAndMarkets.com, the fintech market was valued at INR 2.30 Trn in 2020. It is expected to expand at a CAGR of 24.56% between 2021 and 2026 to reach INR 8.35 Trn by 2026. “Increased penetration of the internet and smartphones, and a rise in partnerships between fixed service incumbents and fintech companies propel its growth,” it adds.

As of 2020, the study says, India has the highest fintech adoption rate (87%) and is the biggest destination for investment deals worldwide. The study says that the market witnessed a 40% rise in digital transactions amid the lockdown. New fintech players such as Lendingkart, Instamojo, Paytm, Policybazaar, Finway, ZestMoney, CredAvenue, and PayMe are building intelligent, agile, and high-responsive digital capabilities to outsmart brick and mortar delivery models and overburdened branch networks.

The evolution of financial technology is helping consumers and investors make quick decisions and push toward broader financial inclusion. "A digital revolution in the financial crisis was the need of the hour. The financial services users and employees were not ready for the pandemic-triggered change. Most of the due diligence and meetings used to happen physically in a traditional scenario. But the outbreak has changed everything, and you need tech-enabled innovations to solve the existing challenges," says Harsh Mittal, CTO, CredAvenue, a debt platform for enterprises, lenders, and investors.

CredAvenue currently services over 1000 issuers and 200 investors, and its analytics and API-powered platform facilitate various loan transactions and investment avenues.

Digital-first strategy

Fuelled by multiple factors such as demonetization, the government's promotion of digital payments, Aadhar, and the health crisis, fintech companies witnessed a monumental rise in India in recent times. "During the outbreak, the gaps in traditional banking methodologies became more visible as consumers abruptly transitioned to online and digital channels. The country's FinTech ecosystem was seen as an enabler to disrupt the sector and deliver banking services seamlessly even to the underserved and unbanked in semi-urban and rural India," says Mahesh Shukla, Founder & CEO PayMe India, an instant personal loan platform.

The new fintech entrants have been leveraging data and analytics-based technologies to provide an intuitive digital banking experience at a place and time convenient to them. Some of the new regulations set by the Reserve Bank of India (RBI), such as inviting applications from non-banking participants in the lending and payment space to get an Aadhaar e-KYC license, have also strengthened the Indian fintech ecosystem and even enabled legacy banks to acquire new customers through collaboration.

"It has undoubtedly helped onboard new customers at a quick speed and evades fraud. We have implemented a seamless e-KYC process that a customer can instantly complete through our app. We follow stringent tech, assessment, and governance procedures to secure the data on our platform," says Karthikeyan K, Co-Founder & CTO, KreditBee, a unique loan platform that extends credit to self-employed and salaried individuals.

"Every business has realized the importance of technology in the last decade and how future sustainability would be dependent on it. The pandemic just accelerated the adoption curve and made it possible in a few months what otherwise would have taken many more years," says Vikas Garg, Co-Founder, Paytail, a fintech company enabling instant digital finance and easy EMI's across millions of merchants all over the country. Paytail provides instant document-less Credit up to INR 2 lakhs to consumers for buying products and services across millions of offline merchants.

The new fintech players are also helping micro retailers and entrepreneurs digitize their bookkeeping and transaction records.

"We saw a significant decrease in our digital bookkeeping platform activity, leading to the decline in our active user base by nearly 50% in the 1st phase of lockdown.  However, In the unlock phase of COVID-19, we focussed on getting our users back through data-enabled re-engagement campaigns," says Harsh Pokharna, CEO & Co-Founder of OkCredit. This bookkeeping app aims to help merchants and small businesses record their transactions digitally for every customer and keep their money trail.

"A massive amount of data (~3M activity data points per day) is generated on our platforms, such as who does business with whom and the activities encompassing sale on Credit, payment, and reminders, among others. We have been leveraging machine learning tools on this data to achieve further growth in our user base, allocate cashback, avert payment frauds, understand our users and requirements better, inform product decisions, and create data-powered features for the users," Pokharna adds.

Customer-centric innovations is a key

Technology has enhanced enterprises' ability to handle catastrophes more efficiently and driven them to provide a seamless customer experience with minimum contact. The innovative financial technology platforms have efficiently replaced cumbersome and paper-intensive processes with digitalized real-time lending and payment solutions.

Cloud, AI, and analytics are helping fintech companies to make data-driven decisions, evaluate creditworthiness, interact with specific products and services and provide personalized customer experience. They primarily rely on third-party data to assess the creditworthiness of prospective customers and leverage specialized algorithms to avert fraud and sieving out likely nonpayers. Collaborating with different banks, investors, and financial institutions, they help match the right creditors/investors with the right customers leveraging data-based insights.

“FinTechs’ ability to create tailored and niche-focused solutions from scratch provides them an edge in the industry. The financial services industry recognizes the combined business impact of digital transformation and customer experience focus, which explains why some of the oldest banking institutions in India and digital-native FinTech companies work alongside each other to offer the best digital customer experience,” says The winds of change: Trends shaping India’s FinTech sector, a report by EY.

This essentially helps customers save time, address their pain points, and get the best options for their financial needs.

However, to ensure a steady and dependable experience, they need to innovate continuously to meet different financial needs and concerns. For instance, young millennials' priority is to have a service provider who can quickly address their concerns across all touchpoints. In contrast, security and privacy are essential for traditional customers in any bank interface. So, the personalized aspect of the relationship is a must for growth, and technological interventions should support the same. Agrees, Jyothirlatha B., CTO at Godrej Housing Finance, "One size doesn't fit all, and the need of the hour to deliver exceptional customer experience is the personalization of products and services by understanding your customer deeply and in real-time."

"Enterprise need to analyze data and insights, such as customer data and monitoring interactions, and devise strategies to improve customer engagement. For instance, in today's time, providing an omnichannel experience for the customer at multiple touchpoints helps provide a better customer experience," she adds.

By harnessing customer analytics, a continuous effort is needed to launch applications and disrupt every aspect of banking from consumer finance, insurance, lending to small and medium-sized businesses, retail banking to large scale lending, and delivering concepts such as buy now pay later (BNPL), managing books, wealth, and digital assets.  

"We are using AI/ML/VR at every single processing stage in our enterprise. This analysis is fruitful as it apprises us regarding the financial institutions that would be most suitable for us because we work as a marketplace. So, it analyses which financial institution has a likelihood of getting a particular loan done. The technology of ML is used in our corporation to quicken finding the best-suited organization for our customers to provide loans. For instance, if a particular organization has lent a loan to a specific customer segment in the past, their chances of lending the same kind of loan to the same set of customers get increases," says Rachit Chawla, CEO & Founder, Finway FSC, a fintech company for loans and financial investments. 

During the pandemic, video KYC also saw a significant adoption. Taking a cue from the new-age companies, some private banks, such as Kotak Mahindra and HDFC, also introduced video-based KYC to quickly onboard new customers and other services. Now, many banks are investing significantly in digital technologies and services to meet the changing customer priorities. According to a KPMG report titled COVID19: Impact on the banking sector, the arrival of the pandemic compelled banks, even the most territorial and branch-centric ones, to use channels that have never been their strategic priority.

Key challenges

In 2022, financial technology companies are likely to expand their agile capabilities to respond more proactively to consumer needs. For them, the biggest challenge will be to build trust in their platforms and continue to invest in robust data security and governance solutions. While many Millenials and modern consumers have started to use their services, their image of a steady financial service alternative can come under severe scrutiny if any data breaches are witnessed on their platforms.

With technology moving fast in the digital world, there has always been a challenge for security for modern banks and fintech companies. More challenges lie in the organization's cyber resilience to reduce the impacts. “This requires proactive monitoring and response to the threats with advanced detection techniques. We have strong security governance of monitoring, protection, and incident management. This enables more visibility into the networks to identify anomalistic behaviors to respond quickly, combat threats, and protect sensitive data. We have strong policies and methods for managing user privileges and risk management regime and authentication methods,” explains Jyothirlatha B of Godrej Housing Finance.

According to EY, data leaks, platform downtimes and information theft has become quite rampant in the financial services space and developing a strong mechanism to protect data needs to be taken up as a top priority by startups. “Players will have to invest deeply in mechanisms to control this risk and comply with regulatory requirements towards data security,” adds the study. Other key challenges include lack of financial awareness and getting regulatory maturity in a fast-paced way.

“More than 70% of the population of India lives in the villages, and the use of these FinTech platforms is largely concentrated in the urban segment. This sector needs to make its way to smaller cities and towns with and through awareness and financial literacy,” the study from EY adds.

The way ahead

Banks will implement technology solutions and are likely to leverage the strong tech capabilities of fintech players through collaboration and acquisitions. Technologies such as AI/ML and big data will continue to form the basis of many innovations. In a report titled, Seven technologies shaping the future of fintech, McKinsey states that banks and other financial institutions are tipped to adopt an AI-first mindset that will better prepare them to resist encroachment onto their territory by expanding technology firms. McKinsey estimates that artificial intelligence (AI) can generate up to USD 1 trillion additional value annually for the global banking industry.

The Fintech start-ups will need to make unswerving efforts to embed diversified financial products and service offerings in their apps to become the preferred choice of consumers. Against this backdrop, continuous innovation and modernization in apps – both by banks and fintech companies – will be a key focus area for the CTOs. In 2022, investments in low code and no-code platforms will likely witness a considerable surge to meet the app modernization efforts.