Ways in which fintech is transforming banking in India

There is a very famous saying in the financial service industry in India- “Banks are trying to be fintechs, and fintechs are trying to be banks”. While this may seem like a race between the traditional and non-traditional players, the actual winners are really the customers!

Because each and every player is striving to fulfil an increased demand for inclusive financial services, customer expectations, and the business need to reduce costs while providing faster, safer, and cheaper services to the end user.

But before understanding the impact of fintechs in banking, let’s take a step back. Interestingly- the term Fintech was first coined in the 21st century to describe the technology used in the back-end systems of established financial organizations. Today, however, Fintech have transcended those boundaries, it spans various sectors and industries, including education, retail banking, non-profit fundraising, investment management, and much more.

The fintech startup ecosystem in India saw 5.8x higher capital inflow to reach $4.6 Bn funding across 160 deals in H1 (January to August 202) period

But as India’s banking industry experiences major disruption and change through these fintechs, the country’s banks are also transforming. They are investing heavily in digital technologies and services to catch up the new age financial players.

At the same time, the government has taken several measures to give a boost to this revolution, including social service provisions, transfers and transactions, and formal banking. The country’s rapidly growing digital citizenry is increasingly demanding that India’s banks not only keep pace with the fintechs, but leapfrog far beyond them by developing new, uniquely Indian products, services, and business models.

While over the years, the fintech revolution has been constrained to bigger tier 1 cities of India. But the COVID-19 pandemic and digital penetration have taken fintech innovation into India's smaller towns and cities.

In the past decade the Financial Technology (Fintech) industry globally has transitioned from being the new kid in the block to becoming the norm in financial services. The lines between technology and business are ever-blurring, and startups as well as established banks have realized the importance of technology innovation and are leveraging it to build novel products and services for their customers.

1. There is a race amongst FinTechs, banks, and other corporate giants to create India's first truly comprehensive financial services SuperApp- a concept which got greta popularity after the success of Gojek (Indonesia), Alipay (China, Rappi (Latam) and Revolut (US)

2. Buy Now Pay Later (BNPL) and credit line disbursal to niche segments is reimagining credit and enabling Indians to surpass traditional credit-card and get access to digital credit at the point of purchase.

3. InsurTech is driving innovation on products and digital distribution increase penetration of Insurance products, while building niche solutions for employers as well as young millennials.

4. Digital lending, one of the most funded business models in Fintech, is moving to maturity with an increased focus on collections.

5. Neobanks are rising by offering hyper-personalized banking experiences for the tech savvy of customer segments Neobanks boast of attributes and offerings like accessibility, cost-effective multiple banking and financial functionalities under one umbrella. Some neobanks are infact building niche solutions focusing on blue-collar workers and the underserved needs of thin-file MSMEs, which is the way forward.

6. Wealth/Invest-tech has been a surprise package during COVID. It is transforming the investment landscape and bringing plethora of first-time equity investors to the market through its inclusive and cheap services.

7. Cryptocurrencies: While there has been a a lot of speculation around whether or not Crypto trading is legal in India, banks have always shied away from this sector. According to the latest information regarding the Cryptocurrency bill 2020- the government plans to bring cryptocurrency investments under tax ambit instead of an outright ban- this could be seen as opportunity for a lot of emerging fintechs.

7. API/Smart API banking development, embedded banking and Banking as a Service (BaaS) is empowering every company (financial or non-financial) to add Fintech features and build on the ecosystem. This is also promoting cross promotion of services across various platforms.

8. MSME is the new battleground (after millennials) for Fintech. Startups and banks are desperate to get a piece of this market. Covid19 has further accelerated the adoption of digital by MSME, making this market ripe for disruption.

9. Digital payment (like payment gateways) continues to draw in large funding and has maximum number of firms in the IPO and unicorn queue. The battles have moved from issuance to acquiring. With reduced margins, the players continue to find newer ways using payment as a hook to generate revenue from cross-selling other financial services.

The Fintech industry has grown by leaps and bounds in India, but it has faced its fair share of hiccups and challenges like - data security and privacy risk, varied adoption, rapidly changing regulation and lack of financial literacy and awareness.

The Indian fintech industry is not just one of the most dynamic sectors of our economy but also something being eyed upon across the globe! With services backed by latest technology like blockchain, artificial intelligence, machine learning and data analytics, a number of fintech products will find mainstream adoption in the near future, and most of them into banking. And with the current pace of innovation, a product yet to be introduced or under the paradigm of uncertainty may become the foundation of certain banking services in the years to come.