The pandemic has accelerated digitisation across the value chain of financial services. This is expected to drive new business models to enable new customer acquisition, better customer engagement, provide newer financial products and add monetisation layers.
India continues to grow and lead in the fintech sector globally, with the rapid rate of adoption at 87 percent. Funding for startups operating in this space will remain buoyant.
India is at the cusp of shaping the competitive landscape of finance with deeper internet penetration and technological advancement in the next decade.
Making finance and financial products more accessible to potential target groups
India has leapfrogged the digitalization wave thanks to the phenomenal level of smartphone access by the unbanked and the underbanked. Their extent of engagement with the formal financial sector still remains low inspite of a large population among them having a basic bank account. Therein lies further potential for fintechs to make finance more accessible to them compared to traditional banks and financial service providers.
The MSME sector accounts for one-third of India’s GDP and only one-sixth of the 60-odd million MSMEs in existence access credit from formal credit channels, which alone reflects a $340-billion opportunity for credit alone. They currently access credit through informal channels and at exorbitant rates of interest.
An entire generation of Gen Z who are digital natives clearly prefer to do their banking and investments in financial products through digital means and are looking for frictionless customer journeys at the click of a button. The pandemic has also driven Gen X and Gen Y to adopt digital banking as a more convenient option and shows signs of being a long-term trend unlike previous waves of digital adoption by this target group. Having now overcome hesitancy to digital adoption, this cohort can be tapped by digital methods for their investible income for new financial products.
Penetration rates for mutual funds (owned by less than 2 percent of Indians) and insurance products as well as consumer loans are well below global benchmarks. To seize the opportunities for fintech, as envisaged by the original architects of India Stack, technology-driven access would be key to acquiring and delivering appropriately designed products and services to these customers at a viable cost.
Role of technology in fintech
Traditional banks are increasingly acquiring fintech companies or partnering with them to benefit from their agile business models and digital financial platforms underpinned by advancing digital technologies like AI/ ML/ Blockchain/the use of APIs, NLP/ data analytics and other trending technologies. McKinsey estimates that artificial intelligence (AI) can generate up to $1 trillion additional value for the global banking industry annually.
Cloud computing, Internet of Things (IoT), Open Source, SaaS and serverless, No code development platforms (NCDP) and Hyper automation are a few areas on the tech front that will define the future of fintech.
New competition for traditional BFSI with Big Tech in fray
Big Tech like Apple, Amazon, Facebook, and Ali Baba have joined the fray for e-payments and other financial services through their digital platforms. In addition to proliferating fintech companies, Big Tech is building new financial ecosystems. Traditional BFSI has this additional new competition to consider to stay competitive as the new trend involves rapid adaptation and innovative solutions by existing BFSI institutions.
Cyber security and consumer protection
People typically trust banks to keep their money safe. With increased digitalization, cybercrime has hit record levels since the onset of the pandemic. Cyber security is top-of-mind on the part of banks to instil confidence in customers and potential customers. Advanced encryption, secure multi-party computing, zero-knowledge proofs, and other privacy-aware data analysis tools will drive a new frontier in consumers’ financial protection.
(Shoaib Mohammad is Founder and CEO, LUMIQ. Views are personal)