Fintech’s impact and disruption in India

(Left to Right) Ashutosh Khajuria, Executive Director, Federal Bank; Jindal Haria, Director, Financial Institutions, India Ratings and Research; Anup Agarwal, Co-founder and CEO, Mintifi;Karthik Srinivasan, Group Head, Financial Sector Ratings, ICRA; and Suresh R, Vice President, Sales, Kaleidofin

Shakti Pada Mandal, a vegetable vendor in Jamshedpur with a flourishing business had a bank account since 2015. However, he never really felt the need to deposit or withdraw any money from it as his business ran primarily on cash. Every month he sent a sizeable amount from his earnings back to the village to his family and the remaining cash was barely enough to warrant a visit to the bank; the paltry amount also made him feel out of place at the branch.

Little did he know that the year 2020 will change it all and he would need to reactivate his relationship with institutional finance just to be able to conduct day-to-day business. Gradually, as COVID-19 set in, even his most loyal customers started complaining about the inconvenience of having to pay in cash, which would entail an inconvenient visit to an ATM that could also be a potential point of coronavirus infection. Some would explicitly express their preference for payments through no-contact mobile applications for fear of contracting the virus through currency notes that may have passed multiple unknown hands.

While Mandal’s relationship with the bank was renewed through digital payment applications under stressful situations, post the pandemic he continues to provide the Unified Payments Interface or UPI-based payment options to buyers due to the sheer convenience of doing business. What’s more, in the two years that have gone by, he has built significant transaction history to create a background that will help the bank offer him a loan to expand his business. Today, Mandal plans to move out of his make-shift roadside stall and rent out a proper shop. His transaction history has also helped him become a local delivery partner of one of the leading farm-to-fork platforms.

TRANSFORMING SMALL BUSINESSES IN INDIA

Financial inclusion is not limited to just having an account with the bank. Rather, it entails other opportunities such as using the account for easy transactions, affordable credit and even wealth management. The Rangarajan Committee set up by India’s apex bank the Reserve Bank of India (RBI), defined financial inclusion as the process of ensuring access to financial services and timely and adequate credit for vulnerable groups such as weaker sections and low-income groups at an affordable cost. During the last two years, mobile application-based digital payments platforms have not only provided the common Indians and micro-businesses ease of transaction they have also acquainted countless, faceless citizens with institutional finance.

The UPI interfaces of banks are difficult to understand for the masses where financial and technical awareness and literacy are not very strong. However, simpler interfaces provided by fintech platforms such as Paytm, PhonePe, Google Pay, and Bharat Interface for Money (BHIM) picked up a customer base that grew at a rapid pace and ingrained a habit that cannot be completely reversed even as businesses return to normal.

Acceptance for digital payments has grown significantly in the last few years, driven primarily by the demonetisation in 2016 and the long spell of nationwide lockdown, from 25 March 2020 till the final phase of unlocking in March 2022, which limited the ability of businesses to conduct in-person transactions. The impact is visible in the RBI’s digital payment index which jumped from 173.49 in September 2019 to 304.06 in September 2021.

A look across sectors and walks of life and one can find multiple such examples of individuals like Mandal and micro-businesses that either initiated or cemented their relationship with the formal financial sector to access the ease of mobile digital payments platform linked to the bank accounts. It not just brought in ease of transaction and safety due to no-contact payment, but also ensured such vendors and small-time service providers did not have to worry about foregoing earnings due to the non-availability of smaller denominations or change.

Parvati Mahajan offers her services as a cook to five households daily and belongs to the large unorganised sector of workers striving to make their ends meet in Mumbai. It was only after the first Covid-induced lockdown that Mahajan opened an account with the Bank of India. She realised that if only she had a bank account, she needn’t have stepped out of her home to collect her salaries from households when she wasn’t allowed to enter those buildings to work. Her employers could have easily transferred the money to her through a mobile application.

India’s Digital Payment story
Period RBI-DPI Index
March 2018 (base) 100.00
March 2019 153.47
September 2019 173.49
March 2020 207.84
September 2020 217.74
March 2021 270.59
September 2021 304.06

Source: Digital Payment Index, RBI; published in Jan 2022

Caption: The RBI-DPI index continues to demonstrate significant growth in the adoption and deepening of digital payments across the country.

“The biggest benefit of digital payment platforms has been the financial inclusion. A lot of under-banked who did not have access to formal financial services or faced difficulty in accessing banking and financial services are now part of the system, thanks to the explosion in fintech,” says Karthik Srinivasan, Group Head of Financial Sector Ratings at ICRA. He also highlighted that technology has transformed the structure of payments.

“On the payments side, the use of QR codes has made receiving payments from buyers very easy. On the credit side though, it will take some more time. A lot of fintech players have set up their modules and algorithm but that will possibly take more time to scale up,” he stated adding that in the last couple of years, the Jan Dhan Yojana – the Government of India’s massive scheme of financial inclusion initiated in 2014 – coupled with the challenges during the Covid and Demonetisation, has led to a higher inclination towards using fintech since financial services concern one’s day-to-day lives.

GROWING IMPACT OF FINANCIAL LITERACY

Analysts pointed out that financial inclusion has also brought about major changes in user behaviour, thanks to growing financial literacy and awareness. The trend has been catching up even in Tier 3 and Tier 4 cities and villages where businesses and individuals have begun to use app-based payment platforms as an alternative to cash payment options, learning either from a loss of a customer to the shop next door or from word of mouth in the community. On their part, the private-sector players and the government has also been creating awareness about digital payment applications with much success.

“Thinking about borrowers in the micro-finance sector from the aspect of literacy or phone ownership one might assume that they may not be aware of UPI. However, last month when I met a set of micro-finance borrowers in Southern India, I found out that most of them knew about UPI. Those who had not used it also knew about it and the convenience it offers; they knew of Google Pay,” quips Jindal Haria, Director, Financial Institutions at India Ratings and Research.

“Most of them had at least one touch phone in the immediate family. In a particular group of 15 women, three women knew how to transact while the others indicated that either their husband or their children knew how to manage it,” he said. Haria further stressed that in close-knit communities in the villages, people take note of how each other’s lifestyles and aspire to attain those standards.

Today, there is greater awareness of the importance of creating and maintaining a credit history through these digital payment transactions. Non-bank financial institutions also had a role in instilling this behaviour while they made efforts to bring in more and more customers who were earlier left out of banking services into the formal financial ecosystem.

Besides, mobile applications offering financial savings and investments like Systematic Investment Plan (SIP) and mutual funds have also helped popularize the concept of digital financial tools, platforms, and apps simpler and more accessible to the youth. Fintech ventures in insurance and investment, despite their limited reach to cities, have been able to inculcate prudence and wealth management to a certain age segment and employment strata.

DIGITAL PAYMENT AND OPPORTUNITIES

To understand the potential of transaction data one could draw from the Santa Monica-based fintech company Tala’s model. The company is giving out personal loans or small unsecured business loans to borrowers with no formal credit history based on their bill payments and online activity history.

In India, as well, fintech companies are already mining digital transaction data to underwrite credit to sectors that lack formal documents or trails of business numbers and are developing services and products that are more customised and targeted to meet the needs of small groups of people.

“Businesses in the informal sector and those run by women, that have traditionally faced difficulties with access to institutional finance for the reasons above have benefitted most from the increased usage of UPI-linked payments,” highlights Suresh R, Vice President of Sales at Kaleidofin, a neo-bank providing credit, savings, investment, and a gamut of other financial solutions to the informal economy.

“With the trail of digital transactions as proof of business, many fintech firms can use the data to underwrite this segment and offer financial products suitable for their need,” he says adding that their ability to customise and offer products that suit specific characteristics of customers such as volatile incomes and sudden need for cash is equally important.

“For instance, Kaleidofin Goals, a saving-led product allows a customer to miss a payment without any penalty. It also allows customers to withdraw or take a loan against their savings to tide over any urgent needs for cash,” elucidates Suresh.

Having understood the customers’ requirements and abilities with a certain degree of accuracy, one of the greatest wins for fintech companies is their ability to incorporate data into products promptly and provide customised solutions.

“Each transaction leaves a digital trail which is used by multiple fintech firms to better understand the needs as well as the risk profile of customers. This helps us modify our terms and conditions based on their billing cycle, adjust for market risks, and even offer different repayment terms,” explains Anup Agarwal, Co-Founder and Chief Executive Officer of Mintifi, a digital lending platform that provides unsecured loans to small and medium enterprises in the distribution chain to buy inventory.

TECH PENETRATION TO DRIVE REACH

Affordable internet and mobile devices have helped digital transactions gain ground in various economic strata of Indian towns and cities. According to a JP Morgan report, digital wallets are a fast-growing payment method after cards and are replacing cash for e-commerce payments.

Experts, however, point out that a lot more can be done to expand financial access and inclusion in the hinterland. A report by global consultants PwC suggests a collaboration between fintech companies and Self-help Groups (SHGs) in rural India to inculcate the awareness of savings and management of financial resources among members of the group. SHGs work because they are small communities of people that come from a homogeneous economic and cultural environment.

According to the report, with over 1,300 fintech start-ups and investments worth $5.72 Billion flowing in from 2014 to 2018, India has managed to secure the second position in the global fintech adoption index.  “However, the country continues to face challenges in achieving financial inclusion as 76% of India’s adult population is financially illiterate, resulting in 48% of the bank accounts being inactive (as in 2018) … fintechs can tie up with SHGs to reach out to women and bring about more gender equality in terms of financial inclusion,” the report says.

PwC further highlights that collaboration by fintech players could help take India to move closer to achieving its UN Sustainable Development Goal objectives for 2030, including financial inclusion through poverty eradication, decent work and economic growth, elimination of hunger, and gender equality and innovation in industry and building infrastructure.

NEO-BANKS TO BOOST FINANCIAL INCLUSION

Neo-banks are a step forward in the deepening of partnership between banks and fintech. A few Indian private banks have already stitched partnerships with multiple fintech companies that help them expand their client base. The concept has already piqued great interest among fintech companies with a number of them already setting up shops.

“They have made brick and mortar banking irrelevant. They are not permitted banking licenses so they are partnering with banks,” says Ashutosh Khajuria, Executive Director, Federal Bank. According to him, private lenders are already teaming up with companies such as Fi and Jupiter and are exploring more such partnerships.

“There are banks that are quite comfortable with the neo-bank model. We don’t see neo-banks as an animal that will cannibalize the banking system. We look at them as partners… more like banking correspondents,” he says. “Whether it becomes profitable or not will be evident in the days to come. There is absolutely no doubt that they have helped increase financial inclusion and drive financial literacy.”

Simply put, a neo-bank has no physical presence on the ground in the form of branches and operates entirely through digital formats. They provide a variety of customized data-driven financial services, other than lending.

WAY FORWARD

A report published by NASSCOM indicates that in the past two decades digital payments in India have grown 16 times, and the volume of usage has fastened every five years. The apex body of the IT industry in India also projects a further 16x growth with digital payments touching the highest-ever levels of INR 54,800 crore by 2025.

“Technology convergence, with Application Programming Interfaces and cloud-native development, will further boost innovation and integrated offerings.  Innovation in the cyber security realm will accelerate adoption with greater trust in digital payment solutions. Expanding mobile and Internet subscriptions, and 5G rollout will prove catalytic in driving mobile banking and m-payments,” the report says. It further notes that the support from regulations and policies by the RBI and the government would be key for this leap, the report said.

For any innovation to work sustainably three factors will need to work out in the favour of an enterprise: it needs to have an easy, engaging user experience; cater to a specific need and then be able to branch out into a few other requirements; the experience needs to be modifiable as per user.

Note: Units in lakh crore (INR)

KEY TAKEAWAYS

  • Digital wallets are a fast-growing payment method after cards and are replacing cash for e-commerce payments in India.
  • The trend has been catching up even in Tier 3 and Tier 4 cities and villages where businesses have begun to use app-based payment platforms as an alternative to cash payment options.
  • The UPI-based payment is helping micro-businesses create transaction history for banks to evaluate and offer business loans.
  • Fintech firms are using the trail of digital transactions as proof of business to underwrite businesses in the informal sector and offer suitable financial products.

Digital payment platforms are transforming businesses in India and also triggering socio-economic changes.

(Left to Right) Ashutosh Khajuria, Executive Director, Federal Bank; Jindal Haria, Director, Financial Institutions, India Ratings and Research; Anup Agarwal, Co-founder and CEO, Mintifi;Karthik Srinivasan, Group Head, Financial Sector Ratings, ICRA; and Suresh R, Vice President, Sales, Kaleidofin
(Left to Right) Ashutosh Khajuria, Executive Director, Federal Bank; Jindal Haria, Director, Financial Institutions, India Ratings and Research; Anup Agarwal, Co-founder and CEO, Mintifi;Karthik Srinivasan, Group Head, Financial Sector Ratings, ICRA; and Suresh R, Vice President, Sales, Kaleidofin.

Shubhendu Parth is a contributor to Business Transformation Asia (with inputs from Srijonee Bhattacharjee)