FinTech in India
FinTech in India
Key Takeaways
Strong, proactive policy level support from the government has been providing a much-needed
boost to user adoption. Initiatives such as Jan Dhan Yojana, Aadhaar and the emergence of UPI
provide a good foundation for FinTech companies to permeate ‘last mile’ touchpoints and boost
financial inclusion across the country.
The ‘Payments’ segment has been the most funded within the Indian FinTech landscape, riding
on the demonetization wave. However, banking technology solutions, including B2B products,
are also experiencing strong growth and enabling financial institutions to create seamless
solution delivery for end users.
Despite significant reductions in incoming global investments in the FinTech space, the India
opportunity remains promising. India offers the largest unbanked or underbanked population,
along with a strong technology and entrepreneurial ecosystem
Strong Governmental Support
A government push for financial inclusion,
digitization and startup activity has led to the
introduction of policy initiatives which
provide a strong foundation to the FinTech
sector in India.
India Stack
Through the introduction of India Stack, the
government has provided a world-class
technological framework to entrepreneurs,
innovators and corporations, allowing for the
accelerated growth of FinTech ventures. The
scenario somewhat resembles the policy
support offered by the government to the
telecom industry in the 90’s, with FinTech
taking center stage in many reform
initiatives
Startup India Program The Startup India program, launched by the central government, includes the simplification of regulatory processes, tax exemptions, patent reforms, mentorship opportunities and increased government funding.
Jan Dhan Yojana Financial inclusion in the country has grown significantly due to initiatives like the Pradhan Mantri Jan Dhan Yojana (PMJDY), regarded as the world’s biggest financial inclusion program, with an aim to facilitate the creation of bank accounts for large underserved or unserved sections of India’s billion plus population.
Aadhaar Adoption The RBI recently approved Aadhaar based biometric authentication, which will allow for bank accounts to be opened through e-KYC at any Banking Correspondent (BC) location. This will allow financial services companies to do e-KYC checks more economically, thereby reducing transaction costs for customers.
National Payments Council of India Initiatives The National Payments Council of India (NPCI), through the introduction of the Unified Payments Interface (UPI), has leveraged the growing presence of mobile phones as acquiring devices, substantially reducing the cost of infrastructure for FinTech ventures. With the smartphone user base expected to expand to about 500 million users by 2020, up from about 150 million in 2016, the digital banking footprint is projected to grow faster than ever before. The NPCI has also introduced several innovative products, such as RuPay cards, which will allow for immediate money transfers and a more convenient experience for the customer. These initiatives provide a solid foundation for a digitally enabled financial sector in India, giving FinTech startups the opportunity to leverage these technologies and initiatives to be adopted into the mainstream banking experience in India
Public Relations Moreover, the government has also played a strong role in encouraging and educating consumers in the economy towards digitized monetary systems, providing a much need PR push towards digitisation. The industry is still suffering from regulatory uncertainties, particularly with respect to new business models enabled by FinTech applications such as P2P transactions, crowdfunding and data security. More than 40% of industry incumbents and startups reported such regulatory uncertainties to be a major hurdle while working to implement innovative solutions.
Funding Trends
The FinTech sector saw a decrease in
global funding in 2016 due to increased
global uncertainty, driven by lack of clarity
surrounding Brexit and the US
presidential election, among others.
VC-backed global FinTech investment in
2016 was $12.7 billion, which was down 13%
from 2015’s record high of $14.6 billion2
. A
breakdown by geographical region found
that FinTech investment in Europe and the
US was affected the most. VC-backed
funding was down 25% YoY in Europe and
29% YoY in the US in 2016.On the other hand, FinTech investments in
Asia increased to $5.4 billion in 2016, up 12.5%
from $4.8 billion in 2015, driven mainly by
China and India. The increase in investment
in 2016 despite unfavorable economic
conditions highlights Asia as one of the most
promising regions for FinTech investment.
However, despite the growth in FinTech
investments in Asia, the Indian FinTech
space is not immune to broader market
sentiments. Economic uncertainty in 2016,
both global and domestic, has impacted
FinTech investments in India. In Q4 2016,
FinTech funding was at a 5 quarter low,
raising only $32 million across 10 deals, down
from $157 million and $127 million in Q2’16
and Q3’16 respectively. This decrease in investor confidence in Q4 can likely be
attributed to the short-term impact of
demonetization in the country as well as an
ambiguous regulatory scenario.
Another interesting statistic in the FinTech
space is a reduction in the average ticket size
for early stage funding in the FinTech space
in India. For seed funding, the average
ticket size was $0.8 million in 2016, from $1.0
million in 2015 and the ticket size for series
A funding reduced to $4.2 million, down from
$5.4 million in 2015. This demonstrates a
more risk averse attitude held by investors in
the Indian FinTech space in the past year, but
also points towards reducing capital needs for
supporting new ventures.
Alternative Lending Alternative lending is the second most funded and one of the fastest growing segments in the Indian FinTech space. Around 37% of GDP is contributed to by MSMEs but the supply of credit lines is disproportionate. It isn’t surprising then that there are 158 new startups in the space as of 2016. However, competition is stiff, with only 27% of founded companies obtaining funding, and 27% of those going on to raise Series A capital. As of October 2016, alternate lending in India received $199 million in funding across 33 deals, almost doubling 2015’s funding of $103 million across 21 deals3 . The major contributors to the growth of this sector include a large amount of unmet demand for loans from MSMEs, with a gap of roughly USD 200 billion in credit supply, and a significant under-banked and new-tobank population which lies at the heart of the Indian FinTech opportunity.
Sector Snapshots
India’s FinTech landscape has witnessed
strong user adoption through 2016, driven
largely by the payments sector which has
enjoyed a boost post the demonetization of
high value currency notes. Alternate lending
also enjoyed a strong year, fueled by the large
number of unbanked, new-to-bank, and
under-banked consumers. However, while
there is significant headroom for growth in
consumer facing solutions, India’s FinTech
ecosystem still lags behind other FinTech
hubs in the number of middleware and B2B
solutions, which together enable financial
institutions to provide end-to-end solutions
for their users
Payments
Globally, credit card payments overtook cash
payments for the first time in history, and although
digital payments accelerated in India
as well, it is estimated that 80% of
economic transactions in India still
happen through cash, as opposed to
around 21% for developed economies,
thus leaving significant room for growth. The
digital payments sector in India is estimated
to grow to USD 500 billion by 2020, up from
roughly USD 50 billion last year, and
representing around 15% of GDP in 2020.
Mobile payment solutions, such as wallets,
P2P transfer applications and mobile points of
sale, are enjoying strong user adoption, and heading towards one-stop-shop solutions
in the future.
Some players in the sector are taking
advantage of policy initiatives such as
‘Payments Bank’ licenses to converge towards
a hybrid model where mobile services blend
together with banking services.
Alternative Lending Alternative lending is the second most funded and one of the fastest growing segments in the Indian FinTech space. Around 37% of GDP is contributed to by MSMEs but the supply of credit lines is disproportionate. It isn’t surprising then that there are 158 new startups in the space as of 2016. However, competition is stiff, with only 27% of founded companies obtaining funding, and 27% of those going on to raise Series A capital. As of October 2016, alternate lending in India received $199 million in funding across 33 deals, almost doubling 2015’s funding of $103 million across 21 deals3 . The major contributors to the growth of this sector include a large amount of unmet demand for loans from MSMEs, with a gap of roughly USD 200 billion in credit supply, and a significant under-banked and new-tobank population which lies at the heart of the Indian FinTech opportunity.
During our scouting process, alternative lending was one of the most popular
segments, with around 10% of our Top 55 startups falling into the category.
Banking Technology
The ‘Banking Technology’ segment includes
software solutions, fraud and risk
management suites, regulatory compliance
and other solutions for banks and other
financial institutions (FIs). This segment
forms the bedrock for FinTech solutions
offered by new and existing FIs since it
enables the entire process chain underlying
digital transactions to move towards
real-time, verifiable systems. The segment
has seen 74 companies since 2008, of which
6 have been founded in 2016. It is a rapidly
growing segment in the FinTech space in
India.
Emerging technologies such as artificial
intelligence and machine learning have the
potential to revolutionize the customer
experience, especially at the ‘last mile’ by
providing greater levels of personalized
service and greatly improving the back-office
efficiencies at financial institutions. The past
year has seen the adoption of these
technologies for experimentation and
implementation of a variety of use-cases like
bot enabled conversational banking
services at large commercial banks in India,
more intelligent recommendation engines for
targeted marketing of financial products and
automation of underwriting using microeconomic
indicators obtained by scraping the
web and device fingerprinting.
Insurance Tech
The InsurTech segment has been growing
more conservatively than traditional
FinTech segments like payments and
alternative lending. However, as InsurTech
companies demonstrate greater value to insurers by sales improvement, cost
reduction, better risk management and
process efficiencies, the scope for growth is
quite high. The insurance sector in India has
been traditionally quite slow to adopt
innovation, but with rising consumer
expectations and increased access to
technology enabled efficiencies, insurers are
looking to incorporate solutions that improve
customer engagement, retention and
improve the complete customer-lifecycle.
Internet-of-Things (IOT) enabled solutions are
gaining popularity globally within the
InsurTech sector, powered by rich customer
data gathered through various sensors used
for other purposes. Linking of health and
wellness data for instance can help insurers
predict consumer behavior better, and lead to
increased revenues through smarter pricing
strategies. Marketplaces are also bringing
increased transparency to the product
offerings, motivating insurers to make
products simpler and easier to
understand.
Despite a few concerns about regulatory
clarity and reduced deal values in 2018, both
locally and globally, the outlook for FinTech
in India remains very promising. Regulatory
support, financial inclusion and the
digitalization of services in the industry are
likely to boost investment in the area going
forward and will rapidly increase the
adoption of emerging technologies in the
financial services industry
S BHATTACHARYA
Chairman , ASK Fintech