In the past decade, India has witnessed a quantum leap in the fintech industry. Fintech funding grew exponentially in the last few years, and after the COVID-19 pandemic, the industry became the blue-eyed boy of economies.
Of the total 2,100 fintech entrees in operation, 67 per cent of them started operations in the last five years. Amid COVID-19, India saw a 60% growth in fintech investments, and a Boston Consulting Group report released March 2021 says Indian fintech companies will reach a valuation of US$150-160 billion by 2025, becoming three times more valuable in the next five years.
So what the reports suggest is a skyrocketing rise in the valuation of financial technology in India. But the question still lingers: are these Fintech innovations enough to bridge the country’s financial inclusion divide?
Not everything is rosy in the fintech landscape, it turns out. While the sector is on the edge of a landmark journey towards unparalleled growth, financial inclusion of all and the last mile connectivity remains a challenge.
India’s Digital and Financial Inclusion Divide
India has 1.3 billion (and counting) people spread across the length and breadth of the subcontinent, a significant part of which lives in semi-urban and rural areas.
That population accounts for over 70 per cent of the nation’s population. Yet, according to the IAMAI research, just 20.26 per cent of rural Indians and 64.84% of urban Indians have access to the internet (despite the fact ‘mobile-first’ rural generation exists).
The digital financial gap exacerbates in the rural areas, where 80 per cent of inhabitants (and 64.84% of urban inhabitants) are yet to adapt to fintech as per ET stats.
These rural and semi-urban sections of the population do not have access to the traditional banking system. The World Bank estimates, about half of India’s population may be financially excluded, out of the formal financial net.
Even if they have a bank account, most of them are unable to get benefits due to several factors, including the distance of their village or home to the nearest bank branch, limited financial literacy, disinterest on the part of the bank, traditional mindset, trust issues, and others.
So, how can the challenges be overcome?
Fintech – A Beacon of Hope
Looking at the robust growth of sectors like health, education, and others, it can be safely said that technological innovations can bring technology hesitant people within the financial loop and help break the barriers of the digital divide.
According to NASSCOM, financial inclusion can help reshape the economy. Companies such as Udaan, Meesho are assisting people in making money despite living in far-flung areas. Fintech innovations can keep the momentum going on.
As per ET reports, India can grow into a $1 trillion digital payments market which is already the fastest-growing. In the fiscal year 2019-20, the country received 3,435 crores in digital payments which points out the popularity.
While the government is making strenuous efforts to promote digital India, the Reserve Bank facilitates the sector’s growth through regulatory initiatives. For instance, there will be a specific division at the central bank dedicated to fintech companies.
Fintech Innovations is the Way Forward
The fintech innovations can help accelerate financial inclusion, and technologies like AI and ML will further bridge the financial divide in India.
Despite the explosive growth of the fintech industry, lending in rural and semi-urban regions remains a challenge. Only 10 per cent in rural areas are estimated to have access to formal credit.
Also, India’s MSME sector contributing nearly 40 per cent of India’s 2.87 lakh crore GDP, is chronically credit-starved, even as India makes strides in financial inclusion. As a result, an estimated $600 billion credit gap exists in the sector.
But fintech coupled with digital push has the potential to turn the game of financial inclusion around. For example, Statista expects India’s digital lending market will contribute around 350 billion dollars by 2023.
The current pandemic has changed the scenario of the financial landscape. It has pushed digital payments where almost every segment of the population engages in e-commerce and online transactions.
However, this can be true for urban areas, but hinterland and rural areas may still be out of reach of the final inclusion. Fintech has the potential to help financial lending institutions become efficient and serve customised financial products at affordable pricing.
Banking the Underbanked
Fintech innovations like mobile money can minimise constraints by financial services available to this section of the population. For example, Kenya has shown the way with the success story of its mobile currency. Called M-Pesa, this e-currency offers a vast distribution network and user-friendly tech to provide bank access to more than one lakh Kenyans, thus lifting them out of poverty by improving their savings.
As another example, a digital ID card can help ease access and banking operations. For example, Aadhar is already being used for e-KYC for bank account opening.
Customers can obtain relatively small loans from digital lending companies via applications or online platforms. In comparison to bank loans, digital lending does not require a specific bank account, has fewer conditions, and is much faster.
Besides individuals, lending companies can also provide micro, small, and medium loans (MSME). The coronavirus (COVID-19) outbreak increased already high loan demand in this industry. As a result, many businesses could not obtain bank loans and be forced to seek alternate funding.
Increasing Trust and Convenience
Low-income households generally tend to distrust digital financial services and prefer cash for transactions. Therefore, the technology should strive to build a more robust infrastructure that allows users to interact with human interface and not solely rely on digital channels like chatbots to gain the confidence of low-income users.
In addition, fintech innovations such as embedding finance in already operational retail chains familiar to low-income households can help generate trust and inclusivity.
Providing Access to Basic Credit
Low-income households often lack access to essential services like water, health, sanitation, education, and electricity, among others. Fintech innovations like pay as you go models allow this section of the population to avail essential services on their terms.
When they save and see the corresponding benefits, they are motivated to keep going, thus encouraging more people to join and help in economic development. For example, Pradhan Mantri Jan Dhan Yojna is a scheme launched by the Government of India. It aims to fulfil the basic credit needs of the underserved sections of society. It comes with an overdraft facility and also offers accidental insurance cover. It is a zero balance account that aims to cover savings, insurance, pension and credit.
Fulfilling Unmet Credit Needs
Low-income households lack formal property rights and documentation, bank accounts and do not have credit histories. The traditional credit rating system considers all these factors and more while considering loan approvals.
Often these households are filtered out by the conventional lenders due to fear of default. Low-income women entrepreneurs are often hit more by this even though they tend to default less than men.
Fintech innovations such as a digital credit scoring mechanism monitored by machine learning can be used to process details and predict creditworthiness.
Plugging Cash Leakages
Low-income households generally undertake cash-based transactions. However, they are inconvenient, lack efficiency and transparency. Large ticket transactions are unsafe and expensive also. Fintech innovations like digitising payments can plug leakages, reduce costs, and improve traceability.
Financial Products Tailored to Fluctuating Incomes
The cash flow of low-income households is often constrained and unpredictable. This is because most of them are dependent on agriculture for income flows that rely on planting and harvesting times.
Traditional financial service such as monthly EMIs and frequent visits to the bank branch is inconvenient for them. However, fintech innovations such as FarMart and Jai Kisan offer flexible and timely financing to farmers to meet their equipment needs.
To sum up
The fintech innovations have increased its outreach to include stocks, bonds, peer to peer lending, and more. The widening of scope will ultimately help to encompass the underserved low-income sections.
Financial inclusion will catalyse both economic growth and poverty elimination. It will also aid in the achievement of the United Nations’ Sustainable Development Goals (SDGs).
In addition, by bringing innovation, the fintech industry in general and the lending industry will build newer financial products on a scalable architecture.
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