From significant regulators in Mumbai to Blockchain specialists in cities like Delhi, Bengaluru, and Hyderabad, multiple Indian metropolises are snagging the title of ‘fintech hubs’.
With a boom in startup growth and a boost from governmental support, the Indian fintech industry has become a force to reckon with. However, the unprecedented rate at which the sector is taking root in economic activity has raised questions about its viability.
Read on to find out more about what the rise of Fintech could do for the Indian financial system, good or bad.
What Standing does Fintech Hold in the Indian Context?
Albeit a slow takeoff in its nascent stage, the Financial Technology sector rose to dizzying heights last year. Propelled to success by the unparalleled rise in the number of Unicorns and the amount of funding available in the Indian landscape, fintech disrupted the market positively.
This disruption was equally facilitated by high smartphone and internet penetration into previously untapped locales in the country. Simultaneously, the onslaught of the pandemic necessitated the usage of technological innovation in the banking sector to improve financial services.
Also read: 6 Key Challenges That Fintech Startups Face in India
The Indian government further substantiated the need for the unique services provided by the fintech industry by backing initiatives such as Jan Dhan Yojana, Unified Payment Interface (UPI), and widespread Aadhar linking.
2021 proved to be a fruitful year for the industry, having amassed an estimated $50 billion valuation, as well as a record $9 billion in funding. Fintech in India is growing at an exponential rate and is primed to reach a 150-160 billion USD valuation by 2025, according to a report released by the Boston Consulting Group last year.
With favourable economic circumstances and an agreeable government in tow, fintech has carved a sizable place for itself in the Indian market. However, it does seem to be a double-edged sword, simultaneously promising high profits and high risks. We tackle both sides of the coin below.
Does Fintech Symbolize the Potential Road to El Dorado for the Indian Economy?
Financial technology has disrupted the market enough to have permanently altered it and set off an evolution in how the population interacts with the financial system. Moreover, technological innovation brings the potential for multifaceted growth, discussed below.
Banking, insurance, and personal investments
With the advent of an economy vying to be cashless and a shift toward online supports, previously outlandish concepts such as Buy Now Pay Later (BNPL), Neo Banks, Wealthtech, and Insurtech could be the boost the financial infrastructure needs.
Also read: How Digital Lending Startups are Leading the Fintech Revolution?
Having the means to make online banking and payments has changed access to credit for the better. However, this does not close the gap concerning the volume of smaller payments most of the population made toward mutual funds or insurance.
Reforms powered by fintech propose exciting and fecund opportunities in banking, insurance, and personal investments, for instance:
- Moving from physical banks to Neo banks for account services.
- The shift from regular loans and credit cards to digital lending (Peer to Peer loans, Instant loans, Personal Loans, SME Loans).
- The meeting of investment products and Wealthtech could create new channels for personal wealth management.
- Moving from regular insurance to digital coverage.
Also read: FaaS: The Emerging Global Trend of Fintech-as-a-Service
MSMEs and credit lines
Though MSMEs are critical economic drivers, they are a vulnerable sector. Most small or medium businesses are incapable of keeping shutters open for more than two months with a loss in revenue and have the most challenging time getting loans approved.
Accessible and flowing credit lines are essential to their survival and the economy. Fintech innovations in instant loans and P2P lending could be the solution MSMEs need to boost their reach and business.
Financial inclusion
One-eighth of the population is either unbanked or under-banked and lacks financial literacy and awareness. This ‘thin-file’ sector of the population is excluded and failed by the conventional methods of traditional banks.
However, there is increasing penetration of smartphones, the internet, and technological awareness beyond Tier 1,2 and 3 cities. Fintech comes into the picture here and plays a vital role in democratising finance.
Also read: Digital Lending: Perks of Going Paperless
Robust, adaptable, and multilingual APIs drive the financial inclusion and data collation of an underserved population, making the financial sector more transparent.
Job creation
Digital disruption does not always wreak havoc, sometimes, as in the case of fintech, it can empower the young and work demographic to an extent where it encourages the acquisition of knowledge and fuels aspirations.
Well-informed and tech-savvy individuals drive the economy, and fintech creates space in the professional world for these very people.
Risky business—the darker side of fintech
While the siren song of utopian growth may sound appealing, the truth is that fintech is still a budding industry with flaws. This in itself poses several risks to the health of the financial ecosystem.
The fintech bubble and data monetisation
The premise of most fintech solutions lies in data monetisation, however, it does run the risk of creating a ‘bubble’. According to some experts, a bubble-like the ‘dot-com’ bubble of the early 2000s is beginning to form in the fintech industry and could be on the verge of bursting. This could be triggered by the lack of a definition of what exactly comes under the umbrella of ‘fintech’.
Data security
With the fintech sphere getting exponentially larger, there exists an equally large and growing risk of data breaches. In addition, there is the worry that the current measures are not robust enough to mitigate the risk.
Multiple weak spots exist in the infrastructure, which is cloud-based or related to encryption, digital identity, and data integrity. As a result, any breach could prove to be catastrophic on multiple levels.
Regulatory compliances
Being an industry in its nascent stages has its advantages for unparalleled expansion; however, an unchecked industry lacking a uniform regulatory policy is volatile.
Also read: Should India Consider Introducing Digital-Only Bank Licenses?
The compliance framework is in constant upheaval, so transactional safety doesn’t bode well. Without a clear structure in place, there is potential for fraud, money laundering, unchecked cross-border transactions, and terrorism funding.
The challenges of scaling up
Fintechs will face their biggest hurdle when expanding their reach in a country that is still primarily cash-based and reluctant about tech adoption. Over 95% of fintech startups fail at the scale-up stage and often depend on incumbents in their fight for survival.
Fintechs will prove to be vital to not only economic growth in the future but also to how the financial infrastructure adapts with population demands. Therefore, dynamism and adaptation will be critical in determining whether the industry will be a boon or a bane for the Indian economy.
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