Fintech, a portmanteau of “financial technology“, refers to firms using new technology to compete with traditional financial methods in the delivery of financial services. Artificial intelligence, Blockchain, Cloud computing, and big data are regarded as the “ABCD” (four key areas) of FinTech. The use of smartphones for mobile banking, investing, borrowing services, and cryptocurrency are examples of technologies designed to make financial services more accessible to the general public. Financial technology companies consist of both startups and established financial institutions and technology companies trying to replace or enhance the usage of financial services provided by existing financial companies. A subset of fintech companies that focus on the insurance industry are collectively known as insurtech or insuretech companies.
Financial technology (also called FinTech) is an industry composed of companies that use technology to offer financial services. These companies operate in insurance, asset management and payment, and numerous other industries. FinTech has emerged as a relatively new industry in India in past few years. The Indian market has witnessed massive investments in various sectors adopting FinTech, which has been driven partly by the robust and effective government reforms that are pushing the country towards a digital economy. It has also been aided by the growing internet and smartphone penetration, leading to the adoption of digital technologies and rise of FinTech in the country.
Increased funding: A substantial increase in investments from venture capital, private equity and institutional investment has encouraged the rise of FinTech startups.
India Stack: India Stack is a set of APIs that allows governments, businesses, startups, and developers to utilize a unique and common digital Infrastructure. These open API platforms include Aadhar, Unified Payments Interface (UPI), Bharat Bill payments, etc.
Innovation in Technology: New business models are being developed using technologies like Machine learning and Artificial Intelligence.
Increase in smartphone and internet users: India has the 2nd highest number of smartphone users globally with numbers around 550-600 million, and 2nd largest Internet user market with over 795 million internet users as of December 2020.
Government initiatives and Regulators: Government initiatives like Jan Dhan Yojana, Startup India, Digital India program, etc. have played a vital role in encouraging the growth of startups. Startup India, for example, has enabled an online platform-based solution for entrepreneurs to safeguard their intellectual property (IP) and it has offered the startups some exemptions from taxes under certain eligibility criteria. The regulations developed by the Reserve Bank of India (RBI), IRDAI and SEBI has ensured increased accountability and the uninterrupted availability of secure and affordable digital financial systems.
International Collaboration: Startup India has enabled collaboration between Indian startup ecosystem and the global STARTUP ecosystem by enabling bridges that provide a soft landing to emerging new startups from the partnering countries. It has helped promoted enthusiasm by fostering knowledge exchange and fund support mechanisms.
The aim of the FinTechs in the alternative lending sector is to deal with the large demand-supply gap of credit in the country. They address the gap by focusing on improving customer experience and gain operating efficiencies, by implementing both conventional and alternative credit scoring models, and digital workflows.
According to Tracxn database obtained by EY, alternative lending as the second biggest receiver of investment in FinTech after Payments sector, at 29% of the total share. India’s retail digital lending space has grown significantly in the past decade (2012-22) from US $9 billion to US $270 billion with a CAGR of 39.5%. This huge rise in the lending space can be attributed to various factors.
Low credit card penetration: As per the data from RBI, the number of credit card holders was 62 million in 2021. Though it has increased at a CAGR of 20% in last 4 years, the actual number is low keeping in mind India’s credit card eligible population.
Unbanked population percentage: According to the World Bank’s Global Findex Report 2017, 80% of Indian adults (age 15+) have a bank account. This shows that round 190 million Indians above the age of 15 don’t have a banking account and thus no access to credit or any kind of loan.
High credit gap: India’s consumer financing gap stands at $300 billion while the financing gap for the Micro, Small and Medium Enterprises (MSME) stands at $240 billion.
Around 450 FinTech startups were founded in this sector during the period 2014-19 with a total funding of US $1.7 billion. The unicorns in this sector include Slice and Oxyzo Financial Services. There are many more alternative platform, like Anq Finance, emerging in this space to solve for high credit gap by innovating and widening the scope
The key business models that have worked for alternative lending FinTechs include payday lending, EMI/Point of Sale (PoS), MSME lending, Buy Now Pay Later (BNPL) loans and Peer-to-peer (P2P) lending.
Flexibility: Allows you to save information, query data in different alternatives that you could not previously, it also gives you the flexibility to be able to do it anywhere, anytime.
Savings: Not only for companies that are avoiding the hiring of a local rental staff the operating costs are reduced exponentially.
Transparency: Companies can manage in a transparent and fast way. All in one click on your home community from computer.
Only applies to large companies: Effectively large companies started using the FinTech.
Security: Data that is available online can easily be stolen by third parties. they could be used for lucrative purposes or even for identity theft.
Enormous operating cost stemming from multi-layered managements structures and large offices in prime locations. High overhead costs mean they have a hard time competing with flexible technology companies focusing on specialty areas and lower cost of operation.