A Study On FinTech And It’s Emerging

Impact On The Industry

Yash Basit
TYBBA Finance
74021018082
 Abstract
Rapid innovation employing the use of advanced technology for the provision of financial
services, also referred to as ‘Financial Technology’ or ‘FinTech’, is having a rampant effect
on the banking and finance industry. The increased popping up of FinTech start-ups has the
capacity to reinvent financial services across the globe. A variety of financial services,
including digital payments and banking, small business financing, insurance provision and
investment management have been transformed by the FinTech sector. Although the pace and
level of the disruption caused by this sector varies across products, sectors and geographies,
the main reasons for the increasing popularity are ‘efficiency, transparency, simplicity,
minimised operating costs and economies of scale.’ FinTech has the potential to bring about
‘democratisation of finance’ and increase financial inclusion, peer-to-peer (P2P) currency
lending, financial services to SMEs and the underbanked in developing economies, all of this
contributes to inclusive and sustainable growth. However, FinTech innovations have their fair
share of issues and challenges, specifically regarding ‘privacy, cyber-security and operational
risks.’ Advancing technologies increase the vulnerability of digital security, which could
cause trust and confidence issues to build up amongst its clients. Even though they have a
higher level of resilience and security, ‘cloud’ and ‘blockchain’ technologies are prone to
outside intrusions. Overall, if combined with proper public policy, technological penetration,
regulation and proper targeting and distribution facilities, FinTech has the potential to
become the ‘future of banking and financial services.’

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 Acknowledgment
I would like to express my deep sense of gratitude to NMIMS’ ASMSOC for giving me this
opportunity of working on such an extensive project, which has helped me gain immense
knowledge about the aforementioned topic. Having been given such an interesting topic to
work on, it has been a great value-add and also enabled me to spend my time productively.

I would also like to thank my mentor, who has helped me throughout the project in guiding
me and answering all my doubts promptly. Her help has been instrumental in the completion
of this project.

I am also thankful to all the other faculty members who have assisted by providing their vital
advice and inputs, whenever I required. Their feedback and suggestions have helped in
improving the quality of this project.

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 Declaration

I hereby declare that the project work entitled “A Study on FinTech And It’s Emerging
Impact on The Industry” submitted to NMIMS’ ASMSOC, is a record of an original work
done by me under the guidance of my mentor. This project is submitted in place of the
summer internship that had to be done during the course of our vacation. I further declare that
this project has not been submitted and will not be submitted, either in part or in full, to any
other university or institute for the award of any other degree or diploma.

Yash Basit.
TYBBA Finance.
74021018082.

iv
 Table Of Contents

Topic Page Number

FinTech In India – Brief Overview 1

Key Drivers Of India’s FinTech Revolution 4
Funding Received By The FinTech Industry 7
Dominant FinTech Segments In India 8
Key Challenges For Indian FinTech 13
Impact Of COVID – 19 On FinTech Sector 15
Recommendations For Accelerating FinTech Growth 16
Conclusions
17

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 FinTech In India – Brief Overview
Over the course of the last five years, the Indian FinTech market has reached new peaks, both
in terms of customer adoption as well as that of funding received. In 2018, India ranked
second globally in respect to adoption, with the percentage of users being 57.9%. Many
factors have contributed to these statistics. First, the Indian Government has developed an
enabling environment for FinTechs by launching various initiatives aimed at augmenting the
country’s digital infrastructure. Second, consumer experiences have been radically
transformed by non-financial services tech companies, owing to rising digital expectations
from the traditional financial services providers. Third, evolving technologies such as
‘artificial intelligence (AI)’ and ‘cloud computing’ have enabled companies to tame the ‘data
explosion wave’, supported by a mushrooming of internet and mobile penetration.

The increasing number of partnerships between various players across industries, mainly
telecom companies, banks, wallet companies and e-commerce has caused a massive
breakthrough as well. Digital payments have led the forefront in accelerating the industry’s
growth, followed by areas of InsurTech (insurance) and WealthTech (wealth management).
The industry has realised that the true power lies in collaboration.

o The Indian FinTech market is forecast to touch USD 2.4 billion by 2020, as per
NASSCOM.

o The transaction value for the Indian FinTech sector is forecast to reach USD 73 billion in
2020, and to USD 137.8 billion in 2023.

o GDP Impact: USD 700 billion boost by 2025.

o e-Governance: USD 3 billion reduction in leakages, thus resulting in USD 2 billion

savings in subsidies. (reduced need for cash and increases digital transactions, which can
be better monitored)

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o FinTech and Digital Finance can create 21 million new jobs, as India produces 12 million
STEM (science, technology, engineering and math) graduates every year.

o India overtook China as Asia’s top FinTech funding target market with investments of
around USD 286 million across 29 deals, when compared to China’s USD 192.1 million
across 29 deals in Q1 2019.

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Source: Yes Bank + Amazon AWS Study (2017-18)

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 Key Drivers Of India’s FinTech Revolution

1. Unmet Financial Needs

A majority of the Indian population has been excluded from the formal financial
system, leading to lack of awareness about the financial services products and the
difficulty faced by the traditional financial services players to serve this population in
a cost-effective manner. Since the launch of schemes like Jan Dhan Yojana and.
Direct Benefit Transfer, there has been a considerable rise in the awareness of
financial services products. The unbanked and underbanked population, who were
averse to using such products, are now embracing them. This has created an avenue
for the FinTechs to serve this segment across India with their low-cost digitised
offerings.

2. Changing Consumer Demographics and Evolving Needs

FinTech solutions are aimed at tapping the ever-changing needs of the Indian youth
population. These consumers are tech-savvy, spend considerable time on their
smartphones every day and are willing to access financial product offerings on digital
platforms. The industry has to match their rising appetites for digitisation.

3. Government Policies, Regulations and Infrastructure

a) Goods and Service Tax (GST) Regime:
The introduction of the GST regime has played an important role in
formalising the informal sector of the Indian economy, with many FinTechs
taking advantage of the digital footprint generated by the Goods and Service
Tax Network (GSTN). The network has 1.21 crore registered taxpayers and
facilitates lending to MSMEs as well.

b) Jan Dhan Yojana:

This scheme aims to drive financial inclusion in the country. Approximately
320 million bank accounts were opened under this scheme, laying the pillars
for the provision of banking services to the unbanked.

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c) Unified Payments Interface (UPI):
The launch of UPI by the National Payments Corporation of India (NPCI) has
resulted in the widespread adoption of digital payments across customers and
merchants. UPI was used by 92 banks and witnessed 620 million transactions
worth INR 1 trillion in December 2018. The launch of UPI 2.0 in 2019 with
overdraft facility has enabled credit access to many thin-file customers.

d) Availability of the Internet:

Over the last decade, there has been a humongous rise in access to and speed
of internet speeds (roughly 520 million mobile internet users) across India,
which is a prerequisite access to FinTech services. The cost of internet usage
has dropped significantly resulting to a boost in the number of internet users.

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4. Promoting Innovation and Competition in the Industry
a) Digital India Programme:
The Government’s stimulus to boost digital literacy across the country through
avenues such as infrastructure, literacy and ease of accessing digital services has
had a positive impact in improving the overall digital maturity of the Indian
population.

b) Startup India:
The flagship scheme of the Government to stimulate the efforts of startups in the
country by providing financial and regulatory support, has led to a growth in the
number of FinTech startups in the country.

c) Licence for Payment Banks:

The Reserve Bank of India (RBI) has issued licences to 11 FinTech companies to
offer e-banking services like remittances, deposits and savings, and has paved way
for the new ‘branchless-banking services.’

d) Recognition of P2P lenders as Non-Banking Financial Companies (NBFC):

The RBI provided importance for the peer-2-peer lending segment by categorising
them as NBFCs, thereby boosting the sector’s growth.
The RBI has also planned to setup a regulatory authority for FinTech startups. The
central bank aims to achieve a common ground for innovation and regulation to
help the industry achieve its potential.

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Funding Received By The FinTech Industry

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 Dominant FinTech Segments In India

1. Alternate Lending
Alternate Lenders include P2P lenders, marketplace platforms and digital lending
platforms who are tapping specific credit needs of consumers and MSMEs, that
remain underserved by banks and NBFCs. Their business model is based on
technology that facilitates efficient customer acquisition, approval and servicing
activities within a relatively lenient regulatory environment. Despite the low cost of
funds enjoyed by banks, factors such as physical branches’ operating expenses,
regulatory overheads and collections and recoveries functions significantly increase
the average cost of the loan, thus benefitting these platforms.

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2. Digital Payments
Payments have been at the forefront of India’s digital revolution. The demonetisation
drive launched in November 2016 and the development of mobile wallets and
exponential rise in UPI transactions have driven growth in digital transactions. The
rise of e-commerce, innovation in payments using artificial intelligence (AI),
blockchain and the introduction of mobile point-of-sale (POS) devices have led to a
reduction in the cost of infrastructure and boosted growth.
The major forms of digital payments in India are cards, electronic clearing systems
(RTGS, NEFT, IMPS and more), UPI, mobile banking and prepaid payment
instruments (PPI). Additional functionalities like e-toll, micro lendings, cross-border
remittances leverage the base of technology of mobile payments.
Key stakeholders include: ‘Large multinational conglomerates, venture capital firms,
e-commerce players and financial services providers.’

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In an age where digital transactions are booming, the security of the customers’
payment data has become extremely crucial. In lieu of this, ‘card tokenisation’ has
become popular in India. Tokenisation is the process of replacing sensitive
information like card / account details with a random value that is provided by the
bank in form of a token. This ensures that merchants cannot store customer data thus
reducing chances of fraud.

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3. InsurTech
The Indian InsurTech space witnessed a lot of activity in 2018 after receiving a total
funding of approximately USD 378 million. As of February 2019, there were 142
InsurTech startups operating in India. The main trends of the InsurTech market
include ‘product customisation’ (using real-time analytics and availability of data),
‘price segmentation’ (customised profiles on a customer-to-customer basis by
understanding unique risk profiles and personalised pricing) and ‘business model
innovation’ (P2P insurance, platforms to pool insurance premiums and group
insurance policies)

4. WealthTech
WealthTech players employ advanced analytics to offer digital solutions to transform
traditional wealth management and investment management services. The improved
usage of artificial intelligence (AI) and machine learning (ML) models in evaluating
investment opportunities, optimising portfolios and mitigating associated risks have
increased popularity of this domain amongst customers and asset managers. In Q1
2019, WealthTech startups raised approximately USD 845.1 million. Trends include
‘investment advisory’, ‘sentiment analysis’, ‘hybrid models’ and ‘goal-based
investment advisory.’

AUM: Assets Under Management

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5. BankTech
Within the BankTech segment globally, ‘blockchain’ remains one of the breakout
candidates. However, application of blockchain in India remains limited to a few
proofs of concepts. Blockchain can be used for facilitating cross-border payments,
insurance claim processing, equity trade settlements, syndicated loans with multiple
lenders and asset hypothecation.

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 Key Challenges For Indian FinTech

1. Regulations – Balancing Act to Foster Innovation

Increased regulations could stifle innovation and drive up operational costs. However,
clearer regulations will strengthen the sector in the long run, allow them to get
consumer trust and in turn attract capital. As FinTech levels scale up, they will face
more scrutiny and interventions from regulators will increase. A number of
interventions have been undertaken including ‘Bharat Bill Payment System (BBPS)’,
UPI, etc. RBI has also adopted a consensus driven approach to introduce regulation in
new sectors. The key role of the regulator is to create an environment that promotes
innovation, address concerns on customer protection, data security and privacy.

2. Gain Trust and Improve Perceptions Through Literacy

Trust has been the key role in the FinTech sector. Indian consumers are known to be
conservative in nature and have always preferred physical transactions, including the
use of cash. Although the reach of banking has increased, there are still quite a lot of
people who are unaware about such services. FinTech is a relatively new segment and
is yet to gain absolute trust as an alternative to traditional banking. It is also important
to educate the target market about the merits of these services.

3. Financial Infrastructure and Utilities

A new-age business requires building data and infrastructure, which is not easily
available in India. More data is required to create value proposition for customers.
Most of the companies are focussed on consumers with less emphasis on acquiring
infrastructure by a broader merchant base. In the last three years, the Government
taken steps to increase internet penetration and merchant QR code in the country.

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4. Cyber and Data Security
Interfaces between systems (for example: UID Database) present cyber vulnerabilities
and data security issues. As FinTech embark on data-based differentiation, data
privacy is of paramount importance. They might not have access to sensitive financial
information about their customers, but they sure have personal information.
Developing strong defence mechanisms and procedures to address these concerns will
be imperative.

5. Reskilling People for a Digital Tomorrow

One of the key challenges is how the workforce will adopt to reskilling strategies to
cope with the rapid pace of technology-led innovation.

6. Lack of Early Stage Funding

Despite the Indian FinTech industry attracting loads of venture capital (VC)
investments, many small scale startups lack access to nascent stage capital, thereby
hindering their potential to scale up.

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 Impact Of COVID – 19 On FinTech Sector

The outbreak has to led to a slump in digital payment transactions by 30%, owing to people
hoarding cash for unforeseen circumstances amidst the lockdown period. However, the risk
of transmission of coronavirus still persists through the exchange of currency notes. Financial
services have been appealing to the public to go digital for transactions. The shift in payment
habits will be clearly visible in the coming months and it will develop into a full-fledged
mechanism. The focus will be on how human touch or interaction can be done away with for
payments. Demand for virtual cards have shot up and people are preferring contactless cards
to be used at POS systems.
Several startups have started to offer insurance coverage against COVID – 19. PayTM has
rolled out an insurance policy in collaboration with Reliance General Insurance with a cover
ranging from Rs. 25,000 to Rs. 2,00,000. The pandemic could fast forward certain industries
by 3 to 5 years, including FinTech. PhonePe had also launched ‘Corona Care’, a coronavirus
hospitalisation policy in partnership with Bajaj Allianz General Insurance. Priced at Rs. 156,
the plan comes with a cover of Rs. 50,000 for a person aged under 55 years and is applicable
at any hospital offering coronavirus treatment.

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Recommendations For Accelerating FinTech Growth

1. Recommendations to the Government

a) Develop a dynamic digital infrastructure.
b) Introduce special work visas for startup entrepreneurs and technology experts to
attract foreign talent.
c) Build a strong technological and entrepreneurial talent pool by engaging
universities and institutions.
d) Offer coherent tax incentives to startups and venture capitalists.
e) Promote globally and infuse a strong culture of knowledge sharing by organising
a series of events inside and outside the country.

2. Recommendations to the Regulators

a) Adopt the best of regulatory initiatives from the global markets.
b) Setup an innovation office for harmonising regulator – FinTech engagement.
c) Establish a mandatory MSME referral program to support alternate lenders.

3. Recommendations to Financial Institutions

a) Form an independent association focussed on FinTech to give the sector an
identity and a platform to voice opinion.
b) Providing incubation support to FinTech.

4. Recommendations to FinTech Firms

a) Invest in building cyber security capabilities.
b) Mobilise domestic and foreign venture capital funds.

5. Recommendations to Customers
a) Focus on building financial literacy and digital literacy.
b) Be open to trying out digital platforms providing financial services.

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 Conclusions

Disruption of the financial services industry is happening and FinTech is leading it. It
reshapes the way customers and companies engage by altering ‘how, when and where’
financial services are provided. It is critical to filter out the noise around FinTech and focus
on the most relevant trends, technologies and startups.
The main impact of FinTech will be the surge of new financial services business models,
which will bear challenges for both, regulators and market players. There should be a system
leveraging the trusted relationship of the firms and their customers along with their extensive
access to client data.
For many traditional financial service providers, this shall instil them to undertake a shift in
identity and purpose. Focussing on a customer-centric model rather than a linear service
provider will prove beneficial to them. By integrating technologies into their architecture,
traditional financial institutions can stay at the centre and maintain strong positions, even as
breakthroughs and innovations constantly evolve the market.
Financial institutions should capitalise on their position of trust with the customers, brand
name, access to data and sheer knowledge of regulatory environments to save their spot in the
race towards excellence.

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