By Donald D’Souza
In the present state, India is being referred to as the “shining star” and “bright spot” among many other praiseworthy metaphors and perhaps rightly so. India’s economic and financial resilience in the wake of global uncertainty is noteworthy. While the headlines today are more focused on policies to counter global uncertainties, the domestic growth engine is silently working its way to not just countering global headwinds but focusing on broad-based growth. There are several elephants in the room in India growth story, perhaps the most striking among them being financial ingenuity. India’s financial ingenuity is powered by the trinity of technology, innovation and fintech with the key objective of financial inclusion and sustainable development. How has India leveraged on the three pillars and what can we foresee in the future?
Technology – the key enabler: India has smartly leveraged the evolution of technology viz. telecom and internet penetration (lower bandwidth costs) to facilitate the development of services to create efficient payment services, facilitating credit availability and deepening financial inclusion. The total number of broadband internet users today stood at 80.7 cr as of July 2022, with an CAGR of ~20% over the last five years.
Innovation – the driver of financial inclusion, governance and ease of business: Using technology, the services that India has created cover the wide spectrum of opportunities. The seeds had been sown long ago with the initiation of Aadhar and Jan Dhan accounts. The next big innovation was the UPI which has seamlessly integrated all payment mechanisms with the touch of a phone. The UPI innovation is no less than the “eighth wonder of the world” which even developed economies are trying to emulate. Seamless and secure payments systems with two layers of security have clearly changed the dynamics of financial transactions. The innovations have only upgraded from payments to lending and investments covering all forms of sophisticated financial tools.
Fintech – blending finance and technology: the new buzzword today of “fintech” has not left any one of us untouched. Whether it is collection of information about credit worthiness, processing of documents, monitoring of payments, assessment of risk appetite for investment, technology in finance has helped lenders, borrowers, investors and transactors at large. The key benefits being ease of transaction (time and effort), reduction of costs and ease of compliance.
How can we scale up further? From new products, the buzz has shifted to new opportunities are opening for implementing innovative ways of integrating and delivering financial services. This can be gauged from the emergence of more than 100 unicorns in the country with a record 44 unicorns just last year. The pandemic with all its ills, provided a fillip to digital transactions. The period from March 2020 to August 2022 has seen a massive growth of more than 400% in UPI transactions, which reached a new high of 657 crore transactions in Aug-22. The opportunities today are evolving towards transforming the ‘brick and motor’ financial products into digital products and creating platforms which seamlessly integrate the products and services. How can we scale up to the next level?
Let us examine some of the services that can be scaled up
Banking services: While internet banking has been available for quite some time now, the revolution of mobile and internet banking has taken a giant leap with unification of payment services with banking and 24X7 clearing mechanisms. Today, the need for branch banking is reducing immensely, with mobile applications and online services being provided in a secure and seamless way. The two-step authentication system for payments (via OTP) is a huge milestone in secure payment mechanisms which not even developed countries have been able to emulate.
Lending platforms – From almost eliminating the drudgery of documentation, technology enabled loan processing and credit evaluation has not only helped to ease the transaction but also improve efficiency and the volume of transactions. Credit is the backbone for the growth of any business and economic growth is inherent on the ability of the financial system to lend. Needless to say, technology has become the partner through the cycle viz. credit assessment, disbursement, collection and monitoring leading to creation of niche services such as Peer to Peer lending platforms, Account Aggregation, Credit Collection Agencies.
Investment platforms: Not just lending but investment services have also evolved to adopt technology providing ease of transactions for the retail investor. Investment platforms today offer the customer a choice of products and enable the investor to take an informed investment decision guided by the risk-reward of various investment choices. Be it stock market investing, mutual fund investing or investment in bonds, it can all be done at the click of the button.
Service platforms – Beyond lending and investment, there are several financial services viz. insurance, tax management, credit rating services, investment distribution which are largely part of financial services while providing a platform bringing together the lender/investor and borrower/investee together.
Next level of financial inclusion: India’s direct benefit transfer scheme, MSME and SME credit scheme, Kissan Credit Card, Aadhar and JanDhan accounts have demonstrated the power of technology towards financial inclusion. These have a huge potential to scale up as a cost-efficient alternative to traditional banking, The Central Bank Digital Currency (CBDC) is another innovative step that reduces the need for physical cash but can be transacted like physical cash with the security of a digital payment.
Is it without risks? What role does a regulator play?
While the emerging financial services show a lot of promise in ease of transactions, inclusion thereby large opportunities to scale up, it is not without risks. First, and foremost are frauds. Technology can be disrupted and used for frauds and misappropriation. This is applicable not just to retail borrowers or investors but also to financial institutions that offer the services. Secondly, investors or borrowers can be easily made gullible to financial frauds, misinformation, or misguidance by luring into products or services that do not commensurate with the risk. Third, is the mushrooming of unauthorized services or operators. Since an application (app) based service is fairly easy to offer, it leads to launch of several unbridled service providers who operate without proper license. Lastly, competition for the service providers. While competition is not a risk, but rather healthy for the user, it should not lead to unhealthy or uncompetitive practices that eventually end up disrupting the industry.
Here the role of the regulator is paramount. In India, the RBI has been at the forefront of not just promoting financial innovation but at the same time being the vigilant overseer, ensuring that the evolution is happening in a seamless fashion. RBI’s customer protection guidelines and education, stringent KYC norms, emphasis on governance regular due diligence of these financial institutions have been the core of strengthening the overall ecosystem. For instance, recent guidelines on loan recovery processes using recovery agencies are a step in the right direction.
Finance is the backbone of any economy and India’s financial system set up on the platform of digitalization is only expected to grow stronger. India’s FinTech revolution will certainly be the lever to help the economy to achieve the status of the fourth largest economy in the world within the next five years. The trinity of innovation, technology and fintech will become the ‘mantra’ of growth.
The author is managing director and co-head investment banking, Equirus