What has cultivated the growth of fintech in India?

The transformation of India as a country has been radical, with factors forcing change such as the recession in the 2000s, tokenisation, expansion of access to internet and more. The evolution and digitalisation of the country has seen the fintech market size grow to $50 billion by 2021, which is expected to reach $150 billion by 2025.

Despite its exponential growth, challenges have continued to rear their head. For instance, there is a gap of digital penetration in rural areas compared to urban areas. Additionally financial wealth is unevenly distributed which makes inclusion difficult and has slowed down the potential integration of financial services to all. Much like with everything new, the fear of the unknown can be high, so it is the efforts of fintechs in the region and support of the government which will be able to spread awareness to educate the population on technological advances for the financial sector, and the positive impacts they will have. Additionally, the ageing population means that older generations are living much longer, and it is that age range that is more likely to show resistance to change, in comparison to the younger generations who embrace new technologies with speed.

In efforts to minimise the digital penetration gap, the government launched its National Digital Literacy Mission in 2014 and a similar campaign was launched in 2017 to usher literacy into rural India, reaching 60 million households. Educational incentives along with the BharatNet project to bring rural broadband connection are some of the key drivers which show the country’s commitment to digital growth.

Thanks to growing literacy and digital access, more merchants are seeking ways to span into international markets. But why is there such a big appetite for global expansion and cross-border payments solutions among local merchants? Our Head of Legal, India, Mikita Goel shares “Indian merchants have been waiting for an effective global reach for quite some time. Some of the common barriers are accessing the global markets, accepting payments in local currency, ease of settlement with minimum documentation, global accounting, and currency conversion. The entrance of fintechs who can solve these problems end-to-end will provide a platform to these entities. Fintechs are now offering a platform, convenient banking processes and access to global currencies with minimum compliance, which is appealing to merchants and furthering the adoption of fintech”.

It is this appetite from locals and the solutions from fintechs which have led India to be considered as further ahead of the global average of 64% in terms of fintech adoption. Previously the country was mostly driven by cash, as the Indian society had, and to an extent still has, a fear of fraud in online and physical retail. But as the government started stepping in to encourage the use of digital transfer methods for payments, we have seen a shift towards digital payments and fintech services, despite the prevalence of cash use. Here are some of the other key socio-economic and political factors which were fundamental to the transition of digitisation across the country:

– Demonetisation:

Back at the end of 2016, the central government decided to replace the Indian rupee notes of Rs 500 and Rs 1,000 with new ones. The process was declared and conducted under tight timeframes, pressuring people to join lines with thousands of other individuals outside of banks waiting to exchange old notes. The overturn of nearly 96% of the currency in circulation resulted in a shortage of new Rs 500 notes. And consequently, the shortage of notes meant that there was a reduced spend on items, and consumers losing out on money which they were unable to exchange in time.

In the most recent years, the financial sector has undergone a shift in light of the demonetisation impact. India has been seeing new payment methods, smaller banks and insurance companies entering the field as players who provide a better and easier alternative for users. Additionally, the mass reduction in cash came with an undertone to tackle criminal activity, because there was less money flowing through black markets and cash-in-hand scams which couldn’t be mitigated. Additionally banks and financial institutions became the product of choice, as end-users were ushered away from the use of physical money, and into cards or digital alternatives.

– Unified Payments Interface

UPI is an advanced mobile app payment system, allowing users to transfer funds between bank accounts. Developed by the National Payments Corporation of India in 2016, the platform has over 338 banks registered. The introduction of UPI has shaken the apprehensions of consumers around tech, but there is still a gap which needs to be filled as 190 million people in India are still without access to banking services, and thus cannot turn to UPI.

For those able to access the payments system, it is the simplicity of authenticating your biometric data, phone number and Aadhaar card which have been appealing to the masses. UPI services have continued to be adopted because of the trust they offer, as card information is not shared with merchants, and personal information is safe from being leaked even in the event of a hack. Proof of UPI’s favourable presence can be seen where ‘mobile’ accounted for only 1% of transactions in 2010, but the uptake rocketed up to 45% of transactions in 2019.

– Rural towns

Villages in rural areas have largely had less access to the internet until more recent years. Mobile phones were limited and smartphones certainly weren’t as common (and still aren’t), cutting off large proportions of India from the digital revolution. The economy in India is largely agriculture-based, and there is a recent initiative with ICICI Bank which is reaching out to create digital villages, giving access to those who have been unable to open a bank account. Now users can use Aadhaar-based e-KYC to make cashless payments through a SMS system.

– Limitations of traditional banks

Not only have traditional banks struggled to provide high quality financial services, but the services that are provided come with an extremely high cost. Users who visit a bank are plagued with huge amounts of paperwork and long queues which take excessive amounts of time. Outdated processes have thus encouraged the development of digital banks which save time with account opening and money transfers that can be completed conveniently from any location.

In efforts to salvage traditional banks, technologies have been introduced by fintechs, from paperless lending and mobile banking to mobile wallets and digital payments. The shift to digital payments acceptance has created room for not only more players in the fintech space but encouraged merchants to span into the country to maximise growing business opportunities.

What types of fintech payments are driving change in India?

Government initiatives

The Indian government has been a major catalyst in India’s digital revolution. From the creation of their CBDC, the digital rupee, to supporting mechanisms for fintechs and the introduction of Bharat QR codes. Of all the government proactivity to drive digitalisation, the Bharat QR had remained at the forefront of popularity. The platform arose from the direction set by the Reserve Bank of India (RBI) in 2016 for its Payments Vision 2018. Focusing on interoperability, Bharat QR joins four major card companies through a QR code which can be read by a camera phone or QR code reader for payments to merchants.

This innovation has been transforming sales as users are being provided with a seamless customer experience, security of card details and payment authentication. As a driver of fintech payments, the platform has been accelerating electronic payments acceptance across India with a drive to decentralise the process to create transparency and optimise stringent due diligence. Interestingly, as of April 2023, the central government bank announced their decision to abandon their own UPI project, called New Umbrella Entity, as UPI continued to grow and move closer to the 1 billion transaction milestone in 2021. Initially RBI had sought to mitigate the risk of concentration by developing an alternative means that would alleviate strain, as UPI’s value to the Indian economy continued to grow.  

Buy Now, Pay Later

India’s customers are able to now purchase items with a repayment contract in 3-4 instalments with 0% interest. Zest Money has become the popular choice of India, offering sign up with no joining fee and a credit limit. The payment method is largely popular among younger generations in India, and also those who have poor credit or no credit history at all. Open banking in play with buy now, pay later schemes are supporting consumers to make purchases, and giving merchants more revenue opportunities with an array of payment and lending options.

Super apps

Super apps entering the country have brought in financial services and products for locals, catering to the vast imbalance of wealth across India. Users now have access to payments, loans, investments, and insurances that are integrated into ecommerce products. India’s businesses are also given added value incentives from apps, and the convenience to run business functionality in one app. The likes of Paytm, Tata Neu and Reliance have acted as the main drivers to ease purchasing complexities across numerous categories.

Unified Payments Interface (UPI)

UPI is an advanced mobile payments application, which is used to transfer funds between bank accounts. The system was developed by the National Payments Corporation of India in 2016, and has reached 10.62 lakh crore by 2022, which equates to 6.28 billion. UPI was introduced in response to push India into the direction of a cashless economy and promote cashless transactions. Many consider UPI to be a flag bearer for fintech booming across India, as it offers real time payments and saw tremendous growth during the pandemic. Its popularity is drawn from its simple interface and user-friendly experience, making it accessible to not only urban India but more rural parts where smaller businesses prefer accepting particular UPI payments.

With global acceptance of UPI, the digital payments alliance between India and other countries such as Singapore, Malaysia, UAE, France and Nepal is increasing digital access and international connectivity.

The Future of Fintech

With rapid growth comes concern around issues of protection and risk. Much like all other areas around the world, risks are higher with cyber attacks due to the processes of automation and digital data management. Additionally, certain advancements are yet to be regulated by professional bodies, such as cryptocurrencies. The Indian government is yet to determine a policy, and in the waiting game the country has seen an increased change of fraudulent threats in their economy. Nonetheless, apprehension hasn’t stopped India accounting for the 40% of all global digital payments, and is expected to grow by 15.56% between 2023-2027. “Looking at the future of fintech in India, merchants entering the boom must be aware of the pace in which it is occurring. The availability of payment options and the speed in which the country is operating is unparalleled to other countries. But there is also an increase in consumer expectations, which is not limited to how they pay, but also convenience and experience.

India’s fintech boom is becoming an attractive destination for companies for numerous reasons and it will continue to do so. But some of the most recognisable reasons are the access to a huge market that is still growing in internet penetration; faster outreach at lower costs; support of the Indian government; and huge market with an appetite for change.” – Asheesh Agrawal, Senior Vice President, Product and Tech India

Currently India is thriving on the growth and reliability of UPI to make and accept payments, which has begun to wet the country’s appetite for more options; and it’s clear that there is global faith in India’s capability to further develop its fintech market. From 2017-2022, the Indian fintech market received $29 billion in funding to support the enhancements and adoption. The coming years will undoubtably continue to see growth and the entrance of new players into India, bringing new technologies, job opportunities and learnings. With the normalisation of digitalisation, we can anticipate that the financial literacy numbers will increase from the current 27% of Indian adults meeting the minimum level. The convenience of trading, purchasing, lending, and processing times will continue to shorten, building upon better merchant and consumer relationships; and in turn building upon the country’s economy.

Entrants into India are hopeful for an effective regulatory framework, which will promote effective regulation and honest transparency to better support the fintech sector and feed into India’s economic growth. In order to do so, there will be a large movement to maintaining data privacy, as more people turn to banking alternatives and go from being unbanked to banked. A new age is dawning on India’s innovations, and as merchants and customers establish their trust into payment technologies, we can anticipate leaps into other tech-based models such as 3D, metaverse and wearable technology.