Financial technology (Fintech), an industry that recently emerged in the Indian economy, is now set to change the way lending and borrowing, as we know it, is done. Banks, which have been the primary institutions for lending funds for over a century, are now up for competition from some 21st century entrepreneurs.
Banks enjoyed the advantage of wide reach, which allowed them to route money over distant locations. However, with the emergence of new and improved technology it is now possible for other players to enter into the business of money- lending and compete with the banks.
Technology has made the world a smaller place as never before and people are now for the first time looking to alternative ways to meet their need for funds. As per estimates, over 45% of the fintechs active in India are into payment services.
India launched its Startup India plan during this time last year, with a view to transforming the country into a fertile ground for new and innovative businesses and, in turn, boost the national economy. Since the launch of the plan, most of the businesses which came up are e-commerce and fintechs. Both the businesses have technology as their core.
Fintech in India
The fintech industry in India can be divided into 12 broad categories:
1. Alternative Funding
2. Banking Tech
4. Consumer Finance
6. Enterprise Finance
7. Foreign Exchange
8. Insurance Tech
9. Investment Tech
10. Mobile Wallets
12. Software for Institutional Investor
These categories have been rising steadily since 2015 and are expected to keep rising till 2020. The list below shows the number of fintechs founded since 2015 across different categories, according to an article in Live Mint
According to statista.com, the Indian fintech market has seen a transaction value of about $35.46 billion and the number is rising at an annual rate of 21%. With this rate of growth, the segment is expected to hit about $92 billion in transaction value by 2021. Apart from this, the fintech software segment is expected to reach $2 billion in value.
Effects of demonetisation
The Indian fintech segment witnessed a major boost due to the recent demonetisation. The e-payments and e-wallets segments have witnessed a boost of almost 500% in term of traffic (https://yostartups.com/the-state-of-fintech-in-india/
). Government data shows that a whopping 1.7 million transactions were routed through payment wallets within one month of announcement of demonetisation, till 7th December. Estimates suggest that among the fintechs active, almost 46% are into payment services.
Legal scenario for Fintechs
Most of the categories of the fintechs’ functions are not regulated. Categories like peer-to-peer (P2P) lending and payments systems are some sectors that need to be regulated as they deal with public money. P2P lending does not fall under the regulatory framework of Reserve Bank of India (RBI). Hence, these alternative lending institutions have an edge over banks and financial institutions and charge higher rates of interest than banks.
However, the alternative lending platform falls under the Usurious Loans Act, 1918. This Act gives courts in India the power to intervene in cases where interest rates are excessively high, thereby keeping a check on unfair rates of interest. Apart from this, around 22 states have separate Acts on money-lending, which need to be complied with. Also, the platform needs to acquire a licence from the state under the Act to carry out the business of lending.
Entities in the second category of fintechs, whose activities are regulated, are those engaged in the business of e-wallets and payment services. These entities are required to be registered with the RBI under the Payment and Settlement Systems Act. The RBI here has stringent rules and regulation. This ensures security of information and public money, which are routed through the servers of these fintechs. Apart from this, all other categories of fintech are non-regulated, which poses both a threat and an opportunity for the business enterprise. India needs to clarify its regulatory scene for fintechs.
Fintech scenario around the world
One of the most important ingredients for a business to be successful is the environment within which it operates. Like all other major economies around the world, India too is slowly making its business environment suitable for fintech startups. Below is a graphical representation of the business environments of various countries.
1. The Unites States of America
The US is the hub for entrepreneurs as well as hi-tech talent. It has attracted the highest fintech investment and built the largest network of start-up firms.
2. The United Kingdom
The UK has established itself as one of the most attractive locations for fintech, with high digital connectivity, an indigenous financial services workforce and a solid funding landscape.
3. Hong Kong
Hong Kong is shaping up as a strong fintech hub in Asia, backed by robust investment support from the government and venture capitalists to nurture entrepreneurship.
India is gaining ground in the fintech ecosystem with a fair supply of proficient and inexpensive talent, the potential to capture a large portion of the unbanked population and a steady inflow of funds.
From the above charts we can see that the business environment is lagging behind in India. India needs to invest in its business environment so as to emerge as a startup haven, which it claims to achieve by 2020.
India, being the fastest growing economy of the world and home to the largest population under the age of 24 years, has got tremendous potential and opportunity to turn itself into a 21st century super economy. However, this would not be possible unless there is all round development of the business environment of the country.
(Ameet Roy works as Executive at Vinod Kothari Consultants Pvt Ltd)