Disruptive Innovation

With the push towards digital payment and accessibility to smartphones, the government has taken considerable steps to making the nation the world’s third largest

The Fintech industry worldwide has gained considerable momentum. Rising consumer demand, as well as the advent of innovative business models and technologies to make processes and services seamless, cost-efficient and customer-centric, have resulted in the industry growing steadily.

The Unique Identification Authority of India (UIDAI) was launched in 2009 and introduced a new set of infrastructure for Fintechs in India. This included API products and services such as Unified Payment Interface (UPI), Aadhar, e-KYC, Bharat Bill Payment System (BBPS) and DigiLocker as public infra. Both government and private are able to use this infrastructure for business innovation as well as customer empowerment.

The pandemic, though restricted mobility, was a vital force in driving the wider adoption of fintech technologies and products such as digital payments, embedded credit products, InvestmentTech and life insurances.

India currently has the third-largest Fintech market globally and is poised to expand at a compound annual growth rate (CAGR) of 31 per cent up to 2025, which is higher than the global growth rate. Indian Fintechs raised funding worth US$10.6 billion in 2021. Fintech start-ups have shown additional signs of maturity by applying for initial public offerings as well as opting for strategic mergers and acquisitions (M&A) to boost inorganic new payments systems.

This growth has also fuelled the Fintech-focused need in the Indian talent pool. However, Fintech firms are facing two major hiring challenges in form of high cost and attrition due to increased competition.

Emerging technologies such as Web 3.0, cryptocurrency and blockchain are being scaled up with regulatory approvals. One outcome of this is the emergence of metaverse. The evolution of commerce in metaverse is opening up opportunities in the spaces such as virtual banking, digital payments, BNPL payments utilising blockchain technologies.

“The growth in Indian fintech startups has been exponential and the market is expected to reach US$150 billion in valuation by 2025,” Minister of State for Finance Pankaj Chaudhary said in June 2022, adding: “A majority of the Indian fintech startups are not even a decade old, but the progress and growth shown by these firms has been exponential over the past few years.”

India’s Fintech adoption rate is at 87 per cent as against the global average of 64 per cent, he noted.

UIDAI CEO Saurabh Garg, in the same forum, added that the Aadhaar Enabled Payment System in a way has revolutionised banking by doing away with the need for having a brick-and-mortar branch. More than 50 lakh banking correspondents across the country are carrying out ‘cash in cash out’ kind of transactions using the system.

ROADMAP FOR DIGITAL BANKS

Government think-tank NITI Aayog has offered a template and roadmap for a licensing and regulatory regime for digital banks that focuses on avoiding any regulatory or policy arbitrage and offers a level playing field to incumbents as well as competitors.

In a report titled ‘Digital Banks – A Proposal for Licensing and Regulatory Regime for India’, the think tank recommended the issuance of a restricted digital bank license to such financial entities. It rooted for a ‘full-scale’ digital bank license.

The methodology for the licensing and regulatory template offered by the report is based on four factors such as entry barriers; competition; business restrictions; and technological neutrality.

Taking forward the agenda of Fintech innovations, and marking 75 years of India’s independence, the government in its Budget for 200-23 proposed to set up 75 digital banking units in 75 districts of the country by scheduled commercial banks.

The report also maps prevalent business models in this domain. It highlights the challenges presented by the ‘partnership model’ of neo-banking, which has emerged in India due to a regulatory vacuum and in the absence of a digital bank license.

Given the need for leveraging technology effectively to cater to the needs of banking in India, this report studies the prevailing gaps, the niches that remain underserved, and the global regulatory best practices in licensing digital banks, said CEO Parameswaran Iyer while releasing the report.

In recent years, India has made rapid strides in furthering financial inclusion catalysed by the Pradhan Mantri Jan Dhan Yojana for the unversed. However, credit penetration remains a policy challenge, especially for the nation’s MSMEs that contribute 30 per cent to GDP, 45 per cent to manufacturing output, and 40 per cent to exports, while creating employment for a significant section of the population.

Financial inclusion has only been furthered by the Unified Payments Interface (UPI), which has witnessed extraordinary adoption. UPI recorded over 4.2 billion transactions worth Rs 7.7 trillion in October 2021. Google Pay Vice President for Product, Ambarish Kenghe said the UPI has made it easy for people to carry out transactions and the technology is successful because various partnerships have been put in place to deploy it.

RBI WORKING ON PHASED IMPLEMENTATION OF DIGITAL CURRENCY

The Reserve Bank of India (RBI) is working on a phased implementation of the Central Bank Digital Currency (CBDC) in both wholesale and retail segments, according to Executive Director Ajay Kumar Choudhary.

Choudhary said that the Indian Fintech market currently stands as a third largest Fintech ecosystem in the world, just behind US and China. “Today, the world is looking up to India, as we continue to innovate and lead the way seamlessly imbibing the new age technology without compromising on the safety and security aspects,” he said.

Choudhary also emphasised that as a regulator, it is also important for RBI to identify the risks and challenges associated with all innovations. Central bank has taken several measures to foster innovation in the Fintech sector which includes regulatory sandbox, Reserve Bank Innovation hub, etc.

— With input from PwC and agencies