Rise of FinTech: Risk & Opportunities for India's growing economy

The aspirations of a 5 trillion-dollar economy cannot come true without a holistic growth for the entire population. Financial inclusion is one of the key requirements for the same and cost of the last mile delivery has been one of the biggest impediments in this journey. With the advent of the internet, access to technology has been democratised, which has enabled commercial applications that were not thought of before and this is how fintech became the buzzword.

Enabling a vibrant fintech ecosystem will go a long way in democratising financial services to every person in this country. A robust financial services ecosystem aids a frictionless development of the real economy and fintech could go a long way in aiding this development.

This is something that is recognized by the government and regulators alike and many initiatives have been taken in this direction such as the India Stack, UPI, regulatory sandbox, National Blockchain Strategy of the Government and open banking initiatives through the Account Aggregator framework to name a few. Also, the whole RBI initiative on the New Umbrella Entity for Payments is another initiative geared towards enhancing innovation through increased competition between payment infrastructure players primarily NPCI.

Data Ownership: From Belonging to Institutions to Customer -- What does it mean for the Fintech ecosystem?

The biggest driver for the fintech growth globally is how the story on data ownership has panned out. Customer Data historically has been seen to be belonging to institutions that hold customer data and not to the customer. This has now changed with data now belonging to the customer and his consent being needed towards use of the data.

Moving data to the customer has been a significant boom to the fintech revolution. While data was the oil, customer consent became the Internal Combustion Engine (“ICE”) that channelised the power of data into meaningful output. The valuations of all the fintech companies have been under the assumption that the data can be monetised at some point in time. The possibility of easily using customer data with their consent, will open up different used cases in the financial services ecosystem, where the traditional and the fintech players will collaborate together for greater opportunities.

Imagine this hypothetical scenario – An Account Aggregator Platform will have all the customer data including financial information and the platform will allow him to meet all his needs such as investments in mutual funds, fixed deposits, stocks, bonds or bullion, shopping of groceries, clothes, medicines, medical appointments. Thus, the Account Aggregator offers a marketplace, where sellers of products and services can interact with customers seamlessly by leveraging data that can move from the vaults of institutions holding them to sellers of product and services. More the access to data a organization has, greater will be the valuation as the valuation of fintech organizations is on the basis of their potential to monetize data.

Growing Valuation of Fintech Companies basis their ability to monetize data in the future: Is it a bubble that will eventually bust?

Conversations with many private equity players with a focus on new age fintech businesses has revealed the same trend. In fact, most of them tend to look at the effectiveness of their customer acquisition strategy. If funds raised are focused on customer acquisitions, they don’t bat an eyelid because the ultimate goal is sit on a reservoir of data, that will be monetised in the future. There is also a section of the investor environment that believes that it is a bubble, and it will probably burst. But every bubble that has burst has left behind an ecosystem of innovation that has set the tone for the future. The dotcom bubble of the late 90s and early 2000s is an example of the same.

Innovations like the Unified Payment Interface (UPI) which is both a technology and a service is world class and something that the world can learn from India. Third Party Apps like GPay have gained significant market share on the back of this infrastructure, despite not being the early entrant. Technological innovations and the corresponding commercialization will keep reducing the barriers to entry, help increase the customer base, increase competition, and keep moving the bar up on customer experience irrespective of the size of the wallet of the customer. Each of the above-mentioned impacts will have an outcome in the form of a higher GDP, pushing it towards the tag of a developed economy.

The counter argument to the above “Glass-Half Full” opinion is that it is very utopian, and life is not always peachy. But the pandemic did accelerate trends that we did not seem to believe that were possible in the past. While not everything will move to the new normal, there may be a few things that may not revert to what they were. While there are many examples, will limit myself to two interesting examples to elucidate the above:

1. We expect insurance sales online trends to stick. This at- least seems to be the view of 50% of the insurance providers in the market basis our conversations.
2. Conversations with four Banks revealed that there is an increased digital adoption amongst senior citizens, and they expect this trend to stick as well.

Financial History has always shown us that technology propels economic growth and the fintech story is expected to be that not just for India but for Bharat.

Vivek Iyer is Partner and National Leader, Financial Services - Risk.

The article was first published in ET BFSI.