Key major trends driving the fintech revolution in India

The fintech revolution in India has well been established as a development to keep an eye on for some years now. With the future of fintech in India looking brighter than ever before, this revolution has been increasingly gaining momentum.

 

As of June 2022, there are a total of 21 fintechs that have reached the coveted unicorn status in India and this number is only going to increase.

History of the fintech landscape in India


Fintech 1.0

The telegraph, Morse code, and other such outmoded technologies were the earlier ways of transmitting financial information across borders for the purpose of infrastructure strengthening.


The credit card was then introduced in the 1950s. In the industry, it was the first financial product and has gone on to become one of the most widely used financial instruments in the world.




Fintech 2.0

Traditional financial institutions led the switch in this era from analog to digital finances. The outbreak of the internet too helped change peoples’ perception of financial management and institutions.


Specifically during the 1980s and the 1990s when web-based business models, electronic installment framework, portable banking, web-based shopping, and digitization of bank was introduced was a high point in Indian history.




Fintech 3.0

India had already made a name as one of the active players in fintech by the time the 21st century rolled around.


Especially after the Global Financial Crisis of 2008, people started to shift towards new banking systems, moving away from traditional systems.


Significant among these new entrants were Bitcoin v0.1 in 2009, Google Wallet in 2011, and Apple pay in 2014. These releases, fueled by the government's push towards Digital India really helped the fintech industry grow. 


Integration with SWIFT was another major boost for the fintech sector. While traditional banks struggled with this, fintech companies collaborated with each other to offer cost-effective and innovative solutions.

 

The following years saw the emergence of firms like Paytm, Phonepe, Freecharge, Mobikwik, and more.


The rise of digital fintech startups like these meant that the smartphone was growing more and more into people’s preferred mode of handling money.

 

Now, there are over 2000 fintech companies in the country and India is at the forefront of the startup ecosystem.


The fintech revolution in India has developed to such an extent that traditional banks are also having to reconsider strategies to make their services more tech-friendly.


Traditional banks started adopting Banking as a Service (BaaS), Open Banking to allow third-party service providers in accessing their financial data.

Key trends that contributed to the fintech revolution in India


1. Artificial intelligence

The use of artificial intelligence in the evolution of fintech in India has spearheaded the automation and increase in efficiency of financial management.


Tasks that would previously require hours of manual labor and manpower can now be done within minutes by AI.


Artificial intelligence is basically the use of computer systems to automatically do tasks that would otherwise require human intelligence,


For example, decision-making and visualization. In fintech, AI is now being used to automatically approve payments, integrate platforms and so much more.




2. Machine learning

The MIT Sloan college defines machine learning as “a subfield of artificial intelligence, which is broadly defined as the capability of a machine to imitate intelligent human behavior.


Artificial intelligence systems are used to perform complex tasks in a way that is similar to how humans solve problems”.


In fintech, machine learning basically learns and adapts to human financial requirements without the need for explicit instructions.


This is done with the help of statistical models and algorithms that are designed to draw inferences from and analyze patterns in data.




3. Big data and data Analytics

Big data and data analytics has an immense role to play in the fintech revolution in India.


Big data and data analytics essentially uses the technological advancements in the market to analyze and interpret huge amounts of data to uncover patterns and trends in financial behavior.


Earlier this would have been done by a dedicated person in the company who would spend hours reading through and interpreting data.


Now, however, computers can do this all by themselves, without any human intervention. This has helped banking in particular because it helps identify business trends and patterns much faster.




4. Robotic process automation

Robotic process automation (RPA) is a software technology that makes building, deploying, and managing software robots easy. These robots emulate the actions of humans interacting with software and digital systems.


RPA in fintech has made it possible to configure software or robot to perform tasks, engineers use this feature to design robots that can replicate human behavior, which further helps in the automation of tasks.


Interesting read: 4 Best accounts payable software in India for 2023

Factors leading to Immense fintech growth in India


The factors that drive India’s fintech growth are basically fintech startups and unicorns that are trying to solve pain points users face, solving their issues in each industry also governmental initiatives & investments received in fintech companies are driving the growth in India.


Some of the major types of fintech startups doing this fall under the category of:




1. Paytech

Paytech includes the fintech companies that provide payment services to customers and businesses. Major players in the Indian context are GPay, Phonepe, Paytm, and MobiKwik.


They provide services like third-party prepaid cards/Wallets, application providers (TPAP), QR code payment, bill payment, payment aggregators, point of sale (POS), corporate cards, invoice payments, and B2B payments.




2. Lendtech

These fintech companies provide services where some form of loan is provided. This includes personal loans, gold loans, buy now pay later (BNPL), salary loans, auto loans, P2P lending, and education loan.


For businesses, these services include fixed-term finance, as well as trade finance.



3. Digital banking

In this segment, technology is used to create a digital alternative or subsidiary for traditional banking. These are what are called neo-banks.


They provide services like account aggregators, conversational platforms, API providers and aggregators, banking as a service, banks with open APIs, and core banking.



4. Insuretech

The Insuretech segment uses technology to provide services like digital insurers, insurance comparison platforms, employee insurance, as well as electronic insurance.


They also provide services like sales platform, claims management, insurance infrastructure API, underwriting risk management, policy admin system, and insurance product configurator. A giant in this sector is Policy Bazaar.



5. Weathtech

In the Wealthtech segment, startups provide services like robot advisors for wealth and expense management, mutual fund investment platforms, discount brokers, alternative investment platforms, and research platforms.




6. B2B payments

While it majorly caters to vendor or employee payments there is a variety of services in this segment as well. This includes digital accounting, Procure to pay, Quote to cash, Taxation management, and Reconciliation.

Challenges that could affect fintech adoption in India


1. Risk of data security & privacy leak

The risk of data security and privacy leaks poses a major challenge to the future of fintech in India. Regardless of how much technology has progressed, the issue of hackers and other such entities does still exist.


As more businesses adopt software services for their finances the ability to handle sensitive data will be of paramount importance to fintech companies.


The better the industry is able to handle this the brighter the future of the fintech revolution in India will be.




2. Lack of financial literacy

Poor educational infrastructure, low internet penetration, and other such factors all contribute to the low levels or lack of financial literacy in India.


Despite the fact that the government is attempting to change this circumstance, the results of their effort will only show in the long term.

 

Even today, it is true that there is a significant chunk of the population of India that is unbanked and chooses to use cash for their purchases.

 

An example of how the low financial literacy of India impacts the sector is the Pradhan Mantri Jan Dhan Yojana.


A World Bank report suggests that even after opening a total of 180 billion bank accounts, upwards of 48% of the accounts remained unused without even one transaction in a year.



3. Government regulations: In India

In India, there is a long list of formalities that fintech startups need to complete before they can open their operations.


These tend to act as massive barriers for new entrants to the sector. Compliance and regulatory laws are put in place by the government to reduce and prevent fraud.


However, regulations tend to become too restrictive at times and this contributes to the slowdown of fintech growth in the market.



As we’ve observed, the fintech revolution in India has been in full swing for some time now. With so many players in the market and more coming up every day, India has reached one of the highest rates of adoption for fintech in the world.


The industry has no doubt grown by leaps and bounds. There are over 6000 fintech startups in India with a market size that was USD 50 billion in 2021 and is estimated to grow to a whopping USD 150 billion by 2025.


Factors such as the pandemic, rapid digitization of finances, penetration of the internet into daily lives, and more have greatly contributed to this development, and the future fintech revolution in India is exciting indeed.


Interesting read: Guide to statutory compliance in payroll in India

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