What comes next for FinTech in India?

Financial technology (FinTech), which is the gamut of digitally-enabled banking and financial solutions, is a booming industry in India. According to the India FinTech Report 2019, India has 2,035 FinTech startups, the second largest in the world after the US. Over the course of just four years (2015-2018), the number of FinTech startups grew three-fold. According to NASSCOM, FinTech in India is poised to grow to a $2.4 billion industry by 2020. FinTech is evidently a momentous opportunity for India, not only in terms of the ease and convenience that it lends to financial services but also the fact that it can facilitate financial inclusion for underserved populations on a large scale. So, what are the emerging trends in FinTech in India and what does the future of the industry hold? Let’s take a closer look.

Opportunities

• A common feature when discussing the future of any industry in any part of the world are the innovative disruptions that artificial intelligence and machine learning will likely cause. In FinTech, too, AI and machine learning are massive opportunities with the potential to revolutionise the sector. AI and Big Data are key for facilitating user personalisation, which can then be used to create new services and new avenues of service delivery, or improve upon existing ones. For instance, user personalisation can help to solve the problems in risk identification and qualification. It can also facilitate financial inclusion for underserved and unbanked communities through facial recognition networks, which act as a digital identity solution that simplifies the on-boarding process for people living in remote and backward areas.
• India’s FinTech industry is also slowly moving towards specialised and niche solutions and services in key sectors. A prime example is AgriTech. Applications of technology in improving productivity and efficiency in agriculture are manifold, and India is slowly catching up. Adopting the Farming-as-a-Service (FaaS) model, tech-enabled solutions to agricultural woes range from using drones to monitor livestock and crop fields and developing metholodogies for precision farming to boosting crop health through the use of nanotechnology. With India still being a farm-dependent economy, with 800 million living in villages and depending on agriculture for their survival, juxtaposed with worsening agrarian distress, AgriTech is a massively transformative opportunity for India. Other emerging sectors are RegTech, which focuses on tech-enabled solutions for enhanching regulatory processes in financial services, and PropTech, which deals with digital innovation in the real estate industry.
• FinTech companies are also moving towards greater consolidation. Most significantly, a demand for easily available and affordable wealth management services means that digital payment firms are now morphing into financial services companies. This trend is set to disrupt the traditional wealth management industry as we know it.
• As the big opportunity for FinTech in India is faciliating financial inclusion for a massive unbanked population, analysts predict that voice services and vernacular languages are the next big thing for FinTech in India. Since the underserved populations far outnumber those who have access to financial services (digital or otherwise), the next innovation will focus on providing voice recognition services to the next 500 million users. The same logic applies for services in vernacular languages -- in order to bridge the gap in education and financial inclusion, both these innovations are crucial.

Challenges

• With privacy and data protection becoming critical issues in the country, Parliament is likely to legislate on new regulations and laws aimed at safeguarding the private data of individuals. For existing FinTech companies, this will mean a need to restructure and upgrade their backend infrastructure not only to be compliant with data protection regulations but also to retain and attract new customers or clients. For new companies, they will have to incorporate data privacy compliance into their infrastructure from the get-go.
• Regulatory uncertainty remains a challenge for the FinTech ecosystem. The FinTech industry is still largely governed by banking regulations, and there no comprehensive guidelines or regulations specifically for FinTech companies. In order to flourish, the FinTech ecosystem requires regulations that inspire trust, increase transparency, and impede the risk of fraud. Even in Budget 2019, even though measures have been delineated that can have positive impacts for startups, SMEs and NBFCs, and therefore percolate to the FinTech industry as a whole, no emphasis has been laid on the need to craft a clear and hospitable regulatory structure for the FinTech ecosystem.
• Another challenge may be that of credibility because many Indians are still wary of digital finance owing to a fear of comprising security. To facilitate adoption, FinTech companies will have to develop innovative solutions that are tailored and customised for different income groups, and create models for widespread scalability of these solutions. 

Budget 2019: A boost for FinTech in India?

As mentioned earlier, regulatory uncertainty remains a challenge for the FinTech industry in India. In Budget 2019, no particular emphasis has been laid on the need to craft a clear and hospitable regulatory structure for the FinTech ecosystem. Having said that, the Budget has delineated several measures that have the potential to positively impact startups, SMEs and NBFCs, with a clear percolation of benefits to the FinTech industry as a whole.

The Budget has focused on financial inclusion and digital payment systems that bodes very well for India’s FinTech ecosystem. For instance, the Budget proposes an integrated payments platform for micro, small and medium enterprises that can bring large unregulated parts of the MSME industry under the formal economy. To disincentivise cash payments, a 2% TDS has been proposed on cash withdrawal of more than Rs 1 crore in a single year from a bank account.

There’s also a considerable push on investments in innovation and technology which are critical for the FinTech ecosystem to thrive. The Budget proposes training 10 million young people in new-age technologies such as AI (artificial intelligence), IoT (Internet of Things), robotics and big data, in order to plug the skills gap and also ensure that India’s young people are able to meet the demands of the new job market. If this is implemented, India’s FinTech industry could be revolutionised. Apart from this, the government also plans to make considerable investments in innovation research through the National Research Foundation (NRF).