The State of FinTech in India
The seventh largest country by area and the second most populous country in the world, India has a distinct geographical entity among the Asian countries. It is surrounded by water bodies, Indian Ocean on the south, the Arabian Sea on the southwest, the Bay of Bengal on the Southeast ? mountain ranges – Great Himalayas in the north ? and lands – China, Nepal and Bhutan to the northeast, Pakistan to the west, and Myanmar and Bangladesh to the east. One of the oldest civilizations in the world with rich cultural heritage, India has 22 official languages, and hundreds of other languages as 1961 Census put it to 1652.
The last census held on March 1, 2011, shows India’s population as 1.2 billion, which has 623.7 million males and 586.4 million females.
According to Worldometers.info, India’s population was 1.33 billion on December 20, 2016, which is equivalent to 17.84% of the total world population. India’s population density is 446 per sq km and 32% of the population lives in cities. The latest report from the United Nations says that India has the world’s largest youth population of 356 million between 10-24 years old. Even the Census data of 2011 suggests around 41% of Indian below the age of 20 and 65% are below the age of 35%.
Experts believe that if India invests in the education and health of its youth population, they can contribute positively to the economic development of the country. 74.4% people are literate, out of which 82.14% are male, and 65.46% are females. Improving the standard of education institutions and imparting skill training among youngsters have been a top priority of the government.
In the ?Times Higher Education (THE) World University Rankings 2016-17′ 31 Indian institutions have featured in a list of 980 best universities from 70 countries. However, only two universities ? Indian Institute of Science, Bangalore and Indian Institute of Technology (IIT), Bombay ? have made it to the top 400 universities list. To enhance the international ranking of Indian institutions, the government has decided to open twenty world class universities ? ten in the private domain and ten in the public sector ? which will have full autonomy in educational matters. The project is underway.
The new government, which came to power in 2014, has made entrepreneurship and skilling its primary focus. It has set up a separate ministry – Ministry of Skill Development and Entrepreneurship (MSDE) ? to achieve the said purpose.
With this, the government has also sped up the skill training with various schemes under which youngsters are paid to join skill-training programmes. For instance, the current administration has planned to skill 10 million people over four years under one of its ambitious project, Pradhan Mantri Kaushal Vikas Yojana (PMKVY).
Similarly, MSDE’s flagship scheme on entrepreneurship education and training – Pradhan Mantri YUVA Yojana, which spans over five years (2016-17 to 2020-21) ? aims to provide entrepreneurship education and training to over 7 lakh through 3050 Institutes with a project cost of Rs. INR 500 billion. According to a recent working paper from World Trade Organization, if India makes significant progress in skill training, its GDP level can go up by about 3% points in 2035.
India is the fastest growing economy in the world with a 7% growth rate, and International Monetary Fund’s projection shows that in 2016-17, it will accelerate to 7.5%. The World Bank says that India is a third largest economy in the world regarding purchasing power with GDP of over USD 2.1 trillion. After the United States, India is home to the second largest English-speaking population in the world.
Startup Scene in India:
India’s startup scene is booming with unforeseen entrepreneurial initiatives, innovative ideas, adequate infrastructure, good support from the venture capitalists and angel investors and an equally raring-to-go approach from the government. Various reports suggest that 20,000 to 25,000 startups worth $75 billion to $120 billion have come up in India with employment statistics ranging between 300,000 to 450,000 people. The year 2016 witnessed a phenomenal growth of 300% to 400% in the number of startups as compared to the last year.
Experts believe that the rate at which startup firms are coming up in India, it may not be an exaggeration to expect more than 100,000 startups in the next ten years with more than $500 in value and millions of new employment opportunities.
Most of these startups have targeted local, regional or national level issues from all sectors education, medical, financial, logistics, agriculture, supply chain, e-commerce, etc.
Experts also believe while 2015 went into a frenzy of activities, 2016 seems to be more stabilized with right investment environment and realistic valuations. Perhaps that’s the reason despite the decrease in funding and assessment of many of the startups in 2016; there is no let down in the entrepreneurial initiative. More regulated financing and investors’ preference to make the profit rather than spend recklessly has witnessed less big ticket funding on few startups. On the contrary, more startups accessed reasonable funds from investors.
The center of startup activities in India is limited largely to metropolitan cities such as Bangalore, Delhi, Mumbai, etc. but in a couple of instances entrepreneurs from the smaller towns have also come up with startling ideas which were supported financially by the angel investors.
Higher education with more focus on technology, change in cultural, social environment with no peer pressure to pursue a particular career, more emphasis on risk-taking ventures and availability of finance for the project are a couple of factors which have encouraged youngsters to launch startups.
e-commerce sites such as Flipkart, Snapdeal and Shopclues, taxi on demand service Ola, realty sale purchase site such as Housing.com, a peer-to-peer classified ads platform Quikr, hotel room aggregator OYO, Mobile ad-tech InMobi, food ordering portal Zomato, Data analysis company MuSigma, Cloud service firm Zoho, Internet-based cross-platform messaging service business Hike are some of the successful startups. Startups like Licious which delivers fresh meat at 5 degree Celsius in Bangalore, Byju’s Classes which is an Edu-tech entrepreneur, FluxGen which provides a low-cost and local IoT solution for energy and water management have come up with innovative solutions to regional problems.
According to a report, $3.5 billion investment came in for over 800 deals in the first nine months of 2016, a substantial chunk of which came from within the country which shows that the domestic markets of promoters are maturing. While in 2015, most of the investments have come from foreign investors such as Sequoia Capital, Alibaba, Softbank, Google Capital (private equity arm of online search company Google), GE Capital, and Intel Capital. Even the food tech sector, which witnessed the sharp decline in valuation of startups and mass layoff, is believed to have a tremendous potential in the near future with annual growth rate of 16%.
Many experts believe that Logistics and fulfilment; Payments; Data and analytics have a high growth projection. Internet of Thing (IoT), FinTech and Edutech earned a good response from investors in 2016.
Some of the recent acquisitions are TaxiForSure’s acquisition by Ola for $200 million, home food delivery firm Just Eat’s purchase by FoodPanda, Housing.com’s acquisition of online real-estate forum Indian Real Estate Forum (IREF), ZipDial acquisition by Twitter as its first Indian buy and NewsCorp’s purchase of business information site VCCircle.
How big is the FinTech pie in India?
According to statista.com, US$ 35,463 million is the transaction value in the “FinTech” market in 2016, which is expected to saw an annual growth rate of 21%. With this growth rate, the transaction value in 2021 is being projected to US$91,999 million. It further says that “Digital Payments” is market’s largest segment with a total transaction value of US$ 35,373 million in 2016.
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The website sees an emerging scenario for financial technology companies dealing in Digital financial services, alternative finance instruments, digital payments, such as mobile payments, cross-border peer-to-peer payments, digital commerce transactions, etc., marketplace lending platforms for businesses & personal loans, Robo-advisors and automated wealth management services and Online crowdfunding.
Another estimation from NASSCOM suggests that the Indian FinTech software market will touch USD 2.4 billion. It estimates the current market value as USD 1.2 billion.
A report published by ?KPMG in India’ and ?NASSCOM 10,000 Startups has quoted various sources and suggested that the transaction value for the Indian FinTech sector is estimated to be approximately USD 33 billion in 2016. The report says that this value can go up to USD 73 billion in 2020 with 22% growth rate in five-year.
The major boost that the Indian FinTechs sector has received of late is the government’s recent demonetization move. To enhance cashless financial transaction and curb the menace of black money, the Prime Minister Narendra Modi demonetized two high denomination Indian currencies ? Rs 500 and Rs 1000. This has given a major fillip to FinTech firms. For instance, the mobile payment and commerce platform Paytm witnessed 400% to 500% increase in overall traffic on the very first day of the demonetization announcement on November 8, 2016.
Segments of FinTechs in India:
Though mobile wallet companies have emerged the biggest gainer of the demonetization move, other emerging FinTech segments such as P2P lending, Bank in a Box, next generation payments, security and biometrics, the blockchain, robo advisory, etc. are also expected to be big gainers.
Some of the FinTech firms, which have received large funding in the recent years, are mobile wallet companies such as Paytm, Freecharge, Mobikwik; payment aggregators such as Billdesk; Insurance-tech like Policybazar and financial planning company Financial Software and Systems Private Limited.
(a) E-Payments and e-Wallet: Riding high on the government’s demonetization move, FinTechs dealing in digital payments are hoping strong growth in near future. Government’s data suggest that on November 8, 2016, the day demonetization was announced, 1.7 million were recorded through e-wallet companies such as Paytm, Oxigen, MobiKwik, Freecharge etc. and after one month on December 7, 2016, the number of transactions went up to 6.3 million. tHe value of transcations increased four folds from 520 million rupees on November 8 to 1.91 billion rupees on December 7.
Similarly, RuPay Cards, Indian governments equivalent of Visa or MasterCard registered 316% growth from 385,000 on November 8 to 1.6 million on December 7. In terms of value, this increase was from INR 390 million to INR 2.36 billion. Promoters of wallet companies believe that demonetization will increase the share of digital payment for consumer consumption from present 5%-10% to 15-20% in a couple of years.?? The annual personal consumer consumption is estimated at $1.3 trillion out of which at the moment on $70 billion is being paid through digitally.
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Wallets players PhonePe and Pockets have ‘Unified Payment Interface infrastructure’ feature which allows customers to use banking-based debit with wallet facility. According to estimates, 46% FinTech companies are into payments and trade processing. India has over one billion mobile phones out of which only 30% are smartphones, which come as a challenge for the digital payment.
(b) P2P lending: i2ifunding, Loanmeet, i-lend, Lenden Club, Milaap, MicroGraam, InstaPaisa and Vote4Cash are some of the leading P2P lenders who focus on microfinance, consumer and commercial loans, individual loans for various purposes. In the absence of any particular regulatory framework, FinTech startups are registered under the company act.
(c) Bank in a Box: It is an integrated solution to revolutionaries the core banking operations through a third party developed the interface. It helps banks tap the new customers for services such as card management, payments processing, Aadhaar enabled Payments, reconciliation to the payment gateway for e-commerce for financial inclusion. It has received wide acceptance in India. Shivalik Cooperative Bank and Yes Bank have started Bank in a box services.
(d) Robo-advisory: Online financial advice and portfolio management with minimal human intervention are gaining popularity as new companies along with traditional broking companies have started robo-advisory services and have earned significant success. Aditya Birla Money’s MyUniverse, Arthayantra, FundsIndia, BigDecision, 5nance and ScripBox are prominent among robo-advisory firms.
(e) Blockchain: The use of Blockchain technology is at the fledgeling stage in India and, of late, the banking regulator Reserve Bank of India has acknowledged its importance and set up a committee to look into regulatory measures. Zebpay has launched a Blockchain lab, and many IT players are piloting projects on it.
(f) Security and Biometrics: To increase customer confidence in banking, it’s important to ensure proof of identity and fraud detection mechanism. Since more and more transactions are happening through electronic banking, the use and importance of biometric authentication, fingerprint recognition and eKYC have gone up many folds. Banks have collaborated with FinTech companies to develop innovative applications in the field of FinTech security. One such recent initiative was Kotak Mahindra Bank’s Mobility Hackathon.
Status of policy regulation in India:
On August 15, 2015, on the occasion of India’s 69th Independence Day, Prime Minister Narendra Modi made an announcement for an initiative for the Startup India. Five months later, on January 16, 2016, he announced the finer details of his Startup Action Plan to reduce the regulatory burdens. The Plan aims at building a healthy ecosystem for nurturing innovation for sustainable economic growth and large-scale employment generation. A few salient features of The Action Plan are
Allow startups to self-certify compliance with labour and environment laws
A single point of contact for the entire startup eco-system known as ?Startup India Hub.’
Mobile app and portal to serve as a unique platform to communicate with the government and regulatory authorities
Legal support and fast-tracking patent examination at the lower cost
Setting up a fund with an initial corpus of USD 375 million which will be increased to USD 1.50 billion
Credit Guarantee Fund for Startups
Tax Exemption on Capital Gains
Organizing Startup Fests for Showcasing Innovation and Providing a Collaboration Platform
Harnessing Private Sector Expertise for Incubator Setup
After more than a year of launching the Startup Action Plan, the government has taken many steps for its smooth implementation. For instance, the government has established 300 centers for patent facilitation; work is going on for setting up of 500 tinkering labs and 100 new incubators. Despite all these policy initiatives, experts believe that the political and regulatory environment in India is not as friendly to new ventures as in countries like the US or the UK.
Incubation scene for startups in India:
There is no dearth of support and mentorship for financial technology startups in India. Both private and government incubators and accelerators by both financial and non-financial players have come up not only to fund and mentor but also give exposure to the actual market conditions and soft skills.
Some of the instances of financial institutions which have started incubators and accelerators support are CATALYST (an accelerator programme by the Societe Generale Global Solution Centre (SG GSC) in collaboration with NASSCOM 10,000 Startups), Kotak FinTech mobility hackathon in association with NASSCOM 10,000 Startups, StarTank by PayPal to name a few.
Besides this, non-financial institutions too have started support and mentorship initiatives such as E27 by the Tata Group. With its 10,000 start-up program, NASSCOM’s contribution is vital in the expansion of FinTech startups in India.
Universities have technical institutes have state-of-the-art incubation centres and accelerator services which encourage youngsters towards innovation.
Current status of financial institutions in India:
Reserve Bank of India (RBI), which controls banking system in India, have given approval to 25 public sector banks and 19 nationalized banks. There are total 91 commercial banks in India besides 56 regional rural banks 31 state co-operative banks. There are 43 intermediaries of private foreign banks. Despite government drive to bring the unbanked population to formal financial services through ?Jan Dhan Yojana’, 145 million households do not have access to banking services. Jan Dhan Yojana has added over 200 million unbanked population into the banking sector.
Financial institutions have tied up with digital financial companies or started their financial technology arms to move on with the innovative technology and expand their customer base. In the latest move, ICICI Bank, a multinational banking and financial services company with its headquarter in Mumbai, has launched a mobile application, eazypay, for merchants.
According to ICICI, this app will allow consolidation of all modes of payments such as digital wallet, Unified Payments Interface, QR code, debit and credit card. Multiple users can connect to the same account. Other banks such as HDFC, SBI and Axis Bank have also launched their mobile applications PayZapp, Buddy app and Axis Mobile app respectively however ICICI claims to be more advanced than others as lazy pay is an all-in-one acceptance platform for merchants.
The government, in close cooperation with RBI and market regulator SEBI, has come up with many funding and promotional initiative to make Indian economy a cashless one. To open small finance banks, RBI has issued the license to 10 companies. It aims to bring micro and unorganised sector to formal financial services. To achieve 90% financial inclusion by 2021, RBI has given approval to 11 entities for setting up payment banks.
Opportunities for Fintech Startups In India:
Experts believe that despite FinTech firms coming up in every segment, there are tremendous opportunities to tap in all segments, as the country is diverse with thousands of local and regional issues yet to be addressed. For instance, the growth potential of the P2P lending in India is huge as there are about 57.7 million small businesses in the country. Demonetization has also created a lot of opportunities for financial companies to diversify and grow.
The way Indian startup firms and FinTech companies are emerging; there is no denying the fact the country has enormous entrepreneurial potential which has been well responded by the government and the regulatory agencies. The present government is ready to go extra miles to make the cashless economy a reality. However, infrastructure and bureaucratic approval are a concern which government is trying to address.