Fintech

Catch-Up on All Things Fintech

The term FinTech has grown from being a catchphrase among tech-savvy business executives to an organized sector characterized by hyper-growth. Digital technology and its avatar in the financial segment are completely reinventing the way business has traditionally been done.

FinTech is basically the amalgamation of finance and technology. The new generation of companies refers that leverage cutting edge technology to offer financial solutions that are significantly more efficient and effective than those provided by traditional financial institutions.

Many people have embraced this, and the result so far has been easier online offerings and more competition. The increase in risk for the financial system as a whole, as fintech tends to be un- or under-regulated leading to negative effect too. Regulators, therefore, have the unenviable task of regulating fintech innovations in a way that reduces systemic risks while also allowing for their further development.

What does the Indian FinTech landscape look like?

Ancient banking functions are being taken up individually by various companies that are creating separate constructs of the services. Firms are now specializing in certain banking functions, instead of taking an aggregator approach.

Digital Lending: company provides financing facility to SMEs and consumers. Technology is used to create better financial products, improve customer experience and increase the speed of loan approvals.

Payment Services: companies allow individuals and businesses to accept payments without even swiping a card.

Savings & Wealth Management: Companies help individuals save money as well as make and manage their own investments. The software helps to quickly compare different options so that they can make decisions. Scrip box and Funds India are to name a few.

Point-of-Sale (POS): Several new players have emerged in this space and have quickly become prominent players post demonetization. Such Companies operating in such segment provide card swipe machines that enable customers to make cashless payments process easy. Ms-wipe, pine slabs, ICICI Merchant Services, etc are some of the larger POS machine providers in this space.

What are the factors supporting FinTech growth in India:

Adoption of high technology: India has already proved itself as being pro-technology. Its high rate of technology adoption can be seen in the penetration of smartphones

Internet penetration: India, on the other hand, might have a lower internet penetration at just around 35%, but because of the vast population, the reach is significantly higher, towering at almost 500 million individuals with access to the internet.

Government policies: Government policies in India are evolving quickly, providing a favourable backdrop for FinTech. By encouraging digitization, by promoting uniform and widespread identification (Aadhaar Card) and through bank account schemes, the government has taken several initiatives to boost the FinTech ecosystem. Briefly, FinTech ecosystem has a role to play in the digital economy.

Increasing financial inclusion: Currently, Indian’s financial inclusion penetration is extremely low. FinTech can play a crucial role in financial inclusion. The FinTech lenders grew as digital lending platforms can target customer segments that were previously underserved.

Investors getting more interested: Venture capitalists, angel investors, high net worth individuals and private equity houses consider FinTech an attractive investment option.

India is playing catch-up:

India is not far behindhand the world in terms of the state of the FinTech sector, although there’s room for massive growth. As regulators are becoming aware of the need for appropriate and coordinated regulatory reforms. Following thing regulators could do to catch up with fintech innovations, taking into account the various stakeholders:

• The controls on consumer data require strong to improve investors’ and borrowers’ confidence in MPLs
• Magnify traditional data sources in addition to technology and alternative data to fill the gap in credit information
• Include Fintech innovation in their response to the SME funding gap
• Provide tax incentives to promote the development of marketplace lenders as a significant source of funding, particularly for Small and Medium Enterprises (SMEs).

For systemic and regulatory safety they should:

• Improve regulatory reporting requirements so they can understand the risks and benefits of the MPL model better
• The licensing agency allows for a more defined business and regulatory scope
• Clearly, define roles and responsibilities in the debt collection process of MPLs
• Stabilise the concern of borrowers and the profitability of the MPL industry.

And to protect and incentivize fintech investors, they should:

• Protect Investors through strengthening existing securities laws as investors take on riskier forms of investment through the MPLs
• Rely on the traditional banking sector for clearing and settlement and combine it with strong rules regarding the handling of client money, engendering confidence in the burgeoning industry.
• Fintech companies help to ensure that firms operate cautiously in managing financial risks and align their interests with investors.
• Allow secondary servicer agreements to reduce counterparty risk and provide additional investor protection against exposures to potential bankruptcies or operational failures.

Way forward:

FinTech has bright growth prospects. One of the factors that could propel the growth further would be partnerships between this dynamic sector and the experienced traditional banking sector. Collaborations between the two can bring together the best of both worlds and offer unique products to a larger number of people in India.

Current partnerships between FinTech companies and traditional banks clearly suggest that two entities needn’t necessarily compete, but can co-opt. Though banks can serve huge amounts of money for lending purposes, FinTech companies bring technological expertise, customized credit products, and advanced data analytics to the table.

The sector has young businesses that need help in reaching their true potential. Incubators and accelerators can mentor these businesses and assist them in competing against the big players in an extremely challenging, cost-conscious Indian market.