The Emergence of Fintech in India

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As India emerges as a major global economic power, its inclination to leverage technology for financial services has simultaneously increased. However, the growing reliance on technology for delivery of financial services poses significant risks, be it financial fraud or misuse of personal financial data. 

As part of the Global Technology Summit 2019, Carnegie India hosted a workshop that traced the evolution of India’s fintech industry and highlighted the key regulatory interventions that are necessary for the sector’s sustained growth. This was facilitated by Suyash Rai, fellow at Carnegie India.

Discussion Highlights

• Growth of Fintech: Participants examined the rapid growth of financial technology, commonly referred to as “Fintech,” over the last four to five years. They noted that this term has become popular, with Google search trends for ‘Fintech’ multiplying significantly in 2015. They further elaborated on the intersection of technology and finance—technology has always been integral to finance, but its application to finance has only gained attention in the past few years. 
• Promise of Fintech: Participants highlighted that technological innovations in the finance industry had been stagnant until recently. However, the recent emergence of fintech platforms like mobile wallets, digital transfers, payment instruments, and insurance technologies have radically altered financial operations in India. Participants pointed out that despite these innovations, the cost of intermediation of the financial sector to the Indian economy has not changed and has remained highly inefficient. Participants further elucidated that the financial industry has a habit of formulating large institutions that continue to grow and, thereby, curtail the benefits of competition innovation. With this in mind, participants declared, theoretically fintech offers scope for major disruption in the finance sector and can ensure reductions in its cost to the Indian economy. Participants further analyzed three possible impacts of fintech in India—low, medium and high impact. They stated that in the low impact scenario existing banks will maximize the use of fintech and banks that are more efficient in using technology will grow. In the medium impact scenario, they forecasted, traditional banks will get unbundled and payments function will move out of banks. Finally, in the high impact scenario, they stated, fintech will completely replace existing banks. 
• Uniqueness of India’s Economy: Participants explained that fintech has a unique opportunity to ensure access to financial instruments for two distinct sections of India’s economy. The first, they noted, comprises of about 55 million micro, small, and medium firms, many of which lack the agency, in terms of paperwork, collateral, and capital, to secure loans. Thus, they do not have access to formal financial institutions, participants stated, whereas large, established organizations primarily get loans from the formal banking system in India. Regarding the second, participants highlighted the gender gap in rural India. They explained that women have lacked the necessary documents, collateral, and credit history to gain access to financial instruments. Participants concluded that India provides a unique scenario for fintech to cover those who are not covered by traditional avenues of finance. 
• State of Fintech in India: Participants stated that according to an Ernst & Young (EY) report, India has the second highest fintech adoption rate in the world. Fintech’s growth in India is, however, driven by the incumbent financial institutions, participants added. To illustrate this, they highlighted that most bank accounts in India in the last few years have been opened using fintech. They further noted that as India has a young population, many citizens are interacting with the financial sector for the first time through fintech. Participants added that the largest fintech firms in India work in the payments sector, as a result, mobile and digital based payments have spiked. Further, equity markets have completely adapted to fintech and even insurance companies are moving towards fintech-enabled platforms. Participants also highlighted that there are three types of fintech adoption in India: in-house usage of fintech by existing financial institutions, like banks and insurance companies, financial firms appointing agents to use fintech, and independent fintech firms. 
• Regulation of Fintech in India: Participants discussed the regulation of fintech in India, highlighting two specific policies. The first is pricing regulations, which enable the government to demand that certain fintech-based payment instruments should be provided for free, they noted. The second regulation, they discussed, requires banks in India to open accounts without charging fees, whether for the account or the services they provide, to enable financial inclusion.  Further, participants highlighted that while peer-to-peer lending started in India without any restrictions, now, individuals cannot extend a loan amounting to more than INR 50,000 per peer. Similarly, access to the Unified Payments Interface (UPI) has been limited to banks, they added. Overall, participants stated that while the political economy of financial regulation in India favors incumbents, it is not entirely hostile toward fintech. However, if fintech emerges as a threat to these incumbents, the system could become more wary of fintech, participants noted. 

This event summary was prepared by Suchet Vir Singh, a research intern at Carnegie India.