The True Challenges in the Fintech Space in India

Fintech and mobile banking are booming in India, but inequity is still a factor.

If you live in India, chances are you’re part of one or the other of these scenarios:

• Your mobile phone is slowly replacing your wallet. Payments, remittances, transfers — you’ve moved from cash, to card, and now to a few screen swipes. As of March 2016, 139 banks had their own mobile banking population. If you have some kind of banking relationship with any of these institutions, you have access to a plethora of services that would, even three years ago, have required a significant amount of paperwork and time spent at bank branches. As one customer of a Fintech company put it, “Banks would take 28–30 days to process loans. Digitization brought that down to 2- 5 days. Now, there are Fintech startup solutions that will do the same within 10 minutes.”
• You belong to that segment of the population that does not have a bank account at all (more than 40% of the country). You’re eligible for one of the various government programs focused on driving financial inclusion under the umbrella of the country’s Aadhaar Act, which was passed in 2016. Aadhaar provides access to an array of financial services, including financing, pensions, savings and checking accounts to the unorganized workforce and the unbanked. These programs have raised bank account penetration from 35% in 2012 to 53% today, but many Indians still do not have accounts.

These trends of favorable government policy and banking practices, combined with increasing availability and affordability of mobile internet, have created the perfect sweet spot for the Fintech sector to thrive in India. The transaction value of the Indian Fintech market is placed at $33 million in 2016, with the sector estimated to grow at 22%.

Last year Village Capital ran its first program in India in the Fintech sector, and we are always seeking to better understand the space. While there is clearly immense opportunity for Fintech startups, these opportunities need to be understood in terms of possible impact, which in turn will define the potential for mass acceptance and scale.

To that end, Village Capital facilitated a brainstorming session earlier this year with a set of experts in the Fintech space in India. The group included companies, investors, banks, MFIs and experts in the SME / rural finance space.

While there is no disputing the innovation in products and services that Fintech has inspired, the group unanimously felt that companies focusing on this space still have not addressed, nor perhaps even adequately recognized, several critical issues. Questions raised during the discussion included:

• What problems are Fintech solutions addressing on the ground?
• Who actually accesses and uses these new products ?
• What are intersection points of Fintech with financial inclusion?

As one of the investors put it: “The issue today is not that of lack of products or services. The issue is fundamentally that of inequity — inequity in the way the primary consumer is defined and targeted as well as inequity in distribution.”

The group highlighted specific examples of inequity, including:

• Regional disparities: particularly low financial inclusion in the low-income states, such as Bihar, or North-Eastern states like Arunachal Pradesh, and Mizoram.
• Gender disparity: Factors like restricted internet and cell phone access among women, particularly in smaller towns and villages, create an additional layer of complexity in enabling their access to financial services.
• Lack of tailored financial protection for farmers
• Lack of streamlined processes for government payments and subsidies that genuinely target lower socio-economic segments.

The last part of the discussion revolved around the necessity to increase both access and relevance of Fintech solutions, creating better alignment with problems facing large sections of the population. Some themes that emerged were:

• Leveraging existing distribution channels in innovative ways for greater market penetration
• Streamlining and building on existing government initiatives or large bank initiatives, such as Jan Dhan Yojna, Aadhaar etc.
• Better collection and use of customer data for product design.

Most companies in the Fintech space today do address issues of convenience, affordability and transparency. As the sector grows and investment continues to pour in, the challenge will lie in creating sustainable business models that will truly leverage the advantages of the existing ecosystem and will scale these benefits to underserved communities and demographics across the country.

As a Village Capital partner said during the session, “The challenge today is not about finding innovative products in this space. The challenge is to tailor, target and distribute these products so they address relevant needs and relevant audiences.”