Competitors or Collaborators: The Way Ahead for FinTech Firms and Traditional Banks

The rise in digital payments has created fertile opportunities for credit democratisation and the trend is likely to continue.

By Mrigank Gutgutia, RedSeer Strategy Consultants | Updated: 23 May 2022 13:00 IST

Competitors or Collaborators: The Way Ahead for FinTech Firms and Traditional Banks

Photo Credit: Unsplash/ Christiann Koepke

Digitisation has helped push FinTech in India

Highlights

India is the third largest FinTech ecosystem in the world
FinTech is expected to grow at a rate of 22 percent in next five years
Government initiatives have helped accelerate FinTech adoption in India

Finance seeps into the very fabric of our daily lives — for individuals and businesses alike, so it only seems fitting that banking and financial services keep up with the times and imbibe technology into most, if not all processes. There is also the fact that India is the third largest FinTech ecosystem in the world. Following suit only after the US and China, the Indian FinTech market–valued at $31 billion (roughly Rs. 2,40,600 crore) in 2021– is poised for a quantum leap. In the next five years, FinTech is expected to grow at a Compound Annual Growth Rate (CAGR) of 22 percent. Funding for FinTech companies in India through IPOs, M&As, and private funding rounds increased by 3x in 2021. The numbers tell a great story, but it seems that we're only getting started.

Within the FinTech space, some of the emerging players in the sector are digital payments, neobanks, digital lending, WealthTech, and InsurTech. In the digital payment space, India has grown to become one of the most mature markets globally. Even after COVID, digital payments have continued their massive growth. India's Buy Now Pay Later or BNPL market is also witnessing a spurt with 9x funding growth and massive adoption growth in 2021.

In the last few years, Unified Payments Interface (UPI) has emerged as the largest retail payment system in India. Dec 2021 saw nearly 4x growth in UPI per two million transactions compared to April 2020. According to the Economic Survey, India witnessed 4.6 billion transactions worth Rs 8.26 lakh crore through UPI in December 2021 alone.

Considering the promising numbers and the direction in which the market seems to be headed, it's only natural to wonder what the figures bode for the Indian marketplace. How will it change the economy, the way money is spent, and how banks operate? To fully understand the national reshaping across this sector, we need to analyse why FinTech presents such an attractive proposition to the Indian economy.

Understanding the rise of FinTech

FinTech, the more enhanced and digitised delivery of financial services, encompasses a wide range of sectors and businesses, including education, retail banking, nonprofit fundraising, investment management, and more.

As India stands at the brink of a FinTech revolution, exploring some of the initiatives that have expedited this growth may be worthwhile. Over 435 million people have enrolled in the Jan Dhan Yojna, the world's largest financial inclusion program; financial literacy has improved across all sections of the population; e-RuPI, a user-friendly digital payment instrument has enabled cashless and contactless payments; and IndiaStack, an API platform, has enabled governments, businesses, and startups to become paperless, cashless, and presence-less.

Before digitisation, India was highly underpenetrated in terms of banking services, with traditional banks focusing on a specific group of customers – financially well-off individuals and large corporates. Attracted by the immense scope presented by the Indian market, several FinTech players have entered the digital lending space and this trend is expected to solve issues for chronically underpenetrated segments.

The rise in digital payments has created fertile opportunities for credit democratisation and the trend is likely to continue, with the digitisation of corporates, merchants, and retail consumers creating a vibrant digital payments ecosystem.

With large captive customer bases, payment apps are expanding to other high-margin and large addressable markets. Since 2015, there has been increased investment into InsurTechs and WealthTechs, with payments and alternative finance segments constituting more than 90 percent of the sector's investment flow. By 2019, 75 percent of consumers were using online money transfers, payment services, or both. In 2020, India had 25.5 billion transactions, ahead of the US, UK, and China combined. In September 2021, India had more than 5.7 billion digital payments worth nearly $2 trillion (roughly Rs. 1,55,17,500) (Total Digital Payments).

Neobanks, digital-only entities partnered with traditional banks, are poised to transform the retail banking experience through better technology. Based on learnings from the growth trajectory of neobanks globally, it is expected that Indian neobanks will have more than 100 million consumers by 2025. Marquee investors too have resonated their belief in neobanks to drive the next wave of India's banking space. 2021 saw an investment of nearly USD 900 million.

As FinTech brings innovation across various applications, including payments, loans, and insurance among others, they are increasingly becoming a well-loved part of banking and financial services.

Major growth drivers for FinTech

Payments innovation
The ever-evolving payments industry has continued to attract underserved and last-mile customers with alternative forms of digital payments infiltrating areas where branch banks and ATMs are not feasible.

With the high adoption of smartphones, digital payment channels provide an easy, convenient, and rewarding payment experience to customers.

MSME digitisation trends
Recent structural changes have altered how Micro, Small & Medium Enterprises (MSMEs) conduct their day-to-day operations. By leveraging digital payment options, MSMEs have been able to optimise both their front and back-end operations.

COVID-19 impact
During the lockdown, the number of digital transactions in the market increased by 40 percent. As a result of their fear of public gatherings, people began to switch from traditional financial ways to cashless and digital payment methods. The InsurTech industry also grew dramatically as people became more interested in life and health insurance.

Government-led initiatives
Government initiatives such as 'Make in India' and 'Digital India' played a significant role in accelerating FinTech adoption. Demonetisation and GST also contributed to the nation's FinTech revolution, paving the way for a shift from a paper-based economy to a digital one. Digital financial

inclusion programs such as PMJDY, DAY-NRLM, Direct Benefit Transfer, and Atal Pension Yojana have also propelled the digital transformation journey, benefiting more people, especially in rural areas. The Reserve Bank of India (RBI) has also encouraged the growing use of electronic payments in recent years to create a truly cashless society.

How can FinTechs and traditional banks work together?

Traditional banks have more sophisticated security features and processes, established networks, and decades of customer loyalty, making it imperative for FinTechs to coexist with banks. The best way forward is for FinTechs and banks to collaborate and leverage each other's strengths as below:

Innovation: Customer experience across the banking ecosystem is likely to improve through FinTech-led innovation.
Revitalising growth: Traditional banks witness a boost in adoption, especially by the Gen-Z/ millennial segments.
Trust: Easier for FinTechs to overcome consumer adoption barriers by leveraging the trust built by traditional alternatives.

The writing on the wall has never been clearer. The way forward would be for both banks and FinTechs to work together and enter the next digital wave as collaborators rather than competitors.

The author is a partner at Redseer Strategy Consultants.

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