We are halfway past the 2011-2020 decade and growth for India couldn’t get any better. Well Almost. One of the segments that have seen tremendous growth is the startups in general and fintech in particular. The startups in India are growing ever so rapidly transforming us into the third largest startup market in the worlds.
The small businesses have been an integral part of our economic infrastructure since ages but they’ve always stayed at bay; those that wanted to venture out were restricted by the lack of funding options. On a positive note, the recent approach to the MSMEs by the government is providing them with the required impetus to take on risks and grow further. Combine this with the rise in entrepreneurial minds and funding options to support these entrepreneurial ideas we are on a growth spurt. You might want to note that the general population of India is very young; 65% of the population is below the age of 35.
TL;DR What are we looking at here?
In this post we will aim to look at the rise of fintech in India and few factors that have contributed immensely to its growth. The penetration of mobile internet in India was the foundation for innovation in the financial sector. Apart from bringing connectivity to major parts of India, the mobile internet was exploited by the banks in India. The ease in making online payments encouraged the growth of India’s e-commerce segment. This translated for a well established foundation for fintech firms to tap into.
One of the most exciting events to have rolled out in the Indian market has been the growth of the mobile internet along with the fintech disruption. Which came first is a matter for debate. The financial sector is going gaga over news of fintech disrupting the traditional banking and everywhere you turn there is news of how fintech is creating headlines. Perhaps what we are slightly less aware of, is how few crucial elements have come together to provide the right atmosphere for fintech to bloom.
The services provided by conventional banks were old-hat, the increasing demand for ease and convenience in financial solutions, the growth of mobile internet and the increasing lack of innovation among the already existing services to list a few; the perfect cocktail for a fintech explosion.
When we look at India the biggest contributing factor to the rise of fintech has been the advent of her mobile internet segment. How exactly does mobile internet help the growth of a particular segment? Well, picture it this way- more internet penetration = more access to the population but more importantly, more mobile internet = ease of access to the web irrespective of location, time or situation. As far as fintech is concerned, this translates into the ability to tap into a wider market more easily.
The Mobile (internet) of Things
As per the TRAI report for quarter ended September 2015, the number of mobile internet users stood at 305.35 million. Another way to look at this number would be as the combined population of Tamil Nadu, Kerala, Maharashtra, Madhya Pradesh, Uttaranchal and Jammu&Kashmir.
Now although this might look like more than half of India still does not have access to internet (which is not so harsh considering that half of India lacks access to a host of basic infrastructure); what is vital here is to assess the rate of growth in the number of mobile internet users. During January to March 2015, the number of mobile internet users was around 285 million. By the end of September 2015 the number stood at 305 million users and by the end of Q1, 2017 the number of internet users in India is estimated to touch 500 million.
India is set to overtake the US and become the second largest mobile internet market in the world; then catch up with China which has around 600 million users
Hold on, you’re probably wondering what all this has got to do with the growth of fintech? Right, so mobile internet comprises ~94% of the internet usage in India. This means that only 6% of the entire internet users in India have access to wired internet or a broadband connection at home. Now, this is where it gets really interesting; mobile internet is to fintech what bees are to flowers. You see in a dynamic country like India, fintech corporations are betting on the growth of the mobile user base. Without the mobile users as a foundation, the penetration that fintech will be able to achieve would be considerably less.
Truth is that it’s more expensive for an average Indian to apply for a wired internet connection than it is for them to avail a mobile connection. This is why the mobile internet base dwarfs the wired broadband user base.
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In a country where majority of the population find computers to be expensive, accessing the internet through a wired connection is a luxury they cannot afford.
As per the TRAI report released during September 2015 the total number of internet users or subscribers to the ISPs in India stood at 324,952,598 and there were 131 registered service providers with the TRAI. This includes both the mobile service providers and broadband service providers.
During Q3 of 2015, the internet subscriber base has seen a growth of 78% over the previous year. This is good news for a lot of players looking to capitalize in on this market. Although rural penetration of mobile internet is still low, the rate of progress has been encouraging none the less.
The World Bank estimated that for every 10 percent rise in broadband access, economic growth increases by 1.38 percent in low-and middle-income countries. The IAMAI-ICRIER report also highlighted that a 10 percent increase in broadband penetration in India will lead to a 1.08 percent increase in its GDP contribution.
Before we can dive into how the growth of the mobile internet has directly influenced the growth of the fintech space, we need to look into how some other segments have tapped into the mobile user base to propel their growth.
The Banking Scenario of Things
Banks were among the early adopters of the mobile internet surge to focus on expansion. Although one could argue that the variety of services provided have remained the same, banks are still the number one places to assess how the intersection of finance into technology can affect business.
There was a time when branch banking *(ATM included) was the norm of bank operation model. You visited a bank branch to open an account, deposit money, transfer money, open an FD or any investment plan, applying for a loan and so on. With the advent of internet banking many of these functions moved online and banks started seeing more volumes transacted online.
With the growth of the mobile internet and its user base, banks introduced their banking applications onto this platform. As of March 2016 there were 139 banks that had their own mobile banking applications. The aftermath of this has been the most encouraging event in India since liberalization and globalization of the Indian economy.
We’ve reached a point in time, where customers are jumping from branch banking directly to mobile banking; bypassing the web browser in between
Mobile banking has enabled banking to seep into remote parts of India and with almost all the services of conventional banking being offered on the mobile app, this seems to be the way forward. In terms of volumes alone, mobile banking has already outgrown internet banking. Based on the RBI report on mobile banking statistics, the gross value of all transactions done through mobile banking stood at ₹60 billion and there were 23 million users of these apps.
The e-Commerce of Things
Indian e-commerce industry presently stands at a whooping ₹1,08,428 crore of market valuation with a growth rate of around 33% annually according to the IAMAI report in association with IMRB International. This growth again is backed by the growth of the mobile internet market but how so? The greatest blessing of the mobile internet growth to the markets has been the growth and development of mobile apps. The most effective way for any firm to dive into the mobile users and gain that market is to deploy their own application. What this does is increase interactions, sales and the general growth of the firm.
The report has also revealed that the travel industry continues to be the biggest in the segment with 61% of this market share. It is no wonder then that more and more players are entering this market and marketplaces already operating around this model have been able to build robust business models. This segment is estimated to be worth ₹49,730 crore. All you have to do is pull out that mobile phone and check for those travel apps installed on the phone, now scale this up with the number of people in India who use such apps and you have a fair idea of the level of penetration that this sector has achieved.
55% of all e-commerce payments were made online; 40% of all online payments were mobile payments
The Role of Mobile Apps
Mobile applications have been the backbone of the internet revolution. This is because apps have tremendous advantages over the web browser platform. They provide you with convenience at your fingertips. Apps are faster than accessing the same service from a web browser; when it comes to logging into a website on your mobile browser v/s using the application, apps win hands down any day. Affordable smart phones today are as good as a hand held computer which greatly increases the scope of the apps. Being able to integrate seamlessly into your phone resulting in fewer and fewer actions required from your end in terms of using the app as well as making payments- apps are the way forward.
The FinTech of Things
The statista report on fintech across the world puts the transaction value of the fintech market in India at $33,012 Mn in 2016. The highest transaction value is in the US which is $769,323 Mn.
When it comes to fintech in India, they have access to a well laid and established platform; all they had to do was ease into this market. The mobile internet market has grown enough to penetrate both the urban and rural areas to a significant extent. Banks have come forward and initiated the world of online transactions and mobile banking applications. Alongside the e-commerce segment in India has grown rapidly at rates of around 33% annually. It’s almost like the table has been set for fintech disruption.
What happens when there is an increase in the smart phone penetration combined with the rise in mobile payment options? That’s the sweet spot for fintech innovations. Not surprisingly the largest market segment in fintech is that of ‘Digital Payments’ which is valued at $32,538 Mn in 2016.
Fintech is set to disrupt the status quo because of the user experience that new innovative products are able to provide compared to what is already existing
Which brings us to the main question here- what is #fintech? In mundane terms, fintech refers to the segment of companies that have employed technology in an extensive manner to enhance the quality of our existing financial systems. Fintech in India is still in its early stages of growth, which is why the term might seem vague to most. However it is not a system that is completely devoid of any structure; it does have a few verticals. Although each report tends to classify the various verticals of fintech in a different manner, we will for the sake of convenience and understanding branch out fintech into 6 boxes.
What you will find to be the common ground for all the branches of fintech is their heavy dependence on the already existing mobile and banking infrastructure. Combing back to the title of the article, the growth of the mobile internet in India and reinforced the outreach of the fintech firms. The three segments that have grown along hand in hand namely the mobile internet, mobile banking and e-commerce have further ensured that fintech could penetrate the Indian market with ease and efficiency. So how exactly have they integrated into this framework?
How Does Fintech Work in India?
For a down to earth understanding, let’s take the example of a payments situation. Suppose you have just checkout of an online shopping platform and are about to make a payment on the payments page. You have the option of making the payment through debit card/ credit card/ net banking under the conventional model. But the process of payment involving a bank is a tad bit long and does require a wall of security and verification, sometimes which is not possible if you do not have your card handy. Or a payment that could go haywire because the gateway would have to redirect you to your bank site and then back again once the payment was done.
There was the need for a solution that was simpler, quicker and safer; that’s when the ‘wallets’ came up. Just think about it, hasn’t firms like Citruspay and Paytm wallet made our lives easier? In essence the fintech firms are all about filling in the gaps that exist in the online economy in the process enhancing the quality and experience of online financing.
Yet another way to understand the disruption caused by fintech would be to see how they’ve settled into the lending sphere. Traditionally lending money was the business of the banks that had their own criteria on whom to lend and whom not to. Unless you had collateral to pledge, you could not get a loan from a bank. Furthermore the process of applying for a loan was a rather tedious and long one that could well extend over a month. What if you require money immediately but had no collateral? Few fintech firms have managed to address this gap by providing short term unsecured capital on the back of invoice receivable or future payments.
Fintech has seen rapid growth in India on the back of the growth in mobile internet coupled with the demand for innovative payments and transactions platforms. The global economy is increasingly moving to an online mode of operation and the conventional services by banks just don’t cut it anymore. The growth of our e-commerce market has encouraged the rise of many payment portals and wallets that offer more personalized and relevant services. More recently the requirement for short term capital has seen the rise of many p2p lending platforms.
According to the statista report, the fintech segment in India is expected to grow at 22.33% and being in the early stages of its growth in India we can expect to see more in the coming years. Fintech is plugging a lot of these gaps as mentioned before in our financial ecosystem, going in where banks have not ventured so far. This space is one that has received a lot of funding during the past quarter and continues to remain under constant observation of investors. FinTech is prime asset in India at the moment.