The LexGaze Weekly - COVER STORY

Financial Inclusion in India Through FinTech

Ms Neha Mehta

Aug 23, 2020

Issue 10

Financial Inclusion in India Through FinTech

The term ‘FinTech’ is an amalgam of the terms ‘finance’ and ‘technology’. It is broadly defined as technology-enabled financial innovation that would lead to new business models, applications, or products with an associated material effect on financial markets & institutions. FinTech has the potential to bring about a revolution in the landscape of financial services and financial inclusion. FinTech covers tech-based companies that operate in insurance, payment, asset management, etc.

India has become the world’s second-largest FinTech centre, just behind the USA, after investment in the industry increased from $570 million in 2019 to $807 million in 2020. However, according to the World Bank’s Global Findex Data, India also has the 2nd largest financially excluded population in the world after China. (Irony at its best.)

FinTech has become the face of the financial inclusion revolution all across the globe, especially, in the developing world. With the increasing number of FinTech start-ups and favourable government policies, it would be correct to say that this industry is here to stay and grow further.

Role of FinTech in Accelerating Financial Inclusion in India

In India, FinTech has created a positive impact by addressing the deep-rooted barriers to financial inclusion. Financial Inclusion is one of the areas where FinTech has been identified as ‘potentially transformative’ because it helps address various financial problems. Some of these problems include cost barriers for delivering financial services- which are especially severe in remote rural locations and among marginalized groups such as women, the urban poor, and migrants; lack of a verifiable ID; difficulty in meeting customers’ due diligence requirements; and the lack of suitable financial products for the lower-income segments.

Financial Inclusion has helped people save a lot more than what they did before- when they didn’t have bank accounts. Now they can save more for health crises and the education of their children. Having a ‘digital footprint’ makes it easier for financially unstable people operating MSMEs to get credit from financial services.

According to the India FinTech Report 2019, the MSME funding stands at $240 bn and the consumer lending stands at $300 bn. These numbers indicate an approx. $60bn demand-supply gap. Therefore, the MSMEs can receive substantial benefits from the collaboration between financial institutions and FinTech firms. The credit scoring models used by FinTech firms differ greatly from those used by traditional lenders. The technology allows firms to collect and use a larger quantity of information. FinTech credit platforms may use alternative data sources, including insights gained from social media activity. The adoption of machine learning techniques helps mine the non-linear information from variables.

Data analytics and machine learning are enabling individuals to build their digital and financial identities which allows them to demonstrate creditworthiness and eligibility for availing a range of financial services that were inaccessible to them earlier, thereby, leading to the next wave of inclusion. The mass adoption of Aadhaar (India’s biometric linked identity) has streamlined the Know Your Customer (KYC) processes, which in turn has helped in opening bank accounts and electronic wallets. Through the Aadhaar-enabled Payment System (AePS), people in rural areas are now able to make deposits, withdrawals, and transfers.

The Tech in the FinTech Space

The methods of payments have been revolutionized over the last few years, due to the emergence of e-commerce, mobile commerce, and online payments. While financial inclusion is much more than just online payments and transactions, these can be thought of as a gateway to financial inclusivity. With the innovation of Unified Payments Interface (UPI), transactions such as Peer-to-peer (P2P) and person-to-merchant (P2M)have become a lot easier and a lot more widely available.

Investment Advisory administrations have developed trained neural networks to give wealth management advice. These are known as “Robo-advisors”. They provide this advice by utilizing algorithms, helping make financial advice on their behalf. These work at a lower cost than human advisors and are sustainable even at a lower profit margin. Cloud computing adapts to the changing demands and the changing needs of customers. Cloud resources allow easier integrations with advanced technologies. Some FinTech companies are also venturing into insurance and asset management. Paytm Money is one such app that has made investing in mutual funds hassle-free.

But with all this technology comes a greater risk of security. Blockchain is known to provide a high level of security during the exchange of money and sensitive information.

A new form of banking has emerged over the years known as ‘neobanking’. And the banks involved are called ‘neobanks’. These banks offer internet-only financial services and lack physical branches. Neo-banks are expanding rapidly, using state-of-the-art tech to gain customers- who demand simpler, faster, and more cost-effective financial services.

FinTech is improving customer experience by providing tailor-made arrangements and administrations that suit the person’s individual needs. Implementing Artificial Intelligence (AI) and Big Data for personalization will lead to improved risk identification and qualification, which can be utilized in the advancement of recent service models.

FinTech and COVID-19

With the ongoing COVID-19 pandemic, this industry is suffering just like most other sectors. It’s getting difficult day-by-day for early-stage FinTech companies to access funding, as many investors are on more established ones. As the economy is trying to recover, COVID-19 may create new opportunities for some FinTech companies. For example, due to social distancing measures during this pandemic, there has been tremendous growth in the use of digital financial services.

Many countries such as Liberia, Ghana, Kenya, Kuwait, and Myanmar are supporting a shift from offline to online modes of payment with measures such as lowering of fees and increasing limits of mobile payment transactions. In many countries, digital payments services are evolving into digital lending services, as more and more people are deemed credit-worthy, by using different sets of users’ data.

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