Three years ago Jonathan Bill, a former Vodafone executive, co-founded CreditMate. The startup, which started as a fintech lender, has now evolved into a loan collection company. “Along the way we realised the problem we were actually solving was that of loan collection. Since our loan books looked better than our non-fintech peers,” says Bill.

CreditMate is one of several fintech companies which realised the massive opportunity in India where millions do not have access to formal banking. With the passing of years, fintechs began offering more than a simple digital wallet. Now, at the tap on your smart-phone screen, you can get loans, insurance, and wealth management services. When you want to make equated monthly instalments, you can do it through companies like CreditMate by repaying either digitally or scheduling a pick-up, also at a tap.

The traditional banking industry that pooh-poohed the promise of fintech has been playing catch-up. Those that chose to ignore the potential of technology as the upstarts made headway are either making friends and learning from them or making huge investments in creating similar products. Yet, for both fintechs and big banks, there are still vast virgin territories to conquer. The number of Indians who have access to formal credit is less than 10% of the total population, according to World Bank data. This is music to the ears of interested parties.

Fintechs believe technology will help them reach the unbanked and under-banked in the country. And the scenario has been changing thanks to the cheap data revolution and proliferation of affordable feature phones and smartphones fuelled by the entry of Mukesh Ambani’s Reliance Jio. But unlocking this potential would require more. “The one constant theme for me in fintech has been to convert non-consumers into consumers. There is a reason why they are non-consumers—lack of access, cost of access being too high, and appropriate products not being available,”says Vivek Belgavi, partner and fintech leader, PwC India. Whoever scales despite these challenges and builds on its current host of products, be it fintechs or big banks, will eventually get the prize.

Small merchants who use cash for transactions, or tap friends and family for loans can all be converted into consumers if these are provided to them on a digital platform, Belgavi explains. “The money fintech companies make on digital payments will only be so much, so they need to then keep on widening that revenue net, and increase their engagement with the customer by straddling alternative and adjacent revenue streams like e-commerce, investment, insurance, and credit,” he says.

Fintechs seem to be ahead in the game at the moment. A large number of SMEs have registered with either payments or e-commerce players, or both. Bengaluru-based Razorpay recently launched Payment Pages, a payments solution designed to accept online payments with zero integration and minimum set-up and without any hosting charges. Razorpay aims to add 10,000 companies this year.

Meanwhile, on the consumer side, many fintech players are opening their coffers to anyone who wants credit. Take PhonePe for example.Owned by Flipkart, the company, which has been doing Unified Payments Interface (UPI)-based transactions since 2016, plans to leverage its user base to sell other products and services.“When you have millions of merchants and 50 million users on your platform, the opportunity for selling and distributing financial products as well as other forms of monetisation is very real,” Sameer Nigam, co-founder and CEO of PhonePe, told Fortune India in an interview.

Paytm, a unicorn, is another example. In May, the Vijay Shekhar Sharma-led company tied up with Citibank to launch its first credit card, Paytm First. Powered by Visa, the card will provide an unlimited 1% cashback on all transactions. India has about 47 million credit cards and 924.6 million debit cards, according to data from the Reserve Bank of India. So a 300-million user base that Paytm boasts of is as huge an opportunity for Citi as it is for Paytm.

Paytm’s competitor MobiKwik is forging a similar path, minus the e-commerce play. The Gurugram-based fintech company, started in 2009 by IIT Delhi graduate Bipin Preet Singh and his wife Upasana Taku, a Stanford University alumna, is also offering products like small-ticket mutual fund investments and cyber-fraud insurance. This year, the company aims to disburse loans worth $250-300 million. Taku says the company is focussed on building accessible and affordable financial services using its digital platform—which can be done with very little capital expenditure. “If I started sending out a human being to reach out to people, I cannot deliver a ₹20 insurance product,” she says.

The small-ticket consumer is the big sell for most fintech companies. “Over 85% of the transactions on our platform are about ₹500 or less,” says Pravin Jadhav, wholetime director at Paytm Money. He says most of their investors on Paytm Money, a platform for mutual fund investment launched last September, are from tier 3 and tier 4 towns.

Anupam Pahuja, MD, PayPal India.
Anupam Pahuja, MD, PayPal India.
Image : PayPal

Two of the major Fintech players in India were set up a decade ago. Paytm was established as a subsidiary of Sharma’s One 97 Communications in 2010; and MobiKwik was launched in 2009. Meanwhile, mobile payments were changing how people sent money to each other or paid for things. In China, Alipay, which began as an online payment solution on e-commerce marketplace Taobao, had reached a registered user base of over 150 million. In Africa, Vodafone’s M-Pesa, a mobile phone-based money transfer, financing, and micro financing service launched in 2007, was revolutionising payments in Kenya.

However, the turning point for fintech players in India came in November 2016, when Prime Minister Narendra Modi banned two high-denomination currency notes—₹500 and ₹1,000—effectively withdrawing 86% of currency by value over-night. The nation went into a tizzy. There would long queues before ATMs with cash even at night. Suddenly, people wanted a mobile wallet to pay for their groceries, cabs, school fees, and other services. Little boards saying “We accept Paytm” popped up everywhere.Today, there are more than 2,000 fintech startups in the country.Data from research platform Tracxn shows that fintechs attracted $1.7 billion in funding in 2018 and $473.9 million until March this year. The strong consumer base of more than a billion people is the greatest attraction. The appeal has not just enticed private equity(PE) and venture capital (VC) funds to invest in India, but also foreign players. “Any country where the offline banks or commercial institutions are not as nimble and not as quick and not as innovative, it leaves a lot of room for Internet-based models emerging in fintech,”says Hans Tung, managing partner, GGV Capital.

338
The number of lending startups in India. They want to extend credit to underbanked small businesses and consumers.
560 million
The number ofInternet users in India in 2018. The country is one of the largest and fastest-growing markets for digital consumers. 
$1.7 billion
The total funding raised by Indian fintech firms in 2018. They received $473.89 mn investments in the March 2019 quarter.

U.S. company PayPal has been one of the early birds that flew in lured by the promise of India. It came here almost a decade ago.However, Anupam Pahuja, managing director of PayPal India, says the country is just starting on its fintech journey. “We are in the first sprint of a marathon race,” he says. The global payments player says its largest market so far has been “freelancers” or young people who are part of the gig economy.

A couple of years ago, banks started to feel the heat when companies they considered upstarts threatened to disrupt the position they held for hundreds of years. “Disruption in finance has taken place but all the disruptors are not new players,” says Raja Gopalakrishnan, executive vice-president(banking and payments) at financial services technology provider FIS. He says the premise that most fintechs came with was that the financial services sector is an extremely laborious and inefficient market-place, and using technology will streamline the process and will transform the business. “But the underlying foundational elements of lending and deposits, etc... those cannot change,” he says. He also says that new players might be able to disburse a loan in 15 minutes, but those loans can go bad, too.

Banks realised the risks were the same. The thing that made the difference was technology. Soon they struck back. Armed with deep pockets, they hiked their investment in technology. Most big banks developed their own apps and started offering technological solutions to consumers’ banking needs. They innovated and devised products targeting tech-savvy and fickle millennials, who they feared losing to fintechs. They even started collaborating and partnering with fintech players.

However, the big threat for fintech companies is not necessarily from banks any more—but from e-commerce and consumer Internet companies. For Android users, global e-commerce giant Amazon in April launched per-son-to-person (P2P) payments via Amazon Pay. The company also offers facilities such as bill payments, mobile top-ups or recharges, and credit services. “You will see us doing a lot more because we want to make sure that the customers who already love their Amazon app continue to use that for their needs beyond shopping,” says Vikas Bansal, director, Amazon Payments. He says that Amazon Pay is also accepted by more than 100 online merchants such as food delivery apps Swiggy and FreshMenu. The company is also running a lending programme for sellers listed with them. It has got an insurance agent licence, too.

“The objective of both Amazon and Flipkart—and in the future, Reliance—will be to offer a complete ecosystem,” says Technopak chairman and managing director Arvind Singhal. Also, messaging service provider Whats App, owned by social media giant Facebook, last year launched a beta version of its WhatsApp Pay in India. However, the government’s demand for companies to store their data locally put a dampener on its plans. WhatsApp has about 200 million active users in India. If launched, WhatsApp Pay would be a formidable foe for all major fintech players here.

Bundling of different services onto one app is an idea that has done well in places likeChina. Will India, too, see super apps like GoJek or WeChat, which consolidate services like ride-hailing, food-delivery, financial services, and more into one platform?

The opinion is divided. Singhal sees a company like Reliance making it work in India.He says the company is way ahead of others in creating an ecosystem around the customer, with its telecom company Jio, e-commerce platform AJIO, and its payments platform Jio Money. “They will certainly integrate their Reliance Retail with the larger e-commerce play, which they haven’t yet done,” he says.

Paytm, India’s largest and most-valued fin-tech firm, has also experimented with the model to an extent by diversifying into e-commerce through Paytm Mall, which hasn’t been doing well. GGV’s Tung thinks Swiggy could become a super app. Leading Chinese e-commerce platform for services, Meituan-Dianping, along with Naspers and a few others invested$1 billion in Swiggy last year and the Indian startup is seen emulating its Chinese investor’s model in India. MobiKwik’s Taku, however, is not convinced that the idea of super apps will work in India. She wants her company to stay focussed on financial services—consumers can book Ola cabs using their platform though. Such partnerships and interoperability, according to some players, will be the direction that fintech will take instead of only one or two players providing everything.

Aruna Sharma, former secretary in the ministry of IT and member of the five-member panel Committee on Deepening of Digital Payments.
Aruna Sharma, former secretary in the ministry of IT and member of the five-member panel Committee on Deepening of Digital Payments.
Image : Sanjay Rawat

Harshil Mathur, co-founder and CEO of Razorpay, says a financial ecosystem runs on collaboration. Though there are many players in the market, he says, the reach is still very low. “There is definitely space for a lot of players. There can easily be 10 players in each domain. Not everyone will survive but the ones who innovate the best, solve opportunity the best, they will definitely survive,” he adds.

Meanwhile, it still looks like a long way to India becoming a cashless economy. The government might have given an initial push to the idea through the opening of Jan-Dhan (a scheme aimed at extending banking to the unbanked) accounts but those remain mostly unused. It is perhaps looking at a ‘mix of banking and fintech’ approach for financial inclusion. However, it seems difficult without proper regulation for fintechs.

William D. Eggers, executive director of Deloitte’s Center for Government Insights,says if you have very restrictive regulations, on say drones, in a country, all the people who are trying to innovate, manufacture drones and test them, will not work in that country—“they will go outside”. “And it’s happened, in fintech, in autonomous vehicles...regulators have to be much more agile than they were ever before,” he says.

Global financial auditing and consulting company PwC said in a note that fintechs, unlike traditional banks,may not have a very clear idea of regulators and governing bodies,and the rules and regulations they have to follow. Every fintech firm has a unique and dynamic business model that functions on the premise of innovation. Here, they are governed by multiple entities like the Reserve Bank of India (RBI), the Securities and Exchange Board of India, the Telecom Regulatory Authority of India, and the Insurance Regulatory and Development Authority of India.

The RBI seems intent to help. The central bank published a draft framework for a regulatory sandbox, a live environment with some safeguards and oversight for fintechs to test new products, services or business models with customers. Experts are calling it a positive move, which will encourage innovation in a responsible manner, and benefit the financial inclusion agenda.

Upasana Taku, Co-founder & COO, MobiKwik.
Upasana Taku, Co-founder & COO, MobiKwik.
Image : MobiKwik

Industry Insiders, however, say the RBI is still regulating fintechs the way it regulates traditional financial institutions, which needs to change. The central bank granted 11 payments bank licences, allowing the licensees to provide services like deposits, savings and remittances. These bank licences—to some extent—may help fintech firms win customer trust,much needed for the next level of growth, along with technology advancement. However, not all 11 payments banks are operational.

Aruna Sharma, member, Committee on Deepening of Digital Payments—a panel constituted by the RBI, says the RuPay cards that were issued to Jan-Dhan account holders have to be utilised more. “So many credit cards, but they are lying unused. So you start making them use it. Once business comes there all fintech companies will run there,” she says, along with higher digital literacy and Internet penetration, the RBI expects, will spur growth in digital transactions—from 20.69 billion in December 2018 to 87.07 billion in December 2021—more than four times.

The growth of digital transactions and fintech as a whole also hinges on the country’s digital infrastructure, Internet penetration, availability of smartphones, and data protection laws. India is yet to have a full-fledged data protection law. Internet users in the country are one of the most vulnerable to malicious cyber attacks in the world. Perhaps the best way to push financial inclusion in a country like India is through combining the financial muscle of banks with the speed and tech chops of fintechs. That it is already happening is a good sign.

The growth of digital transactions and fintech as a whole also hinges on the country’s digital infrastructure, Internet penetration,availability of smartphones, and data protection laws. India is yet to have a full-fledged data protection law. Internet users in the country are one of the most vulnerable to malicious cyber attacks in the world. Perhaps the best way to push financial inclusion in a country like India is through combining the financial muscle of banks with the speed and tech chops of fintechs. That it is already happening is a good sign.

$130-170 bn
Economic value India has the potential to create in financial services (including digital payments) by 2025, according to McKinsey & Company.
650-700 mn
The estimated number of smartphones in India by 2023. The country has about 354 million smartphone devices currently.

This story was originally published in the June, 2019 issue of the magazine.

(Additional reporting by Abhik Sen and Ashish Gupta)

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