How Fintech Firms Are Driving Financial Inclusion In India

Nishant Jain Jul 12, 2021

India’s financial inclusion journey has seen quite a significant number of milestones over the last decade, owing to financial technologies or ‘FinTech’, being added to our national financial services architecture. From demonetisation to the COVID-19 pandemic, India has accelerated the adoption of digital payments and lending solutions at a breakneck speed, resulting in the mass inclusion of factions of the society that were ill-served by traditional financial methods.

In fact, India has the highest adoption of fintech at 87%, where the global average is 64%, and is projected to achieve 22% CAGR growth till 2025.1 Digital financial services also offer a cost-effective option to small and medium income businesses who can offer contactless and cashless payment option to their customers. According to the Annual Report for FY 2020-21 by the RBI, the volume of digital payments in India stands at 453 crores.2 Let’s look at the key milestones leading to this democratisation of financial inclusion in the nation, and look at the way forward for the fintech 2.0 revolution in India.

Fintech’s role as a lynchpin for inclusivity

The modern world has become increasingly interconnected with most of us accessing a broad range of services, products, and information via our smartphones or the internet. In recent years, fintech has driven new modes of financing, as well as rolled out specialized services and products from microfinance, smart contracts, to AI/ML based decision analysis systems and more. From the times that our financial plumbing used to be extensively reliant on cash and cheques, we have evolved to the era of UPI and contactless payments. We have witnessed a transformational shift in consumer behaviour with not only an increase in first-time customers trying out new age financial services, but also a rise in the dedicated set of customers who are actively relying on them to carry out transactions, shop for products, and avail credit support.

The National Mission for Financial Inclusion (NMFI) in 2014 was the first to sound the horn on financial upliftment. It was, however, the move towards a ‘cashless economy’ with the vision of ‘Digital India’ introduced in 2015 and announcement of demonetisation in 2016, when digital transactions saw a sharp uptick. The aim was to enable universal access to financial services within the reach of the masses, thanks to innovative technologies, redefined business models, and disruptive transactional platforms. It was also the introduction of mobile payment applications such as UPI and BHIM along with a slew of mobile wallets marked another critical milestone in India’s cashless journey.

Of pandemic and payments

Usage of digital and ‘contactless’ payments particularly surged during the 2020 pandemic, as consumers and businesses alike, began opting for safer ways to transact financially than handle physical cash. According to the data released by the National Payments Corporation of India (NPCI), UPI transactions registered a jump of over 103 percent in 2020. While the total UPI transactions done by Indians in 2019 was beyond 2 lakh 2 thousand crore, it crossed 4 lakh 16 thousand crores in the year 2020.

Digital lending- a ray of hope

Fintechs have transformed the way India applies for/ avails loans. Gone are the days when one had to spend innumerable hours and make multiple visits to the bank branch to get a loan.

Of late, newer methodologies for digitising transactions and credit scoring have led to a transformational shift in the way businesses and individuals could apply for loans. Fintechs have made the loan application and disbursal process 100% digital. With these new age companies, those sitting in the remotest corners of the country can also get a loan, almost instantly.

The beginning of Indian Fintech 2.0

Under Fintech 2.0, the focus is steadily shifting from introducing disruptive solutions to creating a sustainable fintech environment that has room to grow exponentially.

To put this in perspective, Indian MSMEs still face a credit gap of $380 billion, and 40% of MSMEs borrowing from informal credit sources3. This presents a huge opportunity for both the economy and fintech companies looking to formalise the untapped market with low-cost technologies, expansion of digital-only banking facilities, tech-driven underwriting and more. There also remains a vast space for innovation as new trends such as e-KYC to reduce falsification of documents, designing of more easy-to-use app interfaces, open financing that allows third party applications in consumer banking, etc. The government has consistently allowed greater liquidity to financial service providers that allows them to take calculated risks, such as the provision of zero-collaterals, eradication of processing fees on loans, minimal documentation, and more.

In this regard, the RBI also continues to play an active role in accomplishing digital transformation of the Indian financial architecture with the setup of Regulatory Sandbox for the fast-growing fintech ecosystem.

Fintechs will have a big role to play in redefining payments as well as addressing the credit gap in the country.

Not a band-aid solution

Even though fintech seems to be growing in the right direction, economic maturity can only come with time and progressive strategies that make banking more and more affordable. The promise is evident given the Indian market attracted $2.7 billion in investments in 2020 (second-highest ever), is valued at $31 billion currently, and is expected to grow to $84 billion by 202545.

However, an all-inclusive and resilient multi-stakeholder based financial ecosystem for the nation will need time to be built. To achieve this, a roadmap of value addition through organic and continued collaboration will help in tapping into the potential of the market. Fintech companies are free of incumbent legacies and are more flexible to diversify the range of products they offer across tiers. There is no doubt that the outward-in approach of inclusion will stand the test of markets and time.