India's fintech revolution: why and what's next?

Set to be worth USD 31 billion this year, the Indian fintech sector is one of the most exciting digital financial ecosystems worldwide. Historically a cash-based society, this may be surprising to many. Indeed, 20% of citizens remain unbanked. So, why the great innovation in financial services? 

From the country’s bold payments digitalization policy to its Unified Payments Interface (UPI) – the drivers of this innovation are numerous. And the growth of fintech is, in turn, transforming the financial landscape and its customers. New mobile wallets, P2P payments, credit services, and money management apps are bringing better, more valuable services to consumers. In parallel, this has also raised open banking and open API solutions higher up the agenda for India’s financial services ecosystem.

The speed of the growth of India’s fintech scene has, however, also brought challenges. But to understand the solutions to some of these questions, it’s worth reviewing the context enabling this fintech revolution. 

Inclusion, Innovation and ID

Strong government policy has formed the foundation for this fintech growth. These initiatives have a two-fold aim: to address fraud and corruption and to increase financial inclusion. The dramatic November 2016 demonetization policy, which saw 86% of cash in circulation withdrawn, was a major turning point. With citizens encouraged to move to more secure digital alternatives, there’s been an estimated 1000% increase in the use of digital payment systems since 2016. 

Infrastructural investments have also played a role. Established over a decade ago, the Aadhaar project assigned citizens a unique 12-digit code linked to their fingerprints and scans of their iris which could be used to access financial services, such as opening a bank account. With over 90% uptake across India, the pool of consumers with access to a digital financial identity and, in turn, fintech services, is far greater. 

Such moves have been complemented by new licensing options from the Reserve Bank of India (RBI), enabling non-banking financial companies (NBFC) and mobile wallet players with good consumer reach to quickly access this market. Payments and Small Finance banking licences, available to fintechs & NBFCs since 2015, have largely championed online and mobile banking solutions and have been used by key players such as India Post and Paytm. 

UPI and APIs

UPI has revolutionized India’s payments infrastructure. As the rest of the world looks to realize its own truly instant payments framework, India’s UPI is heralded as a leading example. An inter-bank platform, it enables truly ‘real-time’ transactions and merges various banking services and features. The initiative is hugely successful, with 1.3 billion transactions in February 2020 alone. 

UPI’s impact on consumer attitudes cannot be underestimated. By transforming their relationship with banks and use of financial services more generally, it’s created an appetite for greater innovation. Plus, it’s the perfect complement to open banking – bringing the potential gains of a more transparent, consumer-focused banking ecosystem ever closer. Combined, the potential of a successful ‘real-time’ payments platform with truly open APIs could be phenomenal. 

Tech nation

Indian consumers are well-primed to embrace fintech. The population is young, tech savvy, and has a growing middle class. Most importantly, there’s a significant smartphone penetration, with an estimated 500 million smartphone users. 

Utilizing the Aadhaar scheme, consumers have already been able to access mobile and P2P payments - even without a bank account or card. Meanwhile, high smartphone adoption has also brought benefits to the nation’s numerous small and micro-merchants. As digital payments look set to overtake cash by 2022, software-based mobile POS (SoftPOS) solutions have risen in popularity. Utilizing the NFC functionality of commercial mobile devices, merchants can accept contactless card or mobile payments at a significantly lower cost and time investment.   

HCE-enabled mobile wallets also look set to rise. Compatible with NFC-enabled smartphones, bank cards are emulated within the phone, enabling devices to make contactless payments. SBI, India’s largest public sector bank, has already achieved significant market success, while RBI’s green-lighting of the use of tokenization, a common security tool for HCE wallets, is setting the stage for more solutions to emerge. 

India’s fintechs have also been responsive to the significant number of citizens who are reliant on more basic phone models. For example, Reliance Jio, in which Facebook recently acquired a minority stake as part of a USD 5.7 billion deal, is launching a low-cost NFC phone with several smart features and support for apps such as WhatsApp and YouTube. Another innovative example is the ToneTag solution, which uses sound waves to transfer payment data. Unlike QR-code or HCE alternatives, the solution opens up digital payments to devices without a camera or NFC. It’s achieved huge success at home and abroad, with over 50 million users.  

The Fintech Frontier?

With all that in mind, it’s unsurprising fintech innovation has grown so rapidly. However, its rapid emergence has also brought with its unique challenges. 

Firstly, innovation in the sector has largely been driven by the ‘tech’ rather than the ‘fin’. This is testament to the considerable influence of India’s highly successful tech universities and the Startup India program. However, it does expose a gap for expert financial services input. 

As the sector matures, partnerships with industry experts will be invaluable. The payments and financial services worlds, both domestically and internationally, are immensely complex. Seeking consultancy can be more time and cost effective than attempting to get to grips with all the nuance internally. Moreover, it reduces the risk of needing to update solutions post-launch and ensures seamless integration from the start. 

Open banking initiatives can also benefit from such expertise. As in Europe, the undefined role of fintechs and increasing appetite for innovation has sparked open API projects. However, the lack of standardization has put immense pressure on banks to ensure functionality, quality, and security. In India, this has regrettably already led to rising instances of fraud, especially among payments wallets. 

European initiatives aiming at standardized APIs, such as STET and the Berlin Group, can offer real value and important learnings. Utilizing these standards simplifies development while opening up access to proven innovation test tools. Indeed, our own TrustAPI tool recently won a coveted Technoviti award in India for the quick and cost effective launch of open APIs. In short, offering a fast-track to greater open API maturity. 

Moving on up… 

Undoubtedly, India has all the ingredients for a world-leading fintech scene. As this sector matures, supporting its advancing open banking and innovation efforts will be fascinating. How will local players maximize the potential of UPI, for example?

Productive expert partnerships have the potential to enable faster progress and more sustainable innovation. Ultimately, though, India is a highly unique, exciting nation that will define its own path. On both a domestic and international stage, the next act will certainly be inspiring.

About Angaj Bhandari 

Angaj is Country Manager - India and South Asia at FIME. He has seventeen years’ experience within the secure transactions industry, with a focus on payment processing and financial technology solutions across transit, payments and mobility ecosystems. Currently, Angaj is responsible for driving FIME’s regional teams in India and South Asia to support customers through various digital transformation implementation challenges including: NCMC, contactless EMV® migration, open banking API compliance, nexo standards, EMV 3DS and open-loop transit implementations. Prior to joining FIME, Angaj played a key role in business leadership across payments, banking, transit and telecom including Paycraft, Euronet, Nokia, Royal Bank of Scotland and Airtel.  

About FIME India

FIME India has supported the market for more than 15 years, combining our global payments experience with local knowledge to enable new and innovative secure payment experiences for India. It has extensive experience in the EMV space, working actively with global and regional payment schemes including India’s RuPay scheme.