Fintech Invasion And Future Of Banking Industry In India

Fintech Invasion And Future Of Banking Industry In India

FinTech is no longer a banking industry jargon. Instead, it has become a common term in the field of technology. Global investments in FinTech businesses have more than quadrupled to $112 billion, up from $51 billion last year. This is more than proof that the financial services sector is on the verge of a digital revolution.

This shift is affecting all banks and financial institutions around the world. But, exactly, what is FinTech? Let’s see what happens.

What is Financial Technology (FinTech)?

FinTech is a term created by combining two words: financial services and digital technology. In a nutshell, FinTech encourages companies to develop novel goods and services using digital technology, such as mobile payments, alternative finance, online banking, big data, and total financial management.

FinTech was defined as a technology utilised by financial institutions and banks in their back-end systems. However, its definition has shifted dramatically since then. It now includes several consumer-oriented applications. By 2019, you’ll be able to use this technology to trade stocks, manage funds, and pay for insurance and groceries.

FinTech for banking has influenced a vast range of applications and changed the way people manage their money. It affects everything from Square, a mobile payment platform, to financial and insurance firms. FinTech’s significant impact can be viewed as a possible threat to traditional or brick-and-mortar banks.

Customers are less interested in traditional financial services in today’s digital environment. Instead, people prefer speedy and secure services. This is why FinTech and FinTech startups are gaining traction and causing havoc in the banking and financial services industries.

Let’s look at some statistics to understand how FinTech has impacted the world. According to estimates, around 1.7 billion people worldwide do not have bank accounts. FinTech is a lifesaver for all of these folks, allowing them to participate in and access financial services without requiring a bank account. FinTech is the best choice for achieving financial inclusion because it was created to give customers direct access to their finances using cutting-edge but straightforward technology.

FinTech’s Impact on the Financial Industry

• Smart Chip Technology

Smart chip ATM cards have greatly reduced the financial losses incurred due to errors. It includes EMV technology, which is built within the chip. For each transaction, this system employs a one-time password. This strengthens security because the code is only valid for one transaction; it will be useless even if it is stolen.

To minimise extra problems and troubles, bank employees often advise their customers to memorise their pin. Bankers constantly seek new methods to protect their consumers from theft and fraud by providing top-notch security. In contrast to smart chips, magnetic stripe technology uses the same pin for all transactions, making it more vulnerable to fraud.

• Biometric Sensors

Biometric sensors are one of the numerous advances that FinTech has brought to the banking business. ATMs are witnessing two technical advancements: biometric sensors and iris scanners. Furthermore, these developments are ground-breaking because they would eliminate the need to carry your credit card. In addition, you won’t have to remember your pin.

Apart from providing convenience and ease, these developments will make ATMs safer than ever before, as you will be able to access your personal account without providing a password. Biometric ATMs use integrated mobile applications, fingerprint sensors, palm, and eye recognition to identify the account’s owner. ATMs also use micro-veins to make identification more accurate and secure, eliminating ATM faults in customer recognition.

Customers worried about losing their ATM card can breathe a sigh of relief thanks to biometric technology. This is because they will be able to access their funds even if they misplace their card.

• Online Transactions

The Monetary Control Act (MCA) was established in 1980 to stimulate competition between private-sector payment service providers and the Federal Reserve to promote an efficient payment system across the country.

The Automated Clearing House (ACH) aided in the smooth processing of all electronic interbank payments. Insurance premiums, social security, salary, dividend payments, bill payments, and direct mortgage debits are all examples of electronic payments.

According to the Federal Reserve report for 2016, the number of online transactions handled in 2015 was more than 3362 million, much higher than the 1189 million transactions processed in 2012. Credit card payments have also increased at a similar rate. Furthermore, when compared to 2012, the number of payments redirected from merchant sites increased by more than 45 per cent.

Debit card users followed the same pattern. The number of people who use debit cards has increased by more than 90%. There were approximately 2.1 million debit card transactions in 2012, which increased to almost 270 million debit card transactions in 2015.

• Omni-channel & branchless banking

FinTech financial services are shifting the banking system from a branch-specific procedure to multiple digital channels such as the internet, social media, and mobile. It also decreases the bank’s reliance on its physical locations to operate.

As a result, several banks are lowering their branch count by implementing omnichannel banking. By 2016, around 9100 bank branches had been closed across the European Union.

• Customer service chatbots

FinTech companies have also developed customer care chatbots, which have become increasingly popular in recent years. Chatbots are simply pieces of software that employ machine learning and natural language processing to continuously learn from human interaction.

Chatbots are highly efficient since they automate customer interactions by addressing questions and forwarding customers to the appropriate departments.

Chatbots can also perform additional tasks, such as providing investment advice to customers, as demonstrated by Bank of America’s Erica chatbot. On the other hand, UBS’ chatbot can scan client emails on its own, cutting the task’s overall duration from 45 minutes to a mind-boggling two minutes. Similarly, a chatbot employed by Japan’s largest bank may assist customers in locating important information on the bank’s website.

Chatbots have become an essential aspect of all banks since they cut costs and improve customer satisfaction, but they also allow call centre operators to focus on value addition.

• Artificial intelligence (AI)

AI has evolved into a critical component of FinTech banking services throughout time. For fraud detection, AI and machine learning are essential. When a suspected fraudulent transaction is detected, the fraud detection software used by banks generates notifications. It is thereafter backed up by a human examination, which assesses if the attack was actual or not.

However, as attacks become more complex with each passing day, detecting them becomes increasingly challenging. As a result, a significant amount of time and money is wasted. Furthermore, the risk of losing consumer data is always present. Banks are turning to artificial intelligence (AI) technologies to solve this problem.

The implementation of machine learning-driven statistical modelling, data aggregation platforms, and process automation, according to McKinsey, can completely revolutionise AML operations by simply infusing new efficiencies.

Data aggregation tools, for example, may account for data and mine unstructured transactions to provide a 360-degree consumer perspective. This view makes transaction validation go more quickly. Furthermore, using machine learning algorithms, banks can use previous data to identify and determine fraud attack trends. The manual effort will be reduced by approximately 50%.

• E-Wallets

Another evidence of the expansion of FinTech financial services is the massive increase of E-wallets. Samsung Pay, PayPal, Android Pay, and Apple Pay are just a few of the world’s most popular e-wallet services. With these wallets, P2P payments, top-up & utility bills, foreign transfers, ticket booking, and many other uses are all possible.

Starbucks and Walmart Pay are two examples of solo wallets. Users have been drawn to e-wallets because of their enticing services, which include thrilling deals, generous cashback, and reward points, among other things. Many banks are now seeing the relevance of e-wallets as a collaborative approach to embrace technology changes due to their great success.

• Mobile Banking

Because of the rise in smartphone usage, banks have been obliged to develop mobile applications that provide convenient FinTech financial services. The majority of banks now offer a smartphone app with a user-friendly layout. Banks have also developed smartphone apps that recognise the user’s fingerprints. The programme performs this function without any biometric software or hardware.

Quick access to monies is provided using a mobile application. A mobile application allows a user to execute various banking tasks, including quick bill pay, check deposit, account balance, statements, and more.

Will large banks wither away with the onslaught of the FinTechs/Big Techs?

FinTechs have been eating into the banking system’s share of essential banking activity, including payments, investments, and now lending. In the payments area, we’ve seen companies like PhonePe, Mobiqwik, and others take advantage of UPI’s favourable regulatory environment to expand their market share. Stockal, IndMoney, Appreciate, and others in the investment area, and now LendingKart, KredX, and others in the loan space, are all vying for a piece of the Indian finance pie. Google Pay’s partnership with small finance banks disrupts the savings industry by offering fixed deposits at varied rates.

Intelligent minds focused on customer pain points have used faster, cheaper, and better technology to disrupt conventional business models in numerous areas, with banking being the easiest to disrupt. However, due to a lack of funding, most of them have yet to scale up and establish an entry barrier. It remains to be seen how this will play out in a world with excess investible funds and large tech companies (Google, Amazon, and Facebook) entering the field in a big way.

Customers’ transfers/remittances gave them fee-based income, which they added to their profits. Cross-selling mutual funds, cards, insurance, and broking to their consumers boosted their earnings, prompting several of them to form independent subsidiaries to leverage their customer relationships even more.

The banking licence granted exclusivity for accepting time and demand deposits at low-interest rates, giving the lending activity a competitive advantage. Furthermore, the benefit of leverage on a modest capital basis assured decent profits for the bank’s investors and sponsors.

Apart from cosmetic differentiation, customer and product segmentation remained relatively consistent across the industry due to legal restraints.

Following the exponential rise of telecom, the launch of the Aadhar and the UPI catalysed the creation of substitutes for payments, investments, and data-based non-discretionary low-ticket loans.

Meanwhile, their deposit growth has been unabated, but loan growth has been stifled by risk aversion and a lack of demand. Most banks’ treasury activity has increased as a result of this.

While they are comfortable investing the majority of their rising liability book in higher-rated loans and bonds to some extent, with the surplus generally invested in G-secs, they are under pressure to expand their program-based Agri and MSME loan books.

Meanwhile, FinTechs continue to emerge, some with barely discernible differences in their features and capabilities. Based on client penetration, some of them can attract subsequent rounds of capital at higher valuations. They are everywhere, and most of them have capitalised on the long-felt need for seamless transactions.

As evidenced by the exponential growth in demat accounts, these FinTechs have also met a long-term requirement for democratising investing. They’ve been able to make loans to the previously unbanked utilising innovative algorithms now that data is more readily available as the economy becomes more formalised. For the vast majority of people, this facilitates the formation of credit histories. Those who previously found it difficult to simply access bank branches, let alone acquire loans, can now do so.

India today has around 2100 FinTech companies in various phases of development. Each of them is upending an established business model, most notably traditional banking. A few, though, provide services combined with finance, like the app for your smart car in India, which also allows you to top up your Fastag via UPI.

Incumbent banks’ services are rapidly becoming commoditised due to disruption from similar FinTechs and Big Techs. Their transactional income has already been cut to nearly none. Its capacity to offer investment products is severely limited and requires a push from its agency channels. Some of the Big Techs have disintermediated loans for client purchases.

In essence, while incumbent banks control many customer relationships, their capacity to provide customised products and services is constrained since their interests are opposed to those of their consumers. Banks have not made it any easier for their customers to exercise choice. Their persistence is partly due to the difficulties in exercising such options and partly due to their customers’ discomfort, as evidenced by the high CASA ratios of India’s largest banks.

This is changing globally, thanks to the rise of Open Banks, aided by rules in some countries, markets in others, and technology in still others. Furthermore, the valuations that some of them have been able to attract, such as Nubank in Brazil, which is valued at USD 50.6 billion, higher than the country’s largest bank, Itau UniBanco, and has only 4 million customers and revenues of USD 1.06 billion, despite losses of USD 99 billion last year, or our own Paytm, which is not yet an open bank but is valued at USD 20 billion.

Given the valuations of some of India’s public sector banks, such as SBI, which is valued at approximately USD 63 billion, and BOI and the Central Bank of India, which are valued at USD 3.45 billion and 2.55 billion, respectively, it will only encourage some of our bright young men to innovate and disrupt even more.

While conventional banks have big client bases and access to cash, most FinTechs that provide ease and personalisation will not develop beyond a certain point due to a lack of capital. FinTechs would consolidate precisely for this reason, and the most successful would develop inorganically through customer, infrastructure, or product/service improvements.

What would this mean for the banks?

Most large banks are expected to make room for FinTechs due to legacy systems burdened more so by the inflexibility of their inherited mindset and the rigidity of their systems and processes. We’ve seen incumbent banks like BBVA launch their Open Platform, HSBC announces Banking-as-a-Service in partnership with Netsuite, Yes Bank, HDFC, and others explore on similar lines.

Banking as a Service, or BaaS, may become the standard in the future. Suppose customer deposits are allowed to be disintermediated. In that case, margin compressions and increasing cost-income ratios may drive banks to consolidate and rely only on increased revenue sharing with FinTechs leveraging their customer base, depending on regulatory allowances. With such high valuations, some of these banks might be acquired by FinTechs, but with more regulatory control and regulation.

Let’s take a closer look at our backyard. The interest and protection of depositors are paramount to Indian authorities. As a result, licence for accepting client deposits and their usage is obligated to be regulated and supervised. And as long as that is the case, the Indian financial system’s liability franchise will continue to offer them low-cost deposits.

As custodians of trust, they would continue to have an extensive customer base with this significant advantage. Payments, investments, and lending would almost certainly become increasingly disintermediated, among other effective operations. Because their clients would be more digitally active in the future, they would seek out options. Banks would work with FinTechs by opening up their APIs to keep their clients in such a case.

On both sides, such relationships are intended to be non-exclusive at scale. This is already happening, but integration takes longer than FinTechs would want, so banks with more agile, contemporary, and cutting-edge technologies will be first to market.

Larger banks may buy out some FinTechs. However, in the case of public sector banks, this may not be practicable because the purchase prices, including intangibles, are constantly vulnerable to criticism. They’ll have to make do with partnerships and, at best, a small investment in a handful of these FinTechs where their potential can be justified.

Larger banks should be able to replicate FinTech solutions through in-house development in theory. Still, the time to market would always lag behind the next fintech invention, making this a suboptimal goal.

Thanks to their licenced liability franchise, the larger Indian banks would survive but not thrive. They might be able to keep their consumers by forming active alliances and investing in technology that enables speedier integration. Compliance, data security, and the resulting regulatory oversights, on the other hand, may raise operational costs.

Simultaneously, on the asset side, they may limit themselves to higher-rated corporate and retail exposures, preferably via market instruments, mainly focusing on personal loans to their existing customers. Small and medium-sized enterprises that aren’t already credit-worthy and aren’t bank customers will be primarily disintermediated. This, like in the UK, might be disrupted by focused FinTechs, such as co-lending, where criteria could be modified to enable sub-investment grade loans on a higher risk-sharing basis. Most banks would have to strengthen their treasury functions due to this.

Customers will be encouraged to assert their rights as a result of technological advancements. To achieve these client expectations, the larger banks will have to beat the FinTechs at their own game. They have the money and the customer; they need to adjust their thinking now.

India, Home of the 3rd Largest Fintech Ecosystem in the World

India now has the third-largest fintech ecosystem in the world. In 2012, the Indian financial services market was valued at USD 500 billion. According to the latest research from Mumbai-based VC BLinC Investment Management, the fintech industry has grown to USD 31 billion. According to estimates, there are 6,386 fintech companies in the South Asian country.

According to the research, 28 per cent of them work in investing technology, while 27 per cent work in payments, and 16 per cent work in loans. The three segments account for roughly 70% of the fintech business in India. Although just 9% of fintech firms provide banking infrastructure, the rest are spread throughout industries such as insurance and Neobanks.

Local fintech startups raised over USD 16.5 billion between 2016 and 2021, accounting for around 60% of capital entering the nation during the previous three years. Too far, investors have spent over USD 24 billion in over 1,000 companies in the field of financial technology, with 162 companies exiting, including 31 IPOs. Personal Finance software has become popular among people who have diversified portfolios.

The Prillionaires App gives users access to the most current available and most user-friendly and creative wealth management platform. You can track your assets and liabilities entirely and accurately using this software, regardless of their location. A net worth calculator is also included. 

According to Amit Ratanpal, the founder and managing director of BLinC Invest, the Indian fintech industry has received more than 25% of all startup funding within India and is expected to gain more interest from investors as the country experiences a rapid increase in digitisation across industries. For the next five years, the Indian fintech industry is expected to grow at 22% per year on average.

Apart from the digitisation that began in 2020, when millions of Indians were able to transact online in response to the COVID-19 epidemic, the expansion of fintech firms has been encouraged by a favourable atmosphere. This includes a burgeoning middle class, more than 80 million internet users, and the government’s initiatives to digitalise public services. In 2030, the country will add 140 million middle-income families and 21 million high-income households.

Digital payments, credit and insurance, investment tech Neobanks, financial institutions, and banking infrastructure are all part of the fintech industry. The BLinC analysis indicated that the digital payment market in India is quickly growing and might reach USD 95 trillion by 2025, out of all the industries studied. The adoption of the Unified Payments Interface, a government-backed bank-to-bank payment instrument, will be the reason. UPI payments hit 38 billion in India in 2021, equating to INR 71.59 trillion.

Paytm, Razorpay, BillDesk, Pine Labs, and BharatPe are just a few leading digital payment companies. According to the survey, more competition has reduced customer satisfaction in the digital payments market. Other roadblocks include rising consumer incentive costs and increasing regulatory limitations, such as KYC for digital wallets and data localisation.

In 2023, digital financing is expected to reach USD 350 billion. Following a drop in 2020 due to the pandemic, the sector grew last year and is expected to grow even faster this year, despite stiffer regulations. Just 20% of medium and small businesses in India have access to finance, compared to 87% in the United States, resulting in a $300 billion credit gap between micro and small and medium businesses.

Most investors are funding companies that provide cash-flow loans for working capital, direct lending to customers, or point-of-sale finance. The digital lending sector has grown due to the use of customer data to create targeted and customised products with lower default rates. According to the analysis, the size of the market might reach USD 250 billion in 2025 as a result of the expansion of tech-based insurance firms and the expanding market for insurance in India.

According to the research, only 3.7 per cent of the population has access to insurance, compared to 11.4 per cent in the United States. Smaller-ticket insurance packages for high-use products, such as electronics, are becoming increasingly popular.

In the fintech business, two new fields are arising: neo banking and investing technology. As consumers from smaller towns begin to examine wealth tech offerings, the investment tech market is estimated to reach USD 14 billion by 2025. According to the survey, this market is significantly underserved, with only 12% of Indians investing in mutual funds compared to 75% of Americans. The survey concluded, “The rise in personal wealth, adoption of digital platforms, and information availability will boost retail investors.” “Many wealth tech-related models remain in their infancy in India, but they are projected to grow as the demand for standardisation and transparency grows.”

VCs put the most money into wealthy tech startups that allow investors to buy mutual funds and provide expense management and robot-advisory services. Neobanking is expected to reach a market size of USD 15 billion by 2026. Neobanks are now operating in India by building strategic alliances with regular banks and providing services to existing banks. “Neo-banks will continue to grow by catering to the largely underserved SME sector and providing a far superior and smoother digital banking experience, resulting in greater levels of digitalisation,” said Ratanpal.

Conclusion

The introduction of cutting-edge technologies and customer desire for a safer and more user-friendly banking experience has led to widespread adoption of FinTech finance technology by banks and financial institutions.

FinTech is now greater than ever, as it encompasses everything we’ve just discussed in this blog. It is expected to grow in size in the following years, with retail banking software, financial core banking software, and various other components falling under its umbrella. Only time will tell how significant a role FinTech will play in our world.