4 key methods that will drive growth

According to a recent report by EY, over 550 FinTech startups received a total of $22 billion in funding over an eight-year period from 2014 to 2022. Moreover, it is believed that the overall FinTech market opportunity in India could be as high as $1.3 trillion by 2025. It is clear that FinTech is on the rise and is poised to play a key role in the Indian economy in the coming years.

FinTech has already had a significant impact on how people and businesses in India engage with financial services. It has the potential to accelerate financial inclusion by solving access problems, reducing friction between customers and financial institutions and attracting capital. FinTech also brings to the table a great deal of flexibility, the ability to package and separate products, and the ability to specialize in areas where there is a gap. All of this is of enormous value to both industry and end consumers.

Let’s take a closer look at a few FinTech practices that have gained traction in recent years and will continue to drive the growth of the sector in India over the next decade:

Digital payments: India has seen unprecedented growth in the use of real-time digital payments since the pandemic, with UPI emerging as the most widely used payment method in the country. In fact, UPI has been a significant contributor to making digital payments a habit in India.

While UPI was primarily used for peer-to-peer (P2P) transactions pre-pandemic, over the past two years peer-to-merchant (P2M) has surpassed P2P transactions in volume. This shift, coupled with an increased focus on scaling up security infrastructure for UPI and other platforms, will continue to serve as a strong driver for digital payments in the years ahead, with total transaction value projected to touch $153 billion by 2023 (15% growth over the total transaction value in 2022).

Open bank: The user experience for financial services is rapidly improving with the growth in the number of third-party providers (TPPs), and open banking has been a key enabler of this. Open banking enables users to securely share financial data with TPPs through APIs for seamless and frictionless access to more personalized services. It made significant strides during the pandemic – registering as high as 611% growth in customer accounts between September 2021 and August 2022 – and is here to stay.

Open banking has made it easier for banks and other financial service providers to offer a range of innovative services to customers, including personal lending, robo-advice, automated tax filing, among others. One of the most popular services facilitated by open banking in India is “Buy Now, Pay Later” (BNPL), which has been adopted on a large scale by Gen Z and young Millennials (as well as other segments that are often overlooked by traditional banks) and is estimated to potentially grow to a $45-50 billion market by 2026.

ESG: The increasing emphasis on ESG (environmental, social, governance) initiatives in organizations – driven by consumers, investors and regulators alike – means that it is no longer optional, but rather a critical consideration for financial institutions. Consumers are actively demanding “green” financial products, regulators are becoming stricter in their enforcement of ESG practices, and investors view ESG as a key component of an organization’s brand and market positioning.

In a recent report, KPMG estimated that investment in ESG FinTech companies (both ESG-native FinTech companies as well as those swinging to ESG) would have reached $6 billion by the end of 2022, a figure that is expected to double by 2023 and grow as high as $28 billion by 2025. This signals a concrete commitment to implement ESG-specific initiatives in this sector. Sustainable infrastructure projects, the transition to low or zero carbon economies, and driving financial inclusion – these are a few key areas where FinTech can make significant contributions in the near future.

Platform bank: The digital platform banking market in India was estimated at USD 776.7 million in 2021, and is expected to grow to around USD 1.48 billion by the end of 2028. This growth is driven by rapid adoption of new technologies, including artificial intelligence (AI ), Cloud computing, Internet of Things (IoT), etc. Moreover, the availability of Open API and open frameworks also acts as a key driver for platform-based banking.

Platform banking is simply a model where third-party developers build products or services for banks. It enables banks and traditional financial institutions to significantly expand the scope and scale of their offerings to customers while improving customer convenience and satisfaction. In fact, young Millennials and Gen Z have shown great enthusiasm for platform-based banking, with 67% and 75% approval respectively, according to a Deloitte study. Platform banking is thus clearly a domain that every future-oriented FinTech company should take into account.

The way forward

Emerging technologies, digitization of financial services, changing cultural attitudes and a favorable regulatory landscape provide a strong driving force for FinTech. A strong emphasis on the aforementioned practices – supported by an investment in time, effort and resources – will enable FinTech leaders to effectively exploit the enormous potential the sector offers.

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