A defining year for digital lenders; Untapped segments see growth potential in 2023

The Indian economy has seen a recovery in the year 2022 after a two-year period affected by the coronavirus waves in 2020 and 2021. Although startups in the year laid off thousands of employees this year, the year 2022 has been a crucial year for the fintech and digital payment industry. Experts said that despite fears of a funding winter, there is capital for fintech expansion as the market remains untapped. They said certain segments of the market remain underpenetrated with significant room for growth in 2023.

The Indian financial technology (fintech) market currently stands as the third largest fintech ecosystem in the world and is estimated to reach $1 trillion by 2030. Tier 3-6 cities in the last two years have contributed around 60-70 percent to new mobile payment customers.

Currently, about 40 percent of payments by value are digital, contributing to a $3 trillion digital payments market due to rapid expansion in digital infrastructure, UPI-led migration to digital, pandemic-led acceleration of change in customer preferences, growing acceptance in sales networks and disruptive innovations from fintechs.

Ketan Patel, CEO, Mswipe Technologies said, “The year 2022 has been a defining year for the fintech and digital payments industry. Furthermore, with the adoption of UPI on credit, democratization of lending will become easier and MSMEs can serve as integrated mediums for them. Despite fears of a ‘funding winter’, there is capital for fintech expansion because so much of the market remains untapped – so companies with a solid value proposition will always get money.”

He added that with the Open Network for Digital Commerce (ONDC) gaining momentum, the digitization of small merchants will increase, democratizing digital commerce with standardized operations and logistics efficiency. The “Buy Now, Pay Later” trend is expected to grow by 35-40 percent over the next 5 years led by rapid growth in consumerism and online spending.

Nageen Kommu, CEO, Digitap, said, “The Indian fintech market currently stands as the third largest fintech ecosystem in the world and is well on track to reach $1 trillion by 2030. There are some notable trends to predict for 2023 .”

He added that considering the huge potential of fintech, traditional financial institutions are expected to enter the fintech space via collaboration. This collaborative approach will become prominent in the coming era with deep alliances, distinctive financial products and motive to offer enhanced banking experiences.

“The regulatory intervention is bound to increase in 2023, ensuring compliant fintech operations and creating an enabling business environment to support sustainable growth in the sector. The importance of data analytics in fintech operations is rapidly increasing, with alternative data emerging as a powerful tool to improve credit reach of underserved and unserved sections. In the year 2023, companies will continue to explore new methods of collecting and using data to accurately understand customers’ dynamic requirements, as well as design products,” said Nageen.

Mswipe’s Ketan said that despite good growth, certain segments of the market are still under-penetrated with significant room for growth. The next wave of growth is likely to come from Tier 3-6 locations, as shown in the last two years where Tier 3-6 cities have contributed nearly 60-70 percent of new mobile payment customers.

He added that the UPI system has burdened India’s transition to non-cash payments, particularly in person-to-person (P2P) money transfers and low-value merchant (P2M) payments.

“Unsurprisingly, UPI saw a 9-fold increase in transaction volume over the past three years, growing from five billion transactions in FY19 to around 46 billion transactions in FY22, accounting for over 60 percent of non-cash transaction volumes in FY22,” Ketan said.

Recently, RBI also introduced the Digital Lending Rules to prevent illegal digital lending activities and due to concerns over business conduct and customer protection.

As per digital lending norms, RBI has prohibited automatic increase in credit limit without express consent of borrowers. Digital lending entities and not the borrowers shall pay fees or charges payable to lending service providers (LSPs) in the credit intermediation process.

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