How fintech enables sustainable cashless economies

Over the past 2 years, India has accounted for the highest number of fintech adopters in the world at 87%, compared to the global adoption rate of 64%. Going cashless has improved the way people transact, while making it easy to borrow and transfer money. Concerns about hygiene when handling notes and coins changed daily financial transactions, resulting in a lasting influence on payment method preferences. Going cashless has also been shown to increase reach and enable financial inclusion.

According to the statistics released by the Ministry of Electronics and IT, digital payment volumes increased by 33% year-on-year in India during FY 2021-22. A total of 7,422 crore digital payments were recorded during the year, compared to 5,554 crore in FY 2020-21. In fact, India’s digital payments market is projected to grow more than 3 times by 2026 to reach a value of $10 trillion.

The digital backbone

With technological advances, fintech firms can improve customer experiences and offer better security. Here’s a closer look at the Fintech revolution and its role in sustaining a cashless economy.

How Fintech revolutionized KYC

From tedious paperwork to identity verification within minutes, Fintech has changed the KYC landscape with the introduction of eKYC. Not only has it made the verification process fast and secure, but it has also improved the overall customer experience. With no need for manual intervention, human error is taken out of the equation.

Less paperwork means a reduced carbon footprint and cost savings. In addition, with customer data being stored in the cloud, the risk of data loss is also reduced. Security has also been improved with the use of biometric data, which eliminates the chances of identity theft. This translates directly into fraud prevention. A machine-controlled process eliminates operational errors and multiple checks can be carried out in real time, simultaneously.

How UPI disrupted payments

Launched by the National Payments Corporation of India (NPCI), under the auspices of the RBI and the Indian Banks Association (IBA), the Unified Payments Interface (UPI) is an effort to drive India’s cashless economy and financial inclusion. UPI supports both Peer-to-Peer (P2P) and Peer-to-Merchant (P2M) transactions, while offering value-added non-financial services such as real-time checking of account balance, transaction history, etc.

The wide acceptance of this payment method is clearly evidenced by UPI transactions reaching a record high of Rs 11.17 trillion in September 2022, representing an 85.55% year-on-year increase in transaction volumes. The simplicity that this digital payment method offers, its seamless interoperability and high levels of security have played a key role in driving its popularity.

With a single point of contact for all digital transactions, UPI has simplified payments. No longer do people need to enter confidential bank details across multiple touch points. For merchants, UPI proves cheaper than POS machines. UPI transactions are estimated to cost less than 45 paise per transaction, compared to 1.25%-2.5% service charges for POS machines.

How Account Aggregator is transforming lending

The Account Aggregator (AA) network was launched in India to overcome the challenges faced by individuals and MSMEs in accessing microcredit. One of the biggest advantages AA offers is the interconnection of digital technologies to bring data from multiple sources together in one place. In other words, Account Aggregator enables the sharing of financial information in a secure manner.

When a business or individual applies for small formal credit, AA collects, with the applicant’s consent, information about their bank accounts, financial assets, financial history, etc., and shares the information with the lender on the AA network. This enables the lender to determine eligibility for credit quickly and easily.

According to a recent report by PwC, AA can lead to the automation of lending, personal financial management, investment advice, etc., which will ultimately drive financial inclusion. “AAs can become agents of financial inclusion by shifting from asset-backed lending to cash-flow-based lending. This can enable them to serve individuals and MSMEs, who were previously unserved or underserved by financial services,” the report said.

How ONDC is going to be transformative

Open Network for Digital Commerce (ONDC) is an effort by the Department for Promotion of Industry and Internal Trade (DPIIT) in the Ministry of Commerce and Industry to democratize digital commerce, transforming it from a platform-centric model to an open network. ONDC is an open protocol based network that will enable the consumer to discover local commerce and access them through any network enabled application. The aim is to create opportunities for micro, small and medium-sized enterprises, while limiting the monopoly of large players, such as Amazon, Flipkart and Walmart.

ONDC will digitize the value chain while standardizing operations and driving logistical efficiency. In addition, it can support new market entrants by improving the discovery and accessibility of goods and services across the platform. In this way, it will provide equal opportunities for smaller players.

Final thoughts

It is not only the convenience that fintech offers that can drive sustainable cashless economies, but also the improved reach of financial services. “In a world where access to financial services and high-speed broadband internet is not universal or affordable, fintech can democratize access to finance and the world can move closer to achieving financial inclusion,” the World Bank said, noting that between 2001 and 2021, fintech has easily access to financial services for 1.2 billion previously unbanked people worldwide. This has led to a 35% decline in the global unbanked population.

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