How fintech has become a game changer in the financial sector

In November 2019, Mark Isakowitz, vice president of government affairs and public policy, US and Canada at Google, wrote an interesting letter to the Federal Reserve in support of the Fed’s idea to deploy “FedNow,” a new interbank real-time gross settlement (RTGS) facility. Interestingly, the letter cited the example of India’s Unified Payments Interface (UPI), a digital money transfer platform that aggregates multiple bank accounts and a peer-to-peer mobile phone-based platform that enables real-time money transfer electronically, 24×7 and 365 days a year. The letter highlights the adoption figures from UPI’s humble beginnings in 2016 to its emergence as the world’s largest payment platform.

The UPI storm in India

The UPI platform has transformed the lives of millions of Indians and helped the country take a quantum leap in bypassing the entire payment journey from cash to checks to credit cards to wallets to P2P! As of October 2022, UPI recorded more than 7.3 billion transactions with a value of over Rs 12 trillion. 1. FY22 case UPI processes more than 46 billion transactions totaling over Rs 84.17 trillion, accounting for nearly 40 percent of global digital payments2. India is currently leading the world in terms of real-time digital paymentsahead of China and Great Britain

Most interestingly, India is perhaps the only country in the world where policymakers have created the greatest innovation, and instead of trying to be a monopoly, UPI has provided an opportunity for more businesses to create APIs on top of this digital ecosystem to build forward successful and scaled payment systems (PhonePe and Google Pay are two notable examples). By making itself a public utility, UPI has driven penetration at a globally unprecedented scale and speed. UPI is just one example of how fintech has led to financial inclusion and increased access to credit for millions of Indians. While UPI was one of the biggest success stories of the fintech revolution in recent times, the building blocks were put in place several years earlier.

The India stack

The India Stack project, started in 2009, has been a game changer for the Indian economy. India Stack essentially refers to four technology layers – consent layer, paperless layer, non-presence layer and cashless layer which are at the core of the digital and fintech revolution in India. The stack is a group of APIs (application programming interfaces) that enable digital payments, instant KYC and digital storage of data in a secure manner. It further creates a digital highway to enable all entities to operate their networks to facilitate payments and other financial transactions.

The maturation of the India Stack has accelerated India’s financialisation. It has become an inspiration for how authorities can drive disruptive innovation through technology. Today, there are more than 2,100 fintech companies in India in digital payments, wealth technology and lending3.

The fintech revolution in India has forced even established banks and NBFCs to restructure their businesses and be “digital first” in their approach.

The global context and pitfalls

Mark Twain once said “History never repeats itself, but it often rhymes.” Events in the financial system and fintech ecosystem over the past year or so are good reminders that in every exuberant bull market there are excesses, and these excesses are inevitably exposed when the environment turns.

While fintech has been seen as a great theme both internationally and in India, what is now becoming clear is that in many cases it was simple liquidity conditions and abundant cash that had inflated fintech assets beyond a reasonable estimate of the underlying value of the business . . Two notable areas where the subsequent purge has been painful for investors have been cryptocurrencies and their ecosystems and ‘Buy Now Pay Later’ (BNPL) businesses. The rout in the valuations of Klarna and Affirm and the contagion led to explosions in the crypto space is a reminder that not all themes make good investments, and not all businesses that follow a hot theme make a good investment that will give investors a return over a longer period.

The fintech opportunity in India is real and significant

The readjustment in asset prices and the “cleansing of the system” as it were, although painful, provides a strong basis for the future. In the Indian context, the opportunity is significant, but investors need to be discerning. It is important that fintech companies are focused on thinking about what really differentiates them and how sustainable this differentiation is. Currently, many segments within the fintech ecosystem have multiple businesses with little or no differentiation. This is likely to be corrected over time with expected mortality in some cases.

That said, there are also businesses that have been built on first principles and with the idea of ​​solving a uniquely Indian problem, and these will be the ones that will continue to dominate the ecosystem and create extraordinary value over the next decade and more.

A notable highlight in the Indian context is also the fact that the Reserve Bank of India (RBI) has been an extremely vigilant and nimble regulator. It has always advocated for ensuring consumer protection and timely safeguarding of consumer interests and will continue to do so.

In our view, India presents one of the most fertile landscapes for fintech. India’s innovation and technological disruption continues through the Account Aggregators (AA) and Open Credit Enhancement Network (OCEN) platforms. OCEN will usher in a new era of financial inclusion in India. The AA framework will synchronize with the OCEN to create a super data and finance superhighway that will facilitate the democratization of credit to provide better access to India’s credit-starved population.

The development of India’s financial sector has only just begun. For the discerning investor, the opportunities are real, and with the recent turmoil, risk-return in many pockets is hugely asymmetric

END OF ARTICLE