Indian fintech takes an upward curve

The Indian fintech sector is attracting tremendous attention from investors and entrepreneurs alike. What are the main reasons and the global implications?


A fintech revolution is sweeping India. Recent research from the Boston Consulting Group (BCG) and the Federation of Indian Chambers of Commerce & Industry (FICCI) has found that nearly two-thirds of the 2100+ fintech companies in the country came into being in the last five years. Government policy, regulatory support, rapidly growing smartphone penetration, and a robust talent ecosystem from India’s legacy as an IT services hub have all contributed to where Indian fintech stands today - an extremely promising emerging market with a predicted sector evaluation of USD 150-160 billion by 2025.

More than a year into the pandemic, the excitement continues unabated. Fintech was the top-funded Indian start-up sector by number of deals in Q1 2021, and right behind e-commerce in terms of funding.  BCG-FICCI research has found that while investments dropped from USD 3.7 billion to USD 2.2 billion in 2020, the country remains neck-to-neck with China as the fifth largest fintech destination worldwide. Since Jan 2020, the sector has seen three new unicorns and five new soonicorns.

A host of ecosystem enablers

Capital flows into fintech will continue, says Shishir Mankad, Managing Partner and Head – Financial Services, at Praxis Global Alliance, a global management consulting firm. While Covid has been a major road bump, the advantage of a young demographic is expected to fuel 10-12% nominal GDP growth within the country. Coupled with untapped potential such as 70% of transactions still taking place in cash, this is a market that investors cannot afford to ignore for the coming decade at least.

According to Mankad, the unsung story behind the phenomenal growth of India’s fintech sector is India Stack. A government initiative that kicked off in 2009, it builds digital infrastructure that encourages Indians to come online for formal transactions. The unique citizen identity number Aadhar, electronic KYC, and the United Payment Interface (UPI) API for digital transactions are some of the milestones in the India Stack journey.

The proliferation of telecom networks that make data affordable to every citizen, and the Indian government’s demonetisation drive in 2016 are additional factors that spurred the sector on. Covid unsurprisingly accelerated this. Constant regulatory backing such as the end-2020 relaxation of profitability criteria for mutual fund licences and regulator sandboxes by the Security and Exchange Board of India and the central Reserve Bank of India also contribute to the digital shift.

The greater role of technology

Efficiency, ease of use, and reach are the obvious boxes ticked by automation, but it has enriched Indian fintech with much more. The growth of ETMONEY, a personal investment app, is an illustration. Since setting up in 2011-12, Mukesh P Kalra, Founder & CEO, ETMONEY and the founding team sensed that digitally-savvy, saaried investors earning approximately between USD 13,000-70,000 per annum were increasingly disillusioned with traditional models. These offered attractive products and personalisation mainly to higher net worth customers.

Keeping this in mind, they used technology to offer the same products and personalisation, along with the flexibility for smaller ticket sizes to fit into lower personal budgets. This found resonance with the target segment in the top 30 Indian metros and beyond. In the midst of Covid-19, ETMONEY has seen 94% retention year on year, with many customers coming on board organically through channels like word-of-mouth.

"Our target customer is very aware that the best products in the market are not always available to them,” explains Kalra. “Mobile-first technology helped us democratize premium solutions to fulfil this unmet need. And we now have the numbers to prove it."

India’s digital infrastructure has also accelerated innovation significantly. Among ETMONEY’s top competitors are Paytm and Groww. All these companies are part of a growing group of fintechs that are building on their core success to become a complete financial partner to their customer. They accomplish this by using the growing API readiness of India’s financial space that began with Aadhar, UPI and now includes a wide gamut of products and services provided by traditional financial institutions.

ETMONEY for instance, now offers customers a government pension scheme, fixed deposits, loans and insurance. Users of Google Pay, Google’s payment app in India can seamlessly utilise ETMONEY services and do not need to register afresh. ETMONEY users can also set up investment plans based solely on their Aadhar, to avoid internet banking, which can be daunting to navigate. “There is an exponential increase in terms of how innovative solutions can be created for a larger set of users,” says Kalra.

Collaboration is the third outcome of the fintech revolution. Traditional financial institutions have recognized the disruption in the industry, says Mankad, and are responding proactively. Banks once viewed new fintech companies as competition but now see them as collaborators.  Many large banks have chief digital officers who interact with the external fintech community as well as internal teams to build the organisation’s fintech mandate. Relationship teams within banks nurture equations with start-ups for continuous innovation to provide Banking-as-a-service. Banks also work with fintech companies to streamline backend operations such as risk management, fraud, KYC and regtech. While banks have had to respond the fastest, Mankad observes a similar shift happening within insurance companies.

A multifarious landscape

With 25.5 billion real-time payments, India led the world in digital payments in 2020, and many of the best-known Indian fintechs are payment platforms. The fintech landscape however, has top performers in other areas too. According to BCG-FICCI research, amongst India’s 50+ fintechs with more than USD 100 million valuations, there are four wealth & broking fintechs, five insurtechs and eight SaaS fintechs.

The emergence of innovative B2B fintech start-ups as the landscape evolves is a notable feature, according to Mankad.

The fintech revolution is also making gradual inroads into serving the underserved. A recent regulatory change that mandates interoperability between pre-paid payment instruments such as digital wallets by 2023, and allows for cash withdrawals from these is expected to help fintechs improve financial inclusion.

Lack of trust comes in the way of adoption in rural areas, Praxis research has found. While nearly 60% of merchants across India accept digital payments, rural users are not fully inclined to go digital for formal transactions and use the technology to make online payments to other bank accounts for personal purposes.

“There is some way to go in gaining the confidence of rural consumers for financial transactions,” says Mankad. In terms of opportunity, insurance for rural customers is the next big area for fintech according to Mankad, as low penetration and high need make it ripe for disruption.

Indian fintech and the world

As expected, there is considerable interest amongst foreign companies to get their share of the Indian fintech pie.  British-based fintech, money transfer firm Wise, recently set up shop in India and neobank Revolut has concrete plans that include making India its global operations hub. Google Pay, second in the digital payments space is owned by Google. PhonePe, the market leader in digital payments, is part of the Walmart group via the takeover of e-commerce parent company Flipkart. 

But Kalra of ETMONEY says it will take a while for a foreign company to build the kind of trust locally that one needs to be a valued financial services partner. Google, he says, was only able to do this on the back of a few decades of connection with the Indian consumer. Mankad also observes that foreign fintechs will have to contextualize their offerings and models to succeed in India. Google Pay which is built on the UPI framework is an example.

With their capacity to innovate and ability to serve varied market segments, can Indian fintechs take their success abroad?  BCG-FICCI research found that 39 percent of the respondents already have a presence outside India; one in three of these have clients in more than two international geographies. At 94 percent, B2B fintechs are more likely to be scouting opportunities abroad than non-B2B fintechs for whom this proportion is about one in two. South-east Asia is the preferred choice at 70%, followed by the Middle East and North Africa, North America and Europe.

Regulatory differences and dependence on Indian digital infrastructure are some of the reasons fintech players focus locally, according to the research. Enterprise SaaS players, payment platforms and B2M SaaS players have the highest scope to go abroad. On the policy front, BCG-FICCI research recommends programs for landing support, regulatory referrals and proof-of-concept grants for start-ups to boost global forays.