Key trends in the FinTech ecosystem
FinTech has become a ubiquitous expression for technology-based innovation in financial services. There could be increasingly more collaboration from, and innovation driven by incumbent banks, prominent technology players, and even regulatory organizations in the market. This is especially true for the Indian FS market, as is evident from a few key trends tracked in the report. The report has combined our secondary research and advisory capabilities with select industry veteran interactions to identify key trends shaping the Indian FinTech landscape in 2022.
1. Digital adoption on an overdrive: unexpected benefit of the pandemic
The COVID-19 pandemic has led to an inevitable surge in leveraging digital technologies. Consumers have not only dipped their toes into the online world but have also taken the plunge to integrate digital into their lifestyles (through digital payment, investment tech, online-only insurance, etc.). The adoption extends beyond the consumer space as well. Micro, small and medium-sized enterprises (MSMEs) are increasing the use of FinTech services. These businesses constitute a distinct customer segment, with needs that differ from those of consumers and large corporations. India’s digital economy is expected to witness exponential growth to $800 billion by 2030 on the back of digital public infrastructure, the development of UPI, and the COVID-19 pandemic.
2. Horizontal expansion: bridge to PayTech profitability lacuna
The dynamic and accelerated development of a payments ecosystem, facilitated by increased adoption of technology and innovation, supports not only the growth in digital payments but also in the availability of a bouquet of safe, secure, innovative, and efficient payment systems.
3. Neobank: partnerships driven by hyper-personalized products
Over the last few years, the number of neobanking platforms and global investments in the neobanking segment has risen consistently. Indian FinTech space has followed suit, and the number of neobanking startups in the country is growing by months and attracting global investors to this market. The continuous funding received since 2017 reflects the increased interest in this sector. The funding activity, however, was buoyed by the pandemic. Investors realized the potential that neobanks bring to the larger financial services industry.
4. Ecosystem banking: capturing value locked in ecosystems
In India, ecosystem banking is helping banks enhance customer experience and generate long-term value for customers. Ecosystem banking offers a single solution to customers who were earlier dependent on complex and disjoint processes across a variety of applications that are run by partners. The large costs and complexity of monolithic technological applications propelled banks toward a purchasing or partnering approach to extend newer services.
5. InsurTech: a new wave of product and distribution innovation
According to S&P Global Market Intelligence, while InsurTech fundraising has been brisk across Asia in recent years, innovators in China and India appear best positioned to move beyond a supporting role and confront the region’s industry incumbents. Indian InsurTech space has grown considerably over the past few years, with steep funding growth (more than doubled in the past two years) enabled by innovative business models.
6. Alternative investment platforms: finding an opportunity in the equities market slowdown
Historically, Indians have invested their surplus in physical assets, real estate, and FDs, refraining from investing in capital markets, as reflected in the low number of demat accounts penetration. But the last two years painted a completely different story in the equities market since the growth in the number of demat accounts in the last two years has increased at a phenomenal rate. During the pandemic (2020-2021), the number of demat accounts jumped 2.2 times, while combined AUC doubled.
7. Regulation and compliance as Achilles’ heel
FinTech is broadly an omnibus term used to describe emerging technological innovations in the financial services sector, with an ever-increasing reliance on information technology. FinTech companies can facilitate digital transactions and help authorities prevent digital fraud through better authentication and identity verification technologies. Accurate and timely reporting is the backbone of governance and RegTechs have been helping industry players become better at this. However, recent incidents of poor governance and failure at proper KYC processes have indicated a fault line in various growth-focused FinTech companies and have drawn regulatory scrutiny.