8 minute read 31 Oct 2022
Trends in Fintech industry

Seven key trends shaping the future of FinTech industry

By Nilesh Naker

EY India Technology Consulting Partner

With over 20 years of experience in the financial services industry, Nilesh plays a critical role in furthering the development of fintech and digital transformation.

8 minute read 31 Oct 2022

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  • The winds of change - India Fintech Report 2022

“The winds of change: Trends shaping India’s FinTech sector: Edition II” highlights the potential and emerging trends in the industry.

In brief

  • FinTech companies are taking advantage of the rising demand for digitization
  • Regulators are making strong moves for customer protection and resilience

FinTech landscape in India

FinTech, enabled by emerging technologies and innovative solutions, has significantly transformed the global financial services industry. India is leading the FinTech adoption race with an adoption rate of 87%, substantially higher than the world average of 64%. The promising Indian FinTech market is expected to reach $1 trillion in AUM and $200 billion in revenue by 2030.

Indian FinTech ecosystem has emerged as a formidable global force and continues to grow as one of the largest FinTech markets globally.

The growth of Indian FinTech is underpinned by a bunch of nurturing initiatives undertaken by the government and concerned regulators, a buoyed funding environment and strengthening VC ecosystem, undeniably massive demographic opportunities, high FinTech adoption, and access to technology and talent for the entrepreneurs building for the new India. There are a few concerns as well. It includes data security and privacy risks in partnership scenarios, varied adoption of digital financial services across demographic groups, a dearth of financial literacy and awareness, IPO underperformance, and global geopolitical and macro-economic events making institutional investors cautious before big investments that are reflected in the first half 2022 funding trends, and the pace of changing regulations that keep FinTech companies on their toes.

On the brighter side, huge opportunities for FinTech outweigh the challenges. Financial inclusion remains an agenda for the government in the wake of traditional FS players’ under-penetration in rural, ageing population, unorganized, and gig segments. Better customer experiences and specialized product expectations present opportunities for FinTech companies, such as new models of neo-banking. Insurance and wealth have witnessed a promising uptick but remain highly under- penetrated. The market opportunity coupled with conducive and proactive regulators has helped the FinTech industry grow at a notable pace. FinTech companies have managed to attract top talent from various sectors, which will continue to help them thrive.

The FinTech sector in India has experienced an exponential surge in funding over the past few years, attracting massive investment from large venture capital and private equity firms. FinTech companies capitalized on the rising demand for digitization of financial services during COVID-19. Indian FinTech market witnessed an investment of $8 billion in 2021, producing over 15 FinTech unicorns during the year.

Forces shaping the future

FinTech, through a global lens, indicates that growth pockets are vibrant in countries with younger populations like India. However, there are a bunch of other factors supporting FinTech growth. Undoubtedly, India is amongst the fastest growing FinTech markets in the world, competing closely with the UK in terms of funding volume and number of start-ups.

As the Indian FinTech ecosystem matures, the top growth strategies include expanding into new markets, technology investment, improving operating efficiencies, and ecosystem partnerships. At the backdrop, this would largely be influenced by the following factors:

Growth drivers of Indian Fintech industry

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[1], 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.

The way forward

Digital adoption will drive financial inclusion and education: Financial inclusion and education will be two of the driving factors for financial services. Digitalization and the increased presence of FinTech aim to reach the underserved population and provide financial services.

India to transform the global payment landscape: As RBI and NPCI guide the future of the Indian payments landscape, major initiatives like credit on UPI and card on file tokenization are likely to have a far-reaching impact on the digital payments and credit space. As RBI and NPCI looked to build on customer data privacy and open banking, the crowded private fintech payments arena has seen strong players emerge to offer and build financial services ecosystems to achieve profitability. The success of the payments sector has brought the Indian FinTech space into the spotlight internationally with NPCI’s ongoing conversation with 30 countries for RuPay and UPI.

Bank and FinTech will bet on product hyper-personalization: Banks and FinTech companies shall build synergic partnerships, where banks can utilize their customer base and regulatory understanding while utilizing FinTech’s agility and customer experience to serve innovative and customer-centric products.

Ecosystem business models will evolve: Ecosystem business models produce co-created products and services, marketing to a common set of customers generating more value and providing their customers with the fullest customer experience.

Potential for the next phase of growth in InsurTech: Technology-enabled customization and transparency are set to reduce fear and invoke the need for insurance. Distribution through bundling with other services is expected to be a major source for tapping into customer need for insurance and boosting awareness as well as the sale of insurance products.

Evolving regulations focusing on overall growth and building secure markets: The regulatory landscape in India has facilitated FinTech adoption by introducing guidelines and regulations which are participative and iterative—they are adapting and changing with the evolving market scenarios and maintaining a customer-centric approach. While being iterative, the regulations focus on overall growth and building secure markets in the Indian FinTech sector

Rise of India FinTech 2.0: The growing maturity of the Indian FinTech ecosystem has coupled aggregation of the digital experience of financial services within one of the biggest marketplaces. This shows confidence and instils trust in overseas markets about the capability of the Indian FinTech sector. Account aggregator could significantly impact lending and other financial services sector and create the next ‘UPI moment’ in the FinTech space.

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Indian FinTech ecosystem has emerged as a formidable global force and continues to grow as one of the largest FinTech markets globally. One of the best digital payments ecosystems in terms of value and volume, phenomenal growth in the consumer and SME digital credit access, and towering participation of the retail investors in the stock market are testimonials that Indian FinTech companies are on the right trajectory.

About this article

By Nilesh Naker

EY India Technology Consulting Partner

With over 20 years of experience in the financial services industry, Nilesh plays a critical role in furthering the development of fintech and digital transformation.