India will soon become the global fintech leader

A lot has been said globally about India’s potential across sectors. The drivers of this viewpoint are India’s free-market capitalism, aggregate demand, massive youth population, increasing digital penetration, etc. But one sector that I believe will exceed expectations and emerge as the global leader, is fintech. This belief is anchored in many aspects but, to begin with, let’s look at the status quo.

The hotbed for investments

In the first half of 2021, India registered $2 billion(1) in fintech investments, in what can be termed as one of its best-ever performances. To put this into perspective, China registered $1.3 billion in the corresponding period, which was preceded by the pandemic, and associated disruptions to investment activities. Startups like Cred and Razorpay received $215m and $160m, respectively, in the ecosystem comprising of more than 2,000 fintech companies. According to BCG(2), at this rate, India’s fintech industry valuation could rise to $150 billion by 2025.

So, what led to this growth?

A decade of top-down and bottom-up efforts

Typically, the financial industry is policy-driven, swayed by top-down efforts of regulatory bodies, governments, and central banks. In India, the industry has also been impacted by changing customer behavior. The rise of the middle class, increase in disposable income, and the emergence of the e-commerce industry, payment gateways, and wallets – especially after 2010 – have been the tailwinds for the fintech industry. The founding of Razorpay in 2014 testifies to this effect.

Personally, I believe the banknote demonetization of 2016, too, played into fintech’s traction. It left no option but to pivot to digital payments, resulting in uptake of services offered by leading players like Paytm. By one estimate(3), Paytm went from 125 million customers, before demonetization, to 185 million customers, three months after. It has continued to grow since and has filed for an IPO, which could give exit options to investors like SoftBank, and China-based, Alibaba-affiliated Ant Group. I believe Ant Group’s exit and going public through an Indian course could legitimize Paytm’s homegrown status. Paytm has demonetization, along with the COVID-19 pandemic, to thank for its meteoric growth, culminating in what could likely be India’s largest IPO ever.

The strengths anchoring India’s fintech ecosystem

Paytm’s success is only part of the story — it is the structural shift that fuels my optimism. The fintech industry in India is characterized by unique, India-specific models that are largely customer-facing. Among other things, these models allow startups to operate as SaaS providers, while banks retain regulatory responsibilities. They lead to strategic partnerships, like the latest one between Paytm and HDFC(4), and they focus on mobile UI. The reason I emphasize “mobile” phones is that the number of smartphone users in India is expected to hit 844 million by 2021(5).

This is why I look favorably upon UPI-related developments. The government has done a commendable job, as far as measures surrounding UPI are concerned. Besides facilitating a favorable ecosystem for homegrown startups, these measures have pushed out foreign competition, with the likes of PayPal and other business-facing fintech companies closing domestic operations(6)

in India. I say it’s a win-win because the rise in UPI has been of great consequence to financial inclusion, across the country. And I’m glad to see that it’s happening at the grassroots.

For instance, in the dairy industry, farmers who supply milk are mandated to have a bank account where the payment is credited. The suppliers must also have a registered mobile number associated with the bank account. That alone will suffice for UPI setup. Many farming communities in remote, rural areas have now pivoted to UPI transactions, reducing unnecessary trips to the bank, or exchange of cash. Similar developments can be found in women-centric careers, under MGNREGA and other national programs. By mandating bank accounts, unbanked women are being brought into the banking fold in large numbers. And fintech’s role in making their onboarding simple, fast, and seamless has to be lauded.

Decentralized, self-sustaining growth

In fact, the onboarding is entirely remote, thanks to e-KYC and smartphones. And such conveniences are not impacting rural populations alone. Integrated services, like Paytm’s stock trading “Money” service, are bringing more youth to financial markets, with investor accounts rising by a record 10.4 million(7) in 2020 – constituting mainly millennials. And considering India has over 800 million youth under the age of 35, we are talking massive, unfulfilled potential.

But we cannot rest on these laurels. More efforts are needed to ensure that the dramatic growth in fintech doesn’t widen inequalities. The government has an integral role to play here. Efforts should be taken to keep underbanked communities at pace, in step with the fintech revolution. Currently, association with fintech is largely limited to money transfers, which should begin to include categories like SIP, borrowing, trading, etc. Also, UPI is not without glitches and reliability issues,

which need immediate fixing. If we get this right, becoming the global leader will soon be a foregone conclusion.