2017: The year of the customer

Year 2017 proved to be a significant milestone in the growth of financial services in India in general, and for fintech in particular. Demonetization sowed the seeds for rapid adoption of digital payments and banking. Fintechs have helped accelerate the growth immensely through innovative products and solutions. Investments in the fintech space in India also witnessed frenzied activity this year, with total value of investments jumping by 388% from $383 million in 2016 to $1,868 million in the first three quarters of 2017, according to industry database CB Insights. This got further impetus due to a number of favourable guidelines by the regulators in consumer facing sectors. Multiple events and activities in the fintech sector crystallized together, and carved out an interesting journey for consumers in 2017.

With over 1 billion mobile phones, 325 million broadband connections and 306 million new bank accounts, India became a case study in digital financial inclusion, driven by the Jan Dhan Yojana, Aadhaar and mobile (JAM), as reported by the communications ministry. Such efforts brought more people into the formal banking ecosystem and fintech innovation helped create solutions that could be customized for particular strata of customers.

The alternative lending industry—which focussed on people who did not have access to formal credit lines due to lack of sufficient credit history—continued to attract attention. More than 225 alternative lending companies were founded in India in 2017 and the segment was the second most funded in India’s fintech space, as per data from an industry database Tracxn.

Earlier, one of the biggest challenges that firms had faced was the lack of regulatory support for new lines of business. The year marked a significant shift in this space as well, with the Reserve Bank of India (RBI) releasing guidelines for person-to-person (P2P) lending. RBI’s directions were a significant step towards creating a differentiated and sustainable lending model in India.

One of the roadblocks in user experience in the past years was the inefficient, costly and broken verification processes at the time of customer registration. This is now history thanks to the advent of Aadhaar and India Stack. According to the National Payments Corporation of India (NPCI), eKYC verifications have jumped almost 77% to 84 million in FY18 over FY17, speeding up the on-boarding process and reducing costs significantly.

The next stage was the transaction environment. The growth story of Unified Payments Interface (UPI) was one of the key highlights of the year. As per NPCI data, UPI volumes stood at 105 million in November 2017, an exponential jump of more than 10 times in just 6 months. Quite a few companies such as Paytm, PhonePe, and Google have rolled out innovative solutions utilizing UPI. Along with this, there were two other significant developments in the government’s push for digital payments. One was the lowering of merchant discount rate (MDR) for smaller merchants and subsequently waiving MDR for transactions up to Rs2,000. Many fintech firms are also contemplating offering EMI and direct debit options over UPI.

Many banks also moved to virtual assistance and chatbots powered by artificial intelligence (AI), and we can expect more localised and intuitive avatars in 2018. Watch out for emergence of voice as the new interface.

Over the past 2 years, traditional financial institutions started perceiving fintechs as collaborators rather than competitors. In 2017, almost 46 strategic partnerships and deals took place between lenders, payments companies and fintech innovators. Some of these were the tie-ups between Paytm and ICICI Bank for short-term interest-free credit lines; Amazon India and Bank of Baroda for unsecured micro loans; Mobikwik and Bajaj FinServ for offering all features and benefits of Bajaj Finserv EMI cards over a digital payments wallet; Fisdom and Lakshmi Vilas Bank for a robo-advisory platform; and between Senseforth and HDFC Bank for chatbots.

Retail investment has also seen a steep rise this year. According to data from the Securities and Exchange Board of India (Sebi), mutual fund folios have grown by over 9.5 million in the first eight months of the current fiscal year to an all-time high of 65 million by November-end. Apart from consumers looking at mutual funds as a preferred destination to park their money post-demonetization, this growth can also be attributed to a variety of factors, including better offerings by incumbents, and the rise of robo-advisory platforms.

Along with the segments mentioned above, a few others could also emerge and will be exciting to watch. One of the areas currently with low digital penetration in India is insurance, but there are many new online insurers and marketplaces coming up that seek to offer seamless and digital distribution models. Traditional insurance companies are looking to partner with them to expand penetration, and are scouting for data partnerships with drone, wearables technology, IoT, telematics and other types of tech startups to augment risk assessment and offerings.

PSD2 (second Payment Services Directive) guidelines around open banking in Europe may see a positive impact in India as well, with banks and fintechs further collaborating over innovative application programming interfaces (APIs). We can also expect more data related partnerships. Blockchain is poised to enter mainstream with use cases such as digital identity, cross-border payments, and enabling trade finance powered by platforms from enterprise application providers. .

In retail investing, discount brokerages and robo-advisory platforms will continue to fuel growth and low-cost investment options. Whereas cryptocurrencies and ICOs are an emerging area across the globe, and have also seen interest from retail investors in India. But most are treading with caution as it is a regulatory grey area.

Overall, the picture looks promising for the consumer and they should continue to remain the king with FinTechs challenging and also working together with traditional financial institutions to provide better, faster, larger and more secure catalogue of innovative services.

Vivek Belgavi, partner—financial services (fintech and technology consulting leader), PwC