By Ray Linetti
Did you know that in 2017-18, 65% of Indian millennials raised loans from non-banking financial platforms rather than getting their loan sanctioned from their bank? Did you also know that in 2018, about 71% of the American millennials would rather go to the dentist than speak to their bank? Does this mean that the Banking and Financing Industry is ignoring the data? Not true banks are known as the early adopters of analytics and technology to focus on customer-centricity. And, yet they face the imminent risk of survival from the very disruptive technology that they happen to be sitting on.
This disruptive technology is popularly known as FinTech.
Fintech is a portmanteau of the terms “finance” and “technology” and refers to any business that uses technology to enhance or automate financial services and processes. Fintech is completely disrupting the traditional banking sector –which is long seen as a highly technical, highly regulated industry dominated by giant banks. Right from mobile banking and insurance to cryptocurrency and investment apps, FinTech has broad applications. To better explain the diverse nature of FinTech, let me provide you with a few examples of companies and their FinTech products:
Founded in 2006, this Netherlands based company provides businesses with a single platform to accept payments through any sales channel anywhere in the world. It serves more than 4,500 businesses including Facebook, Uber, and Netflix, processing mobile, online, and in-store payments. According to Statista, its revenue rose from €$98.5 million to a whooping €496.9 million (2014 – 2019), almost 350% CAGR.
Founded in 2012, Avant is an online lending platform that aims to lower the costs and barriers of borrowing for middle-income consumers. It uses proprietary software to rate the creditworthiness of customers for unsecured personal loans and credit cards, at interest rates that range from under 10% to 36%. By May 2019, the company had more than 800,000 customers and had loaned out $6.5 billion.
Founded in 2010, Paytm is a digital wallet company and the only company in India which has produced two decacorns (companies worth more than $10 Bn). Initially, Paytm started as a DTH and recharge platform, with a wallet service to make payments. It has since then forayed into different segments such as payment gateway, payments bank, investments and more. By the end of 2018, Paytm had a customer base of 300 million, valuing at $16 Billion.
Following the example of how these companies have harnessed FinTech, it should not be a surprise to know that the FinTech industry is cashing $4.7 trillion in annual revenue, and $470 billion in profit, as estimated by Goldman Sachs. Another point to note is that the figures refer to the Pre-Covid-19 era, where lockdown and social distancing norms were rather a fantasy than reality.
Surfacing to the present, the CoVID- 19 era, highly characterized by social distancing norms and the fear of contracting the malady through contact, has opened floodgates for the development of the FinTech industry worldwide. In fact, in India, what demonetisation failed to achieve, the outbreak got its cash-obsessed citizens to switch to online payments.
In June 2020, the value of transactions on the Unified Payments Interface, a platform created by India’s largest banks in 2016, reached an all-time high, despite the slump in digital payments owing to consumers’ preference on holding onto cash. This era is a pivotal point in the evolution of the FinTech industry, but the future holds in the hands of the harnesser.
For an economy like India, which has been ranked second in terms of its adoption rate for fintech products worldwide, what is the future scope of FinTech? The answer lies in the ability of companies to shape the ‘New Normal’ – in terms of:
Collaboration in the times of Competition
Unlike the popular opinion, FinTech and Banks are not opposing forces that will compete for the top spot in the Indian Financial market. Instead, both of them must partner to reap the benefits. FinTech startups have to rely on banks to get their initial funding and often to deliver their core products. On the other hand, banks can invest in FinTech startups to leverage new technology and upgrade their existing operations and offers.
For instance, the successful collaboration between CurrencyCloud and Monese.
Monese is a mobile-only bank in the UK that allows opening a bank account in 3 minutes with a mobile phone and a passport. The only thing it was missing was the ability to send payments across the world. CurrencyCloud offered them access to their payment network with an API that they could integrate in 2 hours. As a result, forex costs reduced by ten times, helping Monese to hit the 1.8 million transaction mark before their $10 million series A.
Innovating in the face of Innovation
The only way to survive and ride over the waves of this disruptive technology is creating new and innovative products for the customer group. Identifying their financial needs and goals can help Indian Fintechs to truly shape the new normal.
For instance, an American company named SiFo, whose main customer base consists of students and newbie investors who wish to dabble in the stock market came up with an innovative product called as Stock Bits, which allows consumers to buy and sell fractional shares of 50 popular stocks for as little as $1. With an investment priced at a dollar, consumers are in a better position to diversify their portfolio without getting too much money involved.
Tap the Untapped
For the first time, India has more internet users in rural areas than in urban cities. The latest report by the Internet & Mobile Association of India (IAMAI) and Nielsen showed rural India had 227 million active internet users, 10% more than urban India’s about 205 million, as of November 2019. This has brought about new and unserved markets that can be reached.
For instance, Tala – a data science company that makes credit accessible to underserved areas around the world. Currently working in Kenya, Tanzania, Mexico and the Philippines, Tala users can apply for loans through the Tala app. Most of them obtain credit in less than ten minutes. Tala helps users build a digital credit history or financial identity without traditional requirements by using alternative data to approve loans and assist customers in establishing credit.
Consolidation in the times of Diversification
Indian consumers are well known for their diversification habits, be it with their investment portfolio – with a mandatory investment in Gold to cushion from the stock market shares; even with banks – consumers tend to invest in multiple bank products across multiple bank accounts. Holding more than one bank account is quite common among Indian consumers. Hence, FinTech companies can create a one-stop personal financial dashboard to review their balances from multiple bank accounts, pull the money and push the money in real-time.
FinTech is here to stay and Millennials will ensure it stays. We must look out for innovations such as the rise of Robo-advisors in stock trading, the use of blockchain in anti-money laundering efforts, and the decentralization of global payments.