India Emerges as a Key Player in the Global Fintech Landscapeby Rebecca Oi March 2, 2023
The fintech industry in India is experiencing rapid growth due to various factors. One of the primary drivers is the increasing penetration of the internet and smartphones, enabling access to digital financial services.
Additionally, the country’s large and young population presents a significant opportunity for fintech companies. The government’s push for digital payments and financial inclusion has also played a crucial role in the country’s fintech sector’s growth.
According to McKinsey’s report, India’s digital payments industry could reach US$1 trillion by this year, fuelled by a surge in online transactions, a growing number of mobile users, and favorable government policies. The report also estimates that India’s alternative lending industry could reach $350 billion in the same year.
Additionally, the fintech market in India is expected to grow at a compounded annual growth rate of approximately 25 percent and reach a valuation of around US$1.01 trillion by 2026. This growth projection is supported by India’s rapidly growing digital infrastructure, a favorable regulatory environment, and the government’s push toward financial inclusion.
In India, alternative lending and payments are becoming the primary categories in the fintech industry. According to a PwC India report, the alternative lending market in the country is projected to grow at a compound annual growth rate (CAGR) of 25 percent, resulting in a value of $460 billion in the current year.
The report further predicts that digital payments in India will grow at a CAGR of 20 percent from 2021 to 2025.
The growth of fintech investments in India
With a significant share of 14 percent in global funding and ranked second in deal volume, the Indian fintech market has secured US$29 billion across 2,084 deals. In the financial year 2022, the fintech sector in India received funding worth US$8.53 billion through 278 deals.
According to projections, the digital investment market will be valued at US$14.3 billion by 2025, representing a substantial increase from its 2021 value of US$6.4 billion. This growth is expected at a compound annual growth rate (CAGR) of 22.4 percent over the next five years.
As a result, India’s fintech industry has experienced rapid growth, leading to the emergence of several innovative fintech companies offering a range of financial services, including digital payments, lending, and insurance.
Furthermore, the government’s push towards a cashless economy and digital payments has also contributed to the growth of fintech in the country.
India’s progressive stance on digital payments
The Indian government’s continued focus on promoting digital payments was recently reiterated by the Finance Minister, Nirmala Sitharaman, during the Union Budget 2022-23 announcement.
The government’s emphasis on advancing digital payments is motivated by multiple factors, including enhancing financial inclusion, transparency, accountability, and promoting economic growth.
India’s digital payments market is poised for significant growth and is expected to increase more than threefold, from US$3 trillion to US$10 trillion by 2026.
This unprecedented expansion will result in digital payments (non-cash) accounting for nearly 65 percent of all payments by 2026, meaning that two out of every three transactions (by value) will be digital.
Consequently, the government has introduced several initiatives to promote digital payments in the country. A notable example is the launch of the Unified Payments Interface (UPI) in 2016, which has revolutionized the Indian fintech industry. UPI has facilitated effortless peer-to-peer payments and transactions, thus broadening digital payment accessibility to millions nationwide.
Moreover, the Indian government has introduced other digital payment initiatives to promote the widespread adoption of digital payments, such as the BHIM app, Aadhaar Pay, and Bharat QR. These initiatives have helped create a more conducive environment for digital payments, making it easier and more convenient for people to transact digitally.
Furthermore, the government’s initiatives, such as Jan Dhan Yojana, which aims to provide access to financial services to the underprivileged, have also contributed to increased consumer adoption of fintech services.
Fintech innovation surges in India
Innovation is a critical aspect of the fintech industry, and India has shown tremendous progress in this area. The number of fintech startups recognized by the Department for Promotion of Industry & Internal Trade in India has exceeded 2,000 and continues to multiply.
India’s fintech startups also focus on developing innovative solutions for various sectors, including banking, insurance, lending, and wealth management.
For example, Paytm, one of India’s leading fintech companies has launched Paytm Money, a wealth management platform that allows users to invest in mutual funds and other financial products.
Similarly, Policybazaar, an online insurance aggregator, has revolutionised the insurance industry in India by providing consumers with a platform to compare and purchase insurance policies.
Additionally, Zaggle Prepaid Ocean Services, a B2B2C software-as-a-service fintech firm, offers enterprises channel expense and incentive management services, enabling them to digitize various operational processes involving expenses for their internal teams, vendors, and distributors.
The challenges confronting India’s fintech industry
The fintech industry in India has grown tremendously over the years, presenting various opportunities and challenges.
The increasing digitization of financial services has led to a rising risk of cyber-attacks and data breaches, making data and payment security one of the most critical challenges faced by the fintech industry.
A recent study found that India has emerged as one of the most targeted and vulnerable countries to cyber-attacks globally. Out of the 829 million cyber-attacks detected and prevented by the firm in the fourth quarter of 2022, nearly 59 percent were aimed at India.
Furthermore, the complexity and inconsistency of financial regulations across different states present a significant challenge for compliance in the industry.
The expansion of DigiLocker services is an advantageous development for fintech companies, offering a secure platform to store and share documents with regulatory bodies, banks, and other entities.
The lack of awareness among end-users about fintech services is another industry challenge. Many consumers in India are still hesitant to adopt digital financial services due to a lack of understanding of how these services work.
According to a recent survey by Mastercard, 76 percent of Indians still view cash as a safer payment option. Notably, 82 percent of this group belonged to the middle-aged category, which spans from 44 to 57 years of age.
To address this issue, fintech companies must invest in educating their target audience and increasing awareness of the benefits of their services.
Working alongside legacy systems like banks is also a significant challenge for the industry. Many financial services are still conducted through traditional banking channels, making it essential for fintech companies to collaborate with banks to ensure a seamless user experience.
Ensuring user retention and providing a positive user experience are crucial challenges for the Indian fintech industry. With numerous companies vying for market share, it is imperative to retain customers by delivering personalized, efficient, and user-friendly services.
By addressing these challenges, the Indian fintech industry can continue to grow and evolve, offering innovative solutions to consumers’ financial needs.