In March of 2021, the Boston Consulting Group (BCG) released a report on India’s fintech industry. The study was undertaken in collaboration with the Indian Chamber of Commerce and Industry (FICCI) to quantify the industry's value potential. BCG's research predicts a remarkable three times multiple in value for Indian fintech over a five year period.
The report puts the sector's current value at $50-60 billion and estimates a valuation of $150-160 billion by 2025. So, what is it about India and its fintechs that supports such an optimistic valuation?
What’s Included in “Fintech”?
For investors new to the sector, it’s important to understand that the term “fintech” doesn't merely refer to the digitization of the finance and banking sector. When we talk about fintech, we're talking about technology-enabled innovation that will change current financial business models. The convergence between financial and business services delivered as "Software as a Service" (SaaS) materially affects and even disrupts a diverse range of markets, creating (net) significant shareholder value in the process.
Initially, fintech efforts were concentrated on payment services and alternative lending. But the sector has since expanded into several sub-segments. For example, in the insurance industry, technology speeds up tedious claims management processing and using data to more correctly assess and price risk on a personalized basis.
However, InsurTech innovation is also changing how the insurance industry works. It is closing the uninsured gap by partnering with online retailers and service providers to offer "point of sale" insurance—and creating innovative new products that address the changing needs of consumers.
WealthTech innovation is changing the face of wealth management with sophisticated investment platforms and automated brokerage services via Robo-advisors. And RegTech is helping the finance industry deal with regulatory monitoring, reporting, and compliance cost-effectively. Cryptocurrency platforms, B2B digital marketplaces, neobanks, and crowdfunding platforms are further examples of how fintech is changing how the world engages with money.
The State of the Indian Fintech Industry
India has just over 2,000 fintech startups, 67 percent of which were created within the last five years. According to the MEDICI India FinTech Report 2020, this makes it second only to the United States for the last three years. Fintech transactions are predicted to reach $138 billion in 2023, up from $66 billion in 2019.
Cumulative investments into the domestic fintech sector in India have exceeded $10 billion since 2016. This was initially concentrated in the Payments and Alternative Finance segments but is now more equitably distributed. For example, in 2020, InsurTechs attracted $215 million, more than four times their 2015 funding.
The country boasts more than 50 fintech startups valued at $100 million or greater. They include four WealthTechs, five InsurTechs, and eight Fintech SaaS businesses. In addition, there are more than 15 early-stage neobanks in India, and in many cases, private banks are partnering with them to improve service delivery.
Government is Driven by the Inclusion of India’s Unbanked Population
In 2016, India underwent a demonetization process to try to counter the problem of "black money"—ill-gotten proceeds of corruption and other crime, or counterfeit money used to sponsor terrorism. The step was also intended to reduce the reliance on cash and create a more sophisticated economy.
Overnight, all high-value denominations (86 percent of India’s currency) were taken out of circulation. It took eight months to replace them with new notes, during which time digital payments increased by almost 30 percent.
However, one-eighth of India’s population remains excluded from formal financial markets. Getting these millions of citizens banked and active in the mainstream economy drives the country’s government to support and incentivize fintech innovation strongly. This is because traditional systems are hampered by the instability of income that characterizes people who participate in the unorganized market, the lack of personal identity documentation, and the absence of verifiable credit histories.
Localized fintech solutions that make use of the internet and mobile devices could help bypass these requirements. For example, their data could be used to develop a picture of the financial status of a given household, bypassing the need for traditional evidence. As a result, Indian regulatory authorities have generally extended broad frameworks and sandbox environments to the fintech sector in the hopes of encouraging innovation.
The Reserve Bank-run unified payments interface (UPI), which allows instantaneous money transfer via a mobile platform, has done much to hasten the take-up of digital payments and promote fintechs. As of May 2021, the 224 participating banks have recorded 2.6 billion transactions worth about $68 billion—a 15-fold increase over the same period in 2018.
In 2019 the Bank released a detailed framework for its Regulatory Sandbox (RS) for startups, specifying entry requirements, preferred technologies, and suggested products. In the same year, the insurance regulator (IRDA) introduced the IRDAI Regulatory Sandbox. And in 2020, the securities regulator (SEBI) released its sandbox framework for entities registered with it.
Indian fintech startups offer investors with a higher risk appetite potential windfalls. With meager financial market penetration rates currently, and a government highly incentivized to increase its tax base, it’s likely things will continue to improve at a rapid rate. A 1.3 billion person population offers a tangible addressable market with much upside.