Varun Rathi, Co-Founder, HAPPAY

Financial Reforms: Disruptive But Shackled with Bottlenecks

A recent report by the Ministry of Finance throws light on why financial innovations often get stalled in India. As per the report, ‘Indian regulators are disproportionately focused on averting scams. This generates a regulatory bias of blocking innovation in order to be safe, and an industry bias of avoiding untested ideas since they expose firms to the risk of frauds.’

In India, regulations have put so many roadblocks that innovation can only occur at a snail’s pace. Worse, the road to financial innovation cannot be travelled at a great speed since India’s financial institutions remain the equivalents of antediluvian Ambassadors and Fiats when the rest of the world is using BMWs and Ferraris.

The Rise of the FinTech Startups: Key Catalysts

Nimble and innovative, Indian FinTech startups are redesigning the financial space with their technological expertise. Some of the key triggers to the growth and success of FinTech startups -

1. Need for Digital Finance - US$ 2billion lost in Transit!

McKinsey estimates that Indians lose more than US$ 2 billion a year in forgone income simply because of the time it takes travelling to and from a bank.

With digital finance, 344 million people could gain access to financial services for the very first time. Convenience, cost, and the range of financial products would dramatically improve for consumers. Government stands to gain US$ 110 billion by reducing “leakage” in expenditure and tax collection. For financial service providers, the cost of offering customers digital accounts can be 80 to 90 percent lower than using physical branches.

2. Smartphone Adoption

India is currently the world’s third largest market for smartphones and will reach 314 million mobile web users by 2017. The transition of India’s mobile network into a legitimate software services platform is helping a lot of FinTech startups to flourish.

3. Interest from Venture Capitalists

Investors are beginning to believe that fintech is more than just payments technology and are investing in a variety of sub-segments such as lending, wealth management, credit reporting among others.

When asked about the potential of Fintech – David Gowdey, Managing partner at Jungle Ventures said that, “In India, there is a large population that don’t have access to consumer credit, they don’t have banking relationships, payments stored value. Once you have stored value, you can buy things and use those credits for all kinds of purchasing. I think the technology that these startups bring forward is an enablement for people to become part of the broader banking ecosystem.”

4. Support from the Government & Regulators

Today, Government along with regulators such as SEBI and RBI is aggressively promoting cashless and digital economy and strengthening the infrastructure required for startups to flourish. Couple of initiatives taken by the Government include -

• The Startup India initiative launched by the Government of India includes US$ 1.5 billion fund for startups

• Income tax exemption for start-ups for first three years.

• Tax rebates for merchants accepting more than 50 percent of their transactions digitally.

• Surcharge on online and card payments for availing of government services proposed to be withdrawn by the Ministry of Finance.

• Exemption on capital gains tax for investments in unlisted companies for longer than 24 months

• Introduction of “Unified Payment Interface” with NPCI, which holds the potential to revolutionize digital payments and take India closer to objective of “Less Cash” society

5. Collaboration by Financial Institutions

The BFSI community no longer view FinTech startups as competitors. Instead they’re tapping the eco-system and partnering with startups. For this they’re adopting few strategies:

1. Via investments in startups: Citi Bank, Barclays and Goldman Sachs have launched fintech-focused accelerator programmes.

2. Via partnerships (in point-of-sale hardware, credit deals and social lending): SBI has teamed up with Ezetap to provide mobile POS devices. Bank of India offers a wal­let from Paynimo. RBL Bank with Happay of­fers co-branded expense cards for businesses.

3. Via nurturing talent: Yes Bank collaborated with T-Hub and three academic institutes to set up a centre of excellence and app store for the fintech startups.

6. The Release of API-based Services

UPI is a platform through which a person can transfer money to another person’s bank account via their mobile phone number.

India has exposed six core technologies: UID, UPI, eKYC, Mobile-based Digital Signature, Digital Locker (which eliminates the need to submit a paper document after the first time) and Digital Consent (which allows people to easily, transparently and securely make their profile and transaction data available to third-parties for services). Together, such real-time digital services will enable FinTech startups to digitize and simplify everything from bank account creation to border security, from voting and subsidy distribution to tax filing and refunds across the world.

What lies Ahead?

FinTech startups will continue to create transformational waves across the financial ecosystem in India. They will not only help financial institutions improve their back-end processes and provide a competitive edge, but will also offer customers a smooth user experience, more value added services and an interactive marketplace.