This article has been compiled by “Rishita Jha” a 1st year student of “Lloyd Law College” Greater Noida Uttar Pradesh.
Abstract- Fintech is fast becoming a global phenomenon, led by innovators and followed closely by academics, and now drawing the attention of regulators. Broadly, fintech is an umbrella term for innovative technology-enabled financial services and the business models that accompany those services. In simpler terms, fintech can be used to describe any innovation that relates to how businesses seek to improve the process, delivery, and use of financial services. While its impact to date has primarily been felt in developing economies like China and India (Ernst & Young Citation2017), it promises to force legacy financial institutions in developed economies to clarify their strategies, develop new capabilities, and transform their cultures. The promise of fintech far outweighs the risks, at least in the medium to long term. Fintech innovations will only become more pervasive in everyday transactions as their adoption increases and more inclusive and open regulatory frameworks allow them to grow. Incumbent financial institutions have no choice now but to reconsider their strategic choices and markets, creating opportunities for strategic collaborations with fintech start-ups. A coherent and pragmatically grounded discussion between businesses, fintech entrepreneurs, and regulators in this direction should aim to discuss the evolution of fintech trends, analyse the changes in supply and value chains created by fintech offerings, and assess the impact of national regulatory processes on cross-border investment and innovation performance across markets.
Introduction- A success story of the FinTech industry, India is frequently portrayed as a global pioneer for technological innovations in finance (IMF, 2022), with results deemed “relevant and applicable for all economies, irrespective of their stage of development” (BIS, 2019). Seeking to strengthen its share in digital payments and encountering opposition from the incumbent US banking sector, Google presented India’ s Unified Payment Interface (UPI), a shared public platform implemented with the support of the Reserve Bank of India to enable real-time payments, as a model in terms of digital infrastructures and policy making (Isakowitz, 2019). Along these celebrations of ground-breaking achievements, current discourses surrounding FinTech in India prominently deploy a narrative of formidable growth on financial steroids: as “a flood of foreign money is washing into India’s startup scene” (The Economist, 2021), industry reports echo the sheer size of industry, with more than 2000 firms founded since 2015 (MEDICI, 2020). In parallel, major Indian cities shine in the global rankings that measure creation rate, investments and valuation. In the latest Global city rankings compiled by Find exable (2021), New Delhi (13th) and Bangalore (20th) ranked ahead of Mumbai (23rd). In the 2018 Global FinTech Hub report, dominated by Chinese and
US cities, Bangaluru (25th) featured prominently, just ahead of Mumbai (26th) (CCAF, 2018). These upward trajectories seem to confirm that “for aspiring financial centres, tomorrow’s geography of FinTech opens up new windows of locational opportunity” (Hendrikse et al., 2020, p. 1517). The portrait of India as an inspirational model by one of the iconic Big Tech giants lobbying for regulatory changes within the heart of global western capitalism, conjugated with the spectacular rise and position of Indian cities in FinTech rankings, raise empirical and theoretical questions for economic geographers. First, beyond the narratives of unicorns, disruption and aggregated ranking indices, the geography of FinTech in India remains largely off the map, leaving unaccounted for the networks of actors and cities that structure the spatial organization of a pioneering industry. This research gap is twofold, as the impact of FinTech on the role and evolution of financial centres in an emerging economy remains also poorly understood. In the context of a global FinTech boom, the growth of FinTech in India therefore questions two central features of India’s financial geography: the historical position of Mumbai as financial capital on a domestic level (Grant and Nijman, 2002); and the enduring peripheral position of Indian cities in global financial networks (Haberly and Wójcik, 2022). Second, India’ status at the forefront of financial technologies interrogates our understanding of FinTech markets and policies framed by the conventional boundaries that underpin the discipline and production of economic geography. The useful and repeated, yet problematic distinction between “banking the unbanked” or
“financial inclusion” for the developing markets, and “transforming banking” in the Global North (Langley and Leyshon, 2020) runs the risk of reproducing a developmentalist approach wherein the economic trajectory of Southern economies remains best understood as a catching up game. Additionally, few studies examine how the re-intermediation of finance affects the role and position of financial centres outside of western economies (Lai, 2020). Yet, as shown by the success of digital payments crafted in Kenya or India (Jacobin, 2021), corporate practises and technological innovations brought by FinTech are transforming banking and financial transactions across advanced and developing economies. As a telling example, the US Federal Reserve eventually announced in August 2022 the roll-out for mid2023 of “Fed Now”, a “flexible, neutral platform” designed to promote inter-bank instant payments (Federal Reserve System, 2022), accomplishing “Washington’s first foray into fintech” (Forbes, 2022).
Although Fintech solutions have not been able to take on banks as the primary fintech solution providers, they have done something different and more inspirational. They have changed the world in a way that businesses, across industries, are taking lessons from Fintech startups. It has been more than a decade since the Fintech revolution came into existence, fuelled by the great financial crash. But every time the banking circles of New York or London are told that a new Fintech startup (financial software development company) is emerging to eat up their lunch, their reaction is the same smirked “will see”. And let’s be honest. Their smirkness birthed by the belief of how difficult it is for Fintech to push them out of business is not a castle in the sky. Even after a decade of their existence, the validity of fintech’s capability to reach heights in the global finance domain is unestablished. There are still no Fintech companies in the Fortune 500 or S&P 500 list. This has kept the industry several steps behind in the banks vs growing Fintech startups comparison. But this can end, once you know how to prepare your fintech startups from not falling.
While there is one thing guaranteed for this year – banks are irreplaceable. But what the Fintech domain must be accoladed for is the continuously rising user adoption rates and all the investments in successful Fintech Sectors it is attracting. Thanks to the digital transformation that is accelerating the change in fintech industry.
What Are Fintech Startups?
The combination of finance and technology gives “financial technology,” which refers to any business that makes use of new technology to enhance or automate financial services and processes. The term is vast and the industry is swiftly growing, serving both consumers and businesses. The number of fintech organizations mushrooming worldwide is shocking. For instance, as per Statistica, in February 2020 in the US, 8,775 startups in fintech were enrolled. In a similar period, there were 7,385 startups in Europe, the Middle East, and Africa, followed by 4,765 in the Asia Pacific region.
The idea of starting up a business which revolves around fintech (financial technology) implies fintech startups.
What Does a Fintech Company Do?
In a nutshell, fintech software development companies make financial services more accessible to the public. These services involve financial transactions processes like saving, investing, and loan processing, among others. And it also encompasses revolutionary financial technologies like blockchain and cryptocurrency.
How do Fintech Companies Work?
Fintech organizations focus on improved speed of service and transactions, a simpler and more charming user experience; and estimating that reduces down on your expenses.
A fintech is both a tech and a finance organization working together. They generally contain a group of designers and developers on one side and market specialists, financial experts and other knowledgeable groups on the other side.
As traditional finance has consistently been monopolized by a small group of banks, it has consistently been to their greatest advantage to keep financial service processes intricate and hard to understand, with an absence of transparency and high pricing.
The adoption and the blessed hand of investors have together charted a Fintech market growth which is poised to be worth US$26.5 trillion in 2022, with a 6% CAGR.
The fintech app development trends added with technology adoption like IoT in Finance and Blockchain in Finance have given rise to a number of new use cases which are being explored by the domain, globally.
Another thing which has brought about this rise in trends is the growing user adoption rate. There are many things that the world loves about the Fintech domain, here are some of the main reasons behind the users’ side of Fintech market growth.
Reasons to use fintech products;
On a different, unpredicted note, fintech app solutions are embedded with some key business lessons for modern-day entrepreneurs. These lessons from startup Fintech are a result of their efforts taken to revolutionize how financial transactions are conducted – in a way that is completely different from the traditional approaches. And how they are behind a long list of problems solved by financial applications.
Policy and regulatory initiatives for fintech industry in India
Given the fintech sector’s competitive existence and overlap with other industries, effective policy and regulation are critical for the sector’s growth and stability. India witnessed a phenomenal growth in cashless transactions with the introduction of demonetisation.
Some of the recent Indian government programmes towards creating a favourable business climate for fintech companies are Unified Payments Interface (UPI), Jan Dhan Yojna, Startup India, Digital India Programme, Recognition of P2P lenders such as non-banking financial companies (NBFCs) and National Common Mobility Card (NCMC).
Challenges for fintech sector
Like with any sector, the Indian fintech sector also faces some challenges that could impact its growth. Some challenges are structural in nature which are likely to have an impact across most segments of fintech.
Absence of fintech specific regulations and regulator
RBI and SEBI are yet to come out with comprehensive and separate guidelines for the fintech sector and it continues to be governed by banking and securities regulations. Increased regulation could hamper innovation – which is key attribute of fintech – and also drive, up operational costs. However, regulatory coherence will support growth of the fintech sector in the long run and help in gaining customer trust – a key factor in attracting more capital. Like any other sector, as fintech sector matures and the start-ups scale-up, they are more likely to be subject to greater scrutiny from regulators.
The key challenge for the regulator is to create an ecosystem fostering innovation, while balancing issues relating to customer protection, data security and privacy. The accelerated rate of innovations in the fintech sector has at times led the regulators to play catch-up and have knee jerk responses to certain market activities, for instance its stand on cryptocurrency, payment regulations and capping of market share by the National Payments Corporation of India (NPCI).
Systemic risk
According to RBSA Advisors, with the huge expansion of fintech and the proliferation in underlying delinquencies due to the nature of the credit flow, it is imperative to have prudential regulation controlling and limiting the system wide risk proliferation. Traditional banks give advances sourced from deposits, whereas fintech start-ups lend from debt funds/equity investments. Thus, the risk can permeate to various categories of people including investors, consumers and enablers.
Data security and privacy risk
The fintech sector has benefited the most from unrestricted data flow. The fintech industry’s biggest issue is the industry’s hidden cybersecurity risks which include data breaches, thirdparty security threats, ransomware, application security threats, cloud-based security threats, and digital identity risks.
To combat the cyber threat and prevent hackers from gaining access to sensitive data, a balanced approach to innovation is needed to support the fintech industry’s growth. A rapid digital transition has forced unprepared governments around the world to step up legislative efforts to protect citizens’ data and rights.
To safeguard the interest of the users, as per Srikrishna committee’s recommendation, the Personal Data Protection Bill 2019 was introduced in the Lok Sabha to make data localisation mandatory for all sensitive personal data (PDPB). Fintech startups’ business models are
highly reliant on outsourcing technical support and cloud services to low-cost, competitive service providers.
Due to data localisation standards proposed in PDPB, start-ups will be unable to choose the most cost-effective cloud service providers from a global supply pool. Data localisation would also require them to participate in product re-engineering in order to comply with complex regulations which will increase technological and operating costs.
Opportunities
In December 2019, the Indian government rolled out the National Broadband Mission to enhance digital communication infrastructure with an investment of $100 billion, including $35 billion for telecom towers, $30 billion for optical fibre infrastructure, and $35 billion for spectrum and research and development. India plans to use optical fibre infrastructure for the rollout of 5G services, which offers opportunities for U.S. companies to supply optical fibre cable, 4G/5G radio equipment, radio frequency frontends and antenna sub-systems, small and large 5G cells, wireline and radio access network solutions, and transmission links.
As part of the National Policy on Electronics 2019, the Indian government launched several schemes for the promotion of electronics manufacturing under its “Make in India” strategy.
With an investment commitment of $30 billion, India aspires to become a global hub for Electronics System Design and Manufacturing as the country’s demand for electronics hardware is expected to reach $400 billion by 2025. The Indian government allocated $7 billion in incentives for electronics manufacturing, $10 billion for a semiconductor and display ecosystem, and $13 billion for allied sectors, including advanced chemistry cells, auto components, telecoms and networking, and solar modules. India’s production of electronics grew from $29 billion in 2014 to $75.7 billion in 2020 and is projected to reach $300 billion by 2025. Revenue from the sale of mobile handsets is expected to triple in 2025 over 2020 levels. The government wants suppliers to provide affordable 5G handsets and mobile devices to further its Digital India initiative, presenting an opportunity for U.S. exporters to supply electronic components, semiconductor/display fabrication units, assembly/test/marking/packaging units, specialized subassemblies, and capital goods.
In November 2020, India launched a draft data centres policy and aspires to become a global hub for the data centre industry with investment of $4.9 billion by 2025. India’s leading companies have announced plans to set up data centres, though many U.S. cloud service providers already serve Indian enterprises. Indian businesses are rapidly digitizing their operations and adopting cloud services to minimize costs. This opens the door for U.S. companies to supply data centres, hardware, computing resources, data storage systems, network infrastructure equipment, and submarine cable networks.
CONCLUSION:
The landscape of banking and financial sector has undergone a phenomenal transformation since 2008 Global Financial Crisis, demonetization and COVID 19, owing to financial technology firms, popularly known as ‘FinTech’. According to MEDICI India FinTech Report 2020 2nd Edition, India had the second highest number of new FinTech startups in the last three years, right behind the US. Also, within FinTech segments, Digital payments have been at the forefront of leading India’s FinTech sector. Lending is the second largest segment in India’s FinTech Sector followed by Insure Tech, Wealth Tech, Neo Banks, Reg. Tech etc.
Over the past few years, India has essayed several guidelines and reforms such as granting multiple licenses for differentiated banking to small finance banks, payment banks and introduced the unified payment interface to include the unbanked population of India in the formal financial services folder, strengthening the major FinTech segments such as payments and lending ecosystem. Initiatives led by the government and regulators for digital India like demonetization, Jan Dhan Yojana, Aadhaar, etc. aided by the growing internet and smartphone penetration, has led to the adoption of FinTech. As more and more customers get on the digital board, FinTech’s will have to focus on building trust and consumer engagement. Especially given the time when cybersecurity is extremely vulnerable. To be critical and to stay ahead of the competition than other FinTech brands, it is necessary to focus on the security along with making the procedure simple for consumers. FinTech has been known for their coming, of age technology owning towards offering the most convenient and flexible options for consumers. It is not surprising that going forward, financial services will offer a customized and local offering to their customers using data analytics. The more and more advances in technology financial services adapt to upgrade their strategies, more growth in this sector is foreseen. This is just the beginning of a huge FinTech market in the upcoming decade. Out of total 21 unicorns in India, ~1/3rd are FinTech companies, Paytm being the highest valued unicorn, at $16 billion. The FinTech market in India was valued at ~INR 1,920 Bn in 2019 and is expected to reach ~INR 6,207 Bn by 2025, expanding at a compound annual growth rate (CAGR) of ~22.7% during the 2020-2025 period. While the FinTech industry is still in its early adoption stage, we believe it is wellpositioned to witness long-term growth in the coming years. The changes will be more focused on digital lending (alternative finance) and open banking. FinTech growth will ultimately create outsized opportunities for firms and help empower them in the digital age.
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