India’s fintech industry has grown phenomenally over the last few years. We are the third largest fintech ecosystem globally, after the United States and the United Kingdom. Today, New Age fintech startups are known for offering innovative solutions, and there has been a rise in strategic partnerships between the government and fintech companies, launch of new digital products, and state intervention in creating policies conducive for growth of fintech players.
Despite two waves of the Covid-19 pandemic, the total value of investments in the global fintech space increased significantly between 2019 and 2021, led by the payments segment. In fact, according to a study by the Boston Consulting Group and FICCI, India’s fintech companies are poised to grow to a valuation of USD 150-160 billion by 2025.
Clearly, we are moving in the direction of a financial revolution, led by the fintech industry. But is this an indicator that India’s financial inclusion agenda too is heading in the right direction? Are fintech companies in a position to shoulder the responsibility of bridging the country’s financial inclusion gap?
Understanding the existing digital divide in financial inclusion
There is no denying that fintech has brought about a sea change in the financial services sector. Yet, there are a few obstacles that fintech companies and the government continue to deal with when it comes to enabling access.
The launch of the Pradhan Mantri Jan Dhan Yojana (PMJDY) by Government of India led to the opening of millions of new bank accounts. However, in the present day, as much as a quarter of these accounts remain inoperative. This indicates that we may have facilitated access to financial services to a certain extent but enabling citizens, especially the rural population, to actively use them, continues to be challenging. On one hand, getting a certain segment of retail consumers to access financial services remains a challenge, while the demand for credit in the micro, and small and medium enterprise (MSME) segment is higher than the supply.
A report by the International Finance Corporation (IFC) highlights that the total addressable credit gap in the Indian MSME sector is ₹25.8 trillion. The addressable market demand, on the other hand, is ₹37 trillion. Of this, only ₹10 trillion is funded by NBFCs, commercial banks, regional rural banks, and urban cooperative banks. These figures point toward the large demand-supply gap in the country. But looking at the lending market scenario, the formal financial services sector will alone not be able to address this demand satisfactorily. The fintech industry is proving its capability to enable financial services to unbanked and underbanked households.
Fintech’s Role in Accelerating Financial Inclusion
The degree of financial inclusion is measured in three dimensions: access to financial services, usage of financial services, and quality of services offered. Here, fintech companies have the capacity to boost access and speed, thereby facilitating more tailored solutions that are easily scalable. Through consumer-friendly processes, fintech companies can propel financial inclusion and credit coverage in an industry that has been dominated by traditional players.
Looking at the trend, this growth is likely to be powered by the unsecured small-ticket size segment and secured collateral-based high-ticket size market. Ultimately, co-lending will emerge as the main operating model in India, and this will push traditional lenders to collaborate with fintech companies to achieve greater competencies. Already, fintech has managed and continues to unbundle the financial services sector in a way that is economically feasible even at a smaller scale of operations.
Several fintech companies are using a combination of technology and local partnerships to reach customers in smaller towns of India. These efforts are helping to increase financial inclusion and provide access to credit to those who may have been excluded from traditional banking services. For instance, (1) payment companies have partnered with local merchants and small retail stores to promote their financial services. These merchants act as agents and help customers in smaller towns to open digital savings accounts, apply for loans and make digital payments using mobile app.
(2) Digital lending platforms have developed mobile apps and a WhatsApp chatbots that allow customers to apply for loans and track their applications from their smartphones. Also, these companies are using alternative data such as Account Aggregator, Affluence score etc to cater to tier-2, 3 & 4 cities in India and help customers in small towns who are new to credit to get various loans.
It is no wonder that there has been a surge in borrowers from Tier-2, 3 and 4 cities, and most customers prefer NBFCs because of their simplified borrowing experience. Both, NBFCs and incumbents are taking efforts to educate users, build awareness around prudent financial management, provide better rates and services on loan products, and strengthen relationships, instead of solely cashing in on a transaction-based model.
Today fintech players enable financial inclusion in their own small ways and have solutions to drive change on the ground. With the right use of tech and support from the ecosystem, fintech players can further boost financial inclusion, improve access to finance, and help expand financial product offerings for different customer segments.
