Importance of Fintech to India

On 8 November 2016, the Government of India announced the demonetization of all ₹500 and ₹1000 banknotes, it set off a wave of Fintech growth in India. Fintech is now mainstream and a critical segment for the future of India's economic growth.

Here are 10 reasons why Fintech is very important to India.

1. Economic Growth
The payment segment has been a major enabler of economic growth. Electronic payments systems added $300B to GDP in 70 countries between 2011-2015, which resulted in ~2.6Million Jobs/Yr
Each 1% increase in electronic payment produces ~$104 B in consumption of goods & services

2. Financial Inclusion
Fintech opens up opportunities for the previously unbanked population to access modern financial instruments. For people living in poverty or at the fringes of the economy, Fintech lowers costs of Financial transactions: Lower cost of credit and other banking services.

3. Speed & Quality of Innovation
Fintech drives improvements in traditional financial services – which will replace legacy systems. Eg: Peer-to-peer lending, Robo advisors, Hi-frequency trading

4. Business Sustainability & Scalability
Fintech has made businesses sustainable & Scalable. The entire e-commerce economy was built on e-payment systems and new business models such as Ridesharing: OLA, UBER, Metro Bikes, etc were developed on Fintech e-payment systems – which allows these businesses to scale and grow rapidly

5. Transparency & Audits
All digital transactions are inherently auditable hence bringing greater transparency into the system. Data sharing in real-time across banks & financial institution reduce fraud risks and reduces the cost of regulatory processes.

6. New Value Streams
New fintech technologies are creating new business opportunities. Bitcoin & other cryptocurrencies have spawned whole new businesses.

7. Market Curation & Structural Transformation 
Fintech technologies are transforming other industries. For example, healthcare record management, Real estate, land registration with Blockchain, etc. This is bringing structural reforms to businesses that were on the fringes of the regulated economy into the mainstream economy.

8. Collaborative Culture
New Fintech businesses are built in collaboration with other businesses. For example, Blockchain is based on open collaboration between members who host the shared ledger.

9. The Scale of the Industry
Fintech has grown from being a niche to mainstream. Today Fintech companies are collectively worth more than $500Billion and directly employ millions of men.

10. Borderless Innovation
Technological innovations in Fintech can be quickly adapted across borders, creating new competition and new opportunities for existing players. This rapid innovation is bringing whole new financial hubs and opening new markets.

Fintech & Rise of Digital Banks

All around the world, we are seeing a new class of banks: The digital banks. These fintech pioneers are redefining the banking industry by connecting with a new generation of mobile-first consumers.

Digital banks are an online only version of a normal bank offering Savings, Checking Accounts with payment, deposit and withdrawal services – but only through web: PC & Mobile devices.

Proving low cost banking services to a new class of customers: People who are highly mobile, tech savvy and unbanked!

Digital banks offer three main services:

1. Payment Gateways

• A seller service, often provided by e-commerce store or e-commerce enabler
• Authorizes a credit card or online transfer to merchants & businesses
• A virtual Point-of-Sale terminal for online businesses

2. E-Wallets

• Mobile App used to make payments to other mobile wallets
• Digital wallet can be set up to transfer funds to/from a bank account
• Popular banking tool for unbanked.

3. Remittances

• International Money transfers between individuals
• Nearly instant money transfers and low fees to lure customers away from traditional banks
• Uses Bitcoin or crypto currencies to avoid regulatory authorities

Current State of Digital wallets in India

This article is a follow up to my previous blogs and revisit the impact of demonetization on small businesses and common man.

It has been 18 months since demonetization and surprisingly, at the street level, India still remains a predominantly cash economy. Only the major industries have moved towards a complete digital economy for a vast majority of their transactions. 

Indian digital wallet companies mainly consists of numerous startups such as Paytm, Mobikwik, and Oxigen Services, etc. These startups along with Airtel and Jio, the two major telecom service providers have played a major role in moving the Indian economy towards digitization and the industry has crossed Rs 12,000 crores of transactions per year in 2017!

While this is a significant number, year 2018 does not seem to be a smooth sailing and I suspect year 2018 will turn out to be a very tough year for digital wallets. 

What Changed?

RBI (Reserve Bank of India) imposed one major guideline for Digital wallet services to fulfill their KYC (know your customer) information & February 28, 2018 was the deadline.

This directive unnerved India's unorganized sector and refused to cooperate and many users were willing to move away from Digital wallets back to cash based transactions. As of march 2018, only 10% of the total customers in the digital wallets industry had submitted their KYC information (which was to link their Aadhar card with the account - by providing biometric information).

This implies that nearly 90% of existing customers were willing to walk away from digital wallets!

A 90% loss in customer base can kill the industry.

But on the ground, things are really not that bad. Though 90% of customers walked away, the total volume of transactions fell by 21.3% and the total value of transactions fell by 16.7% only.

This implies that there is a strong silver lining to the dark clouds and digital wallets companies can continue to grow only if they innovate and develop newer services.

Opportunity Ahead

As per information released by the RBI, the effect of demonetization was at its peak in January 2017 and the overall number of transactions via digital wallet during this period was reportedly about 295.5 million. Despite such a significant rise in digital wallet transactions, the percentage of transactions used for purposes of buying goods and services remained at just about 29 percent, at around 86.8 million transactions and only a minor percentage of all transactions conducted with digital wallets, was used for the purpose of purchasing goods and services.

Digital wallets has now become the first step in formal banking for a whole new generation of customers. For Several young adults, a digital wallet is their first bank account!

It is the nature of this India customer base, which results in such a high skew of the results: 90% drop in customer base results in only 16.7% drop in transaction value. This implies that most customers had very little transactions.

Small & kirana business have returned to cash

Small & kirana business, especially those in small towns and rural areas adapted digital wallets in the initial days on demonetization and now have returned to cash - mainly because of high transaction costs. PayTm charges 3% transaction fees to transfer funds from PayTm account to a regular bank account. 

Majority of small & kirana businesses do less than Rs 2000 of sales per day, and paying 3% transaction fees was unacceptable for small businesses!

eCommerce accounts for a tiny fraction of retail sales

eCommerce accounts for just 2-4% of Indian retail, and only 8% of Indian retail sales happens through organized retailers (such as Big Bazaar, Reliance Retails etc). 

This means that nearly 90% of retail sales is still happening over cash and there is a good opportunity for Indian Digital wallets to win them over - only if the transaction fees are eliminated.

Impact of UPI

UPI or Unified Payments Interface developed by the NPCI. 

The disruptive effect of digital wallets was met with a rapid and effective response by the banks; they quickly launched their own mobile wallets. SBI came up with SBI Buddy, HDFC Bank launched PayZapp, and ICICI Bank offered ICICI Pockets digital wallet - all powered by UPI. 

UPI permitted real time money transfer from one bank to another via mobile phones.

This new payment interface was not available in Digital wallets and that has hindered Indian digital wallets.

Future for Indian Digital Wallets

Year 2018 will be marked as the year of "crossing the chasm" for most digital wallet providers. Companies that can innovate and offer lower cost services (when compared to traditional banks), will ultimately win the battle against use of cash for transactions.

Indian Digital wallet providers must provide an alternate banking model that is affordable, transparent & help customers from financial standpoint.

In Indian context, Indian Digital wallet providers may also have to enable independent agents to work/operate as a human interface with whom customers can talk/call/interact when they have problems. A pure 100% online bank cannot win small business owners - many of them are not fully literate or knowledgeable in digital banking terms/technology.

Use of local agent also helps in onboarding new customers, getting their KYC details and initiating new customers into the world of digital banking.

Indian Digital wallet providers have to innovate beyond payment banks and offer a whole suite of banking services - either directly or via partnering with existing banks, while keeping a sharp focus on winning Indian small businesses and kirana stores. For example offer Peer-to-peer lending services (like Monex), offer investments services: Mutual Funds, Debt funds and government investment schemes etc.

Indian Digital wallet providers have to create a completely branchless experiences. Digital wallet companies need to move beyond mobiles and embrace web banking services and offer value added services - such as international money transfers: Global money remittances, insurance, GST filing, tax planning, etc.

Lastly, Indian Digital wallet providers have to embrace cash! Customers should be able to convert their money in digital wallets into cash without transaction fees.  Though this sounds counter intuitive, there are customers who need cash for their daily living - for example: to buy a bus ticket in DTC or BMTC busses, To pay traffic fines, To pay for postal stamps, etc. There are thousands of areas where government agencies do not accept anything but cash.

Closing Thoughts 

From a business perspective, Indian mobile wallets sector is currently fighting to survive and overcome its hardest phase. The industry has to innovate and continue fighting

I believe that the effect of the KYC mandate on the digital wallet industry is limited. Over the long term, the mandate will prove to be advantageous and enable them to be more competitive with the current banking systems. New innovations will solve the problems of interoperability between different payment banks, debit/credit cards and banks.

Digital wallet industry will emerge from this crisis stronger and better. 


Read more at:

https://economictimes.indiatimes.com/articleshow/62229424.cms?
https://inc42.com/buzz/mobile-wallets-drop-users-full-kyc-rbi/
==

What will Drive Server Refresh

Corda - A Next Generation Blockchain Technology

Corda is a distributed ledger platform designed to record, manage and automate legal agreements between business partners. Designed by (and for) the world's largest financial institutions, it offers a unique response to the privacy and scalability challenges facing decentralised applications

Corda's development is led by R3, a Fintech company that heads a consortium of over 70 of the world's largest financial institutions in the establishment of an open, enterprise-grade, shared platform to record financial events and execute smart contract logic.

Corda is now supported by a growing open-source community of professional developers, architects and hobbyists.

What makes Corda different?

1. Engineered for business
Corda is the only distributed ledger platform designed by the world's largest financial institutions to manage legal agreements on an automatable and enforceable basis

2. Restricted data sharing
Corda only shares data with those with a need to view or validate it; there is no global broadcasting of data across the network

3. Easy integration
Corda is designed to make integration and interoperability easy: query the ledger with SQL, join to external databases, perform bulk imports, and code contracts in a range of modern, standard languages

4. Pluggable consensus
Corda is the only distributed ledger platform to support multiple consensus providers employing different algorithms on the same network, enabling compliance with local regulations

Closing Thoughts 

Corda provides the opportunity to transform the economics of financial firms by implementing a new shared platform for the recording of financial events and processing of business logic: one where a single global logical ledger is authoritative for all agreements between firms recorded on it. This architecture will define a new shared platform for the industry, upon which incumbents, new entrants and third parties can compete to deliver innovative new products and services. 

Disruptive influence of FinTech on Indian Banks

Indian banking & financial services industry has endured a tumultuous months following November 8th 2016 announcement of demonetization.

Banning of high value currency notes and the subsequent cash shortage and financial crisis is still taking their toll on banks. Indian banks were already under tremendous pressure due to bad loans and are now facing increased demands from retail customers. Many banks are still struck with slow & archaic online payments, with users needing to type in user names, passwords, 16 digits from the credit card and more. It is no wonder that the public trust and confidence in Indian banks is arguably at an all time low.

It is no surprise that consumers and businesses alike have moved enmasse to newer financial services which are enabled by FinTech!

FinTech is a catch-all term for the nascent revolution in the financial services space. Mobile payment systems that use technology and Internet platforms to offer a wide range of financial services. FinTech now offers a genuine alternative to traditional banking and payment systems offered by financial services firms such as Visa & Master card!

Indian customers & businesses are tired of the oligopoly of the state owned banks and duopoly of Visa/Mastercard in payments services sector.

Mobile payment systems offer an exciting, democratizing development which offers tools and services needed to meet the demands of vast majority of Indian small businesses and consumers. This denotes a major paradigm shift in banking and it will disrupt existing financial systems.

Disruption

Last few months post the demonetization, Fintech based payment systems in India - PayTM, MobiKwik, Freecharge, mPesa etc., have moved aggressively to get new customers and businesses, thus loosening the vice-like grip of banks & card payments. PayTM has made a huge splash in the 2016 and has changed the way consumers view payments.

Small Merchants in India have openly embraced FinTech payment services - mainly because of ubiquity of smart phones. More and more Indians are using smart phones, which enables banking and payment transactions to be completed electronically.

This transition to mobile payments also coincided with rapid adaptation of 4G data services.  In last 4 months alone, more than 125 Million users have taken 4G data services. This enabled rapid movement to digital payments. Rural businesses & merchants are accepting mobile payment through services like PayTM, MobiKwik,  UPI, etc.

Given the increasing usage of smart devices and mobile payment methods, there will be rapid growth of FinTech industry. I think in the near future we will see everything being paid for with our mobiles– for example paying Rs 10 for cup of coffee!

The movement towards mobile payment systems with newer payment companies using FinTech is just the beginning. Eventually customers will stop using credit/debit cards or cash, opting for mobile payments instead. This denotes the first move away from traditional banking transaction.
Given the increasing usage of smart devices and other contactless payment methods to complete transactions, business to consumer growth seems a natural direction for the FinTech industry.
In the next phase, people will start investing from their mobile platforms. Mobile payments systems will evolve to offer interest bearing investment opportunities - in form of fixed term deposits, Recurring Deposits or Mutual Funds etc., which can be accessed directly from user mobile devices.

As technology and consumer tastes continue to evolve, the market for financial services must keep pace, and learn to evolve. Newer FinTech companies will lead this new revolution.

Traditional banks, insurance & financial companies will struggle to change and adapt to this new paradigm. Banks in India will particularly find it hard to change because their customer experience management, based on legacy systems and legacy thinking, is lagging behind.

FinTech companies on the other hand have no technical debt, and they design the solution based on end user experience, therefore FinTech companies will have the upper hand when it comes to building better services.
  
Closing Thoughts

In the short term, FinTech in India will evolve & grow around the consumer banking space - with focus on consumer banking, making it easier for consumers to pay, and making it easier for small businesses to transfer money to other business entities. FinTech companies will unbundle banking & financial services and pick the 'cherries out of the cake', focusing on high-margin, highly scalable product and service areas, while leaving the commoditized or low margin services to banks.

Banks have the choice of either becoming 'platform utilities' or turning themselves into FinTech companies and building up their own FinTech ecosystems via various FinTech partnership and innovation models, and corporate venturing strategies.

The paradigm has shifted. The influence of FinTech is sure to be felt for years to come. Thanks to a perfect storm of changing banking rules, market forces and business cultures, FinTech has proved to be a disruptive force in Indian banking circles, a trend which looks set to continue well into 2020.

Fintech - The Success Factors

In today's changing world, for Banks to remain competitive, Banks must commit to transforming themselves into fully-digitalised businesses and must operate like a true technology driven company.  

From our perspective, 10 key aspects that have defined success in Fintech companies that Banks needs to adopt -

1. Customer experience - Fintech companies constantly focus on improving customer experience and learn from every interaction. This is the mantra of success.

2. Digitalization - Create a "stretch vision" for digitalization blue print and make CxO's accountable for it. The "stretch vision" are based on what digital outcomes and it should not be constrained by digital interactions or by current technologies or by as-is scenario. These stretch visions should become inspiration for new innovations.

3. Technology is a key enabler – Fintech's are changing the world through agile platforms and new technologies. Banks must acquire new capabilities and technologies and need to invest in promising technologies. Banks must be willing to take on technology risks and bet on emerging technologies to build new parallel solutions/services - instead of the relying only on traditional ways of relying on "Tested & Proven" solutions.

4. Talent Management - Banks must invest on right talent, if needed on a global scale. Companies have to hire people from other regions/nations & en masse. For example, Indian banks should not shy away from hiring people in Silicon valley. Banks should note that they are hiring digital skills not industry experience. To succeed, hire the right talent and change internal staffing processes to do so – if required.

5. High Performance Culture - Success in new technology development depends on having the right digital talent. Key employees must be protected from "business as usual" attitudes and teams need to be built on high performance attitude. This implies changing existing HR polices,  benefits & operating models etc. For some banks, it makes sense to up a separate business unit that nurtures Fintech initiatives. This unit operates outside the "Traditional Banks" and does not suffer from traditional organizational hierarchies and limitations. in order to increase collaboration, productivity and "mind-shift".

6. Data driven decisions - Banks must shift their mode of operations from process driven to data-driven. Data analytics drives every activity and provides insights to decisions. Data analytics and modelling will have to continually evolve and keep adding to its value proposition. Banks must embrace live testing in Fintech as they adopt agile development and work in "live-beta" environments - in order to increase the pace of innovation and acceptability.

7. Create Eco-System through collaboration - Banks must build collaboration, partnership, and open transactions to succeed. This essentially calls for a big mind-shift as Banks now need to look at the entire ecosystem and collaborate with the best in the world to create a global value chain. New regulations impose these in forms but this a great way to successes and this helps compete/collaborate with startups.

8. Agility with Zero-waste attitude- Banks must learn to manage development projects like a start-ups with complete agile process. Along with agility, zero-waste based budget approach for technology development is key. All expenses must be aligned with the value creation and not based on effort spent.

9. Scalability – Solutions built must be scalable across the organization and value chain. This implies that all new technologies being developed must have scalability built into its core DNA and solutions developed may be able to rapidly scale for success. Startup fintechs today keep scalability as key requirement and don't face downtime issues. Banks need to fast track this process. For example, PayTM was able to scale up by more than 1000% in one month after demonetization in India seamlessly.

10. Challenge Status Quo - Banks must challenge everything. Status quo is not acceptable when dealing with Fintech which impacts all functions, products, business units and locations. Banks must examine & change (as needed) all aspects of the business: embracing both customer-facing and back-office systems and processes and be more innovative.

Effect of Demonetization - Indian Digital Wallets will see a surge in Usage

Indian Payments companies like Paytm, Freecharge and Mobikwik will see a huge urge in number of transactions in the comming days - as the government bans the use of Rs 500 & Rs 1000 currency notes.

People in cities - mainly metro cities & tier-1 & 2 cities will be forced to use digital wallets to pay for low value transactions. With the bank ATM shut down for today - November 9th and with limited withdrawals till November 18th (limited to Rs 2000/-), I see a huge opportunity for digital wallets.

Today, I saw many Auto drivers accepting PayTM or Freecharge for payments. At lunch hour, I walked by a roadside push cart fruit vendor accepting PayTM!

Digital wallet companies will see 10 to 15 times increase in transactions in this month alone.

Indian Prime Minister Narendra Modi's fight against corruption and black money will be aided by Digital Wallets - aka "Digital India" another major initiative of PM Narendra Modi.

As on November 1st, Digital wallet companies processed 2-3 million transactions/day, but by November 10th, this number will be around 30-40 million!

This could be a game changing moment for digital payment companies!