State of Fintech in India

Introduction

First thing first, “what is Fintech?” Well, my definition is very simple, “a financial services organization that runs their builds and manages their own technology stack. Specially the components that are mission critical for their business.”

Why is this an advantage? Almost all the incumbents rely on outsourcing or licensing technology from various technology companies who had built their flagship products 20–30 years back and their latest iterations of these products are modifications on those age old products thus not abreast with contemporary needs. Having control over the technology stack gives Fintechs the advantage to move at a much faster pace to the changing needs of the market.

One might come across many start-ups claiming to be Fintech without even having an in-house technology team. In my opinion they are not Fintech and in long run they will not be able to deliver to their promise in long run.

In simple words, “Only advantage an start-up has over any incumbents is speed.” Rest everything can be matched by bigger competitors by virtue of having access to more resources than you.

Having established above, let me spend some time on the biggest flaw with the current situation. Manufacturers of Financial services products create a product and then go out in the market hunting for customers who fit their product. No wonder except for savings account and payments, no other FS product touches more than 15% of Indian population. The credit for payments services being used by larger populace goes to the fact that it is essential, even then still 80% of transactions happen in Cash.

Payments

The most used and talked about financial service is Payments. Without getting into too much dissection of the market let me directly rush into my vision for the future of Payments. RBI is contemplating regulating payment processors, once such regulation is implemented it will pave way for opening up the payment market from the clutches of banks. Banks do not deserve to be at the center of Payments for they have done very little in last so many years and they still seem clueless in terms of how to approach this.

Considering how every new business puts so much emphasis on UX, it is inevitable when every big merchant will want to create and the payment experience in their ecosystem, and the signs of same are already visible in the form of Amazon Pay, Ola Money etc. With increasing adoption of APIs it is going to be easier to do so even for medium sized merchants as well. UPI has already made it clear, what happens when you democratize innovation by opening up core functions in the form of APIs.

In my opinion in coming years, most of the bigger merchants will replace their payment processors with in-house offering, leaving these players to work with small and medium merchant base, thus invariably forcing them to look for alternate sources of revenues. While most of the payment processors are already exploring lending as an option, they need to think beyond. So far none of the payment processors have explored exploiting the network effect, for example turning their platform into a B2B marketplace or a value discovery platform.

UPI has also made another thing very clear, while merchants have clear focus on UX, banks on the other hand do not care. Compare the UPI experiences built by any consumer tech company vs what is offered by banks and you will know the answer.

I recently was talking to a very senior person in one of the top private sector banks regarding the sub-standard UPI experience offered by their app and his reply was but we do not get too many UPI transaction through that app anyway. Well, you may have gotten more transactions had you cared even tiny bit about the user experience.

To be honest, I am certain that most of the banks do not have dedicated functions focused on UX and even if they realize its importance and decide to set up such functions they would be scratching their heads on where exactly in their overall hierarchy they should position this team.

Lending

India so far has been dominated by savings product with really small part of population having access to credit, due to strict qualification criteria of banks and large NBFCs. Entire credit card industry caters to same ~20 million customers. All the new pay later players like Zest Money, Lazy Pay, Ola Postpaid etc are working towards curating the future credit card customer base. I believe restricting only banks to issue credit cards is not right. While many NBFCs have started issuing credit cards (in partnership with Banks) or CC equivalent products to customers, I believe RBI should start allowing NBFCs also to issue credit cards. In short, I think credit card story is yet to play out in India and this is the right time for it to pick up pace.

Most of the users of postpaid/pay later I know use it because of the convenience it offers than anything else, meaning the moment same convenience is matched by other methods (risk based authentication, are you listening RBI?). Besides this can only be a good tool for customer acquisition while all these players have to come up with alternate business model.

The start-ups I will be keeping a close eye on are the likes of Khata Book and OK Credit. The only right way to lend is to have a first hand clear view of the finances of the borrowers and have a recovery strategy as per the income schedule rather than trying to standardize the same. Non-standard products with non-standard schedules are very much possible with technology available today. Just one suggestion, build your own LMS.

P2P lending is still at very nascent stage and has to find cost efficient ways to grow lender base and distribution at scale.

Insurance

Insurance is very low contact business. Customers hear from their insurers only once a year under normal circumstances, i.e. to collect payments from the customers when renewal is due. On the other occasions when a customer needs to get in touch with the insurer is when the customer is going through extreme, high stress situation. Under that situation even the smallest miss-up from the insurer’s side can prove to be fatal not only for that one specific relationship but also for the reputation of entire industry.

While most of the efforts in insurance sector is focused on solving the sales problem, the only way to address the above critical problem is to innovate on the service side and considering the nature of this business it cannot the manufactures in their current form. The only ways to address this service problem is to either change the entire DNA of manufacturers (Start-ups like Acko and Toffee are trying the same) or leave it to third parties, who have a higher engagement relationship with the customer. I have few thoughts around this, which I would keep for a more focused and detailed analysis maybe for a later post or discussion.

Just to give you an example of how much insurers care about their customers, my health insurer, whom I have been with for 3 years now, has a free annual health check up as part of the policy however so far in no ways they have communicated with me regarding the same. If only they cared to make the customer feel cared for, since that is the hook entire insurance industry uses to sell their products. I mean SMS code for a leading insurer used to be PAPA. There is a reason entire insurance industry relies on invoking extreme human emotions to sell their products.

Wealth Management

There are many start-ups that can be clubbed under this category. Personal Finance Managers, Expense Managers, Brokerages etc can all be filed under this category. However most of the start-ups in this category are focusing on selling direct mutual funds. PayTM entering in this business with PayTM money is a reason for worry for all the other start-ups. With PayTM’s deep pockets they can continue to offer this for free for a long period of time, while others doing the same have to soon find out a way to make money, with no commission income and customers skeptical to pay for the advice it’s very difficult to generate revenue. The one company in this space I am keenly observing is ET Money, they have all the necessary elements in place, if they connect the dots in the right way they can really become the breakout performers in this space. With this space I mean, a low cost automated personal financial adviser for Indian middle class.

One clear trend I see emerging in the sector is Banks, who by virtue of being custodians of customer’s money used to have significant control over other financial decisions thus sale of third party products contributing to a significant source of their revenue. Banks in last so many years have done such bad job in selling other financial products to customers by prioritizing their interests over customer’s that large customer base is now losing faith on their banks. The direct result of this will be a clear reduction in size of customer’s relationship with their respective banks. The funny part in all this is that with the kind of resources and customer data banks have access to they should have been the first to figure out a way to serve their customers better but they continue to fail miserably.

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