In India, the financial services and fintech sectors have witnessed significant growth during the pandemic. While growth has been strong across all sectors, the exponential growth in digital payments is a case in point that proves how the sector is adapting quickly to disruptions. As the situation normalises in many sectors, the growth in the financial services and fintech sector has been on an upward trajectory, showing that this trend is not just a passing phase. It is well known that the deepening of the financial services sector contributes to the overall development of the economy. Riding on this momentum, India has emerged as one of the fastest-growing fintech markets in the world, with an estimated market size of $150 billion by 2025.
As we observe the growth of the financial services and fintech space, I see the following trends for 2023:
Integrated Fintech: Many digital-first businesses are now integrating banking and payment channels to enhance the customer experience. This strategy not only brings a disruptive customer-centric approach but also eliminates the complexities associated with involving third-party websites in the payment process. It also allows organizations to build custom solutions to make customer interactions even more seamless. An API and platform-based approach will help technology players differentiate themselves.
Blockchain Technology: With the launch of the central bank digital currency (CBDC), blockchain-based payments are expected to become mainstream. While the e-Rupee initiative is following the normal adoption curve, I believe that in the next two to three years, we will see quite a significant adoption in the retail payments space. Cryptocurrencies will remain firmly in the realm of speculation.
Cashless Economy: A few years ago, it was hard to imagine that buying virtually anything without using cash would become a common practice in India. With ease of use, increased awareness and increased internet penetration, digital payments have seen a rapid rise in recent years. The volume of digital payments in India has grown at an average annual rate of about 50% over the last five years. That in itself is one of the fastest growth rates in the world, but it has grown even faster – about 160% per year – in India’s unique real-time and mobile system, the Unified Payments Interface (UPI). The growth in digital payments is likely to be stronger, led by UPI, as India works to further link credit cards to UPI and integrate international payment capabilities. According to the Reserve Bank of India’s (RBI) ‘Payments Vision 2025’, the central bank aims to triple the number of digital payment transactions by 2025.
Neo-banks: According to a report by Inc42, the neo-banking sector in India is expected to grow by 281% and account for 9% of the total Indian fintech market size. While the regulator and government are keeping a close eye on the sector and Niti Aayog is working on its recommendations for digital banks, I believe many players will still be trying to find the right business model, keeping in mind the dependence on banks until regulations are relaxed. Also, there seems to be some lull in the SME side of neo-banking platforms and this is the area where players have the most opportunities to provide end-to-end solutions that encompass banking, payments and other associated financial aspects of an organization.
Government initiatives: Over the past few years, we have witnessed the Indian government’s continued efforts to drive financial inclusion through initiatives like the creation of DBUs, the setting up of a fintech department by the RBI and the introduction of e-RUPI, among others.
Banking ecosystem: By providing a single solution to customers who previously relied on complex, disjointed processes across a variety of applications, the banking ecosystem helps banks deliver a better customer experience and generate long-term value for customers. The lines between banking and payments are blurring as banks realize that it is imperative to not only integrate with multiple ecosystem players to help their customers purchase goods and services, but also to partner with fintech companies to provide greater customer choice.
Increased focus on security: As financial services increasingly move online, security becomes increasingly important. With the increase in online offerings, cyberattacks such as phishing are likely to increase in volume and intensity. In this context, industry players will invest even more in security tools and services to secure transactions and ensure the confidentiality of customer data. In addition, training of different stakeholders is essential, so it is recommended to adopt a gamified approach to address these challenges.
Despite these major advances, the sector will experience significant opportunities in the coming years, mainly thanks to the emergence of new technologies, changing cultural trends and a favorable regulatory environment. Thus, in 2023, we will have a better idea of what the new normal looks like and how fintech is shaping the financial services of tomorrow.
This article was written by Srinivas Nidugondi, Director, Growth & Transformation, Comviva)