India’s fintech sector, expected to grow to a $2.1 billion market by 2030, continues to struggle with issues such as manual intervention, ineffective credit scoring and fraud detection .
However, a new generation of GenAI startups are disrupting the financial services industry with their India-specific vertical AI solutions.
According to Inc42’s ‘The Rise Of India’s GenAI Brigade Report, 2024′, the fintech sector is investors’ top choice for vertical GenAI solutions.
“In the last 40 years, nothing has been this big. It’s bigger than a PC, it’s bigger than mobile, and it’s going to be bigger than the Internet by far.” This is how Jensen Huang, founder and CEO of NVIDIA, described generative artificial intelligence (GenAI) in November last year.
These projections are indeed proving true for the US-based chipmaker. Nvidia more than doubled its revenue year-over-year (y-o-y) to $60.9 billion in FY24, thanks to the AI boom.
Just like the rest of the world, India is also in the grip of AI fever. The buzzword appears to have opened new avenues of innovation and spawned a wave of new-age tech companies, catering to both B2B and consumer use cases, from healthcare tech to SaaS .
However, it is the banking, financial services and insurance (BFSI) sector that appears to have adopted the emerging technology in a big way. As Inc42 reported earlier, big players like HDFC Bank, IDFC First Bank and startups like Policybazaar, Plum and Fibe are leveraging AI to solve multiple bottlenecks.
This has given rise to a number of vertical GenAI startups that are riding the AI wave to give a technological overhaul to the change-resistant sector. By moving forward judiciously, these fintech-focused GenAI startups avoid building cash-intensive Indian extended language models (LLMs) and instead solve India-specific vertical challenges.
And investors are rewarding this approach by startups for ignoring general-purpose GenAI solutions. According to Inc42 Report “The Rise of the GenAI Brigade in India”The fintech sector is investors’ top choice for vertical AI solutions. As many as 57% of 50 venture capitalists surveyed showed the greatest confidence in fintech-focused vertical GenAI solutions.
So what drives this confidence?
Reshaping Fintech with GenAI
Speaking to Inc42, Anuj Srivastava, co-founder of fintech-focused GenAI startup OnFinance, said many financial institutions still rely heavily on outdated systems and manual interventions. According to him, this provides white space for GenAI startups to enable financial firms to automate tasks and streamline operations.
OnFinance is one of more than 200 GenAI startups transforming the fintech industry by automating key operational tasks such as compliance, enabling financial institutions to scale their operations while reducing staff costs.
While many startups in the industry offer comprehensive customer communications solutions, others help businesses automate credit profiling and compliance for SME loans.
Anirudh A Damani, Managing Partner, Artha Venture Fund, said innovations led by GenAI can prove crucial for fintech companies looking to boost customer engagement and reduce operating costs.
“GenAI is modernizing fintech by tackling inefficiencies across the credit cycle, from improving risk assessments to streamlining debt collections. Beyond these applications, there is immense potential in fintech that cuts across niche areas to create innovative financing models,” added Damani.
GenAI vertical startups are also revolutionizing the way insurers approach fraud detection. A good example is IDfy, which provides AI-based solutions for authentication, fraud detection and risk identification for domestic and global markets. The startup claims to verify more than 2 million individual profiles per day and counts HDFC Bank, Axis Bank, Paytm and PhonePe among its clients.
Solving Fintech Problems
India is the third largest fintech economy in the world. The local fintech market is expected to become a $2.1 billion opportunity by 2030. Over the past 10 years, fintech startups have grown by a staggering 500% and attracted investments worth over $31 billion, Prime Minister Narendra Modi said earlier this year.
However, the Indian fintech sector today continues to face persistent challenges, particularly those related to the labor-intensive nature of manual tasks, high operational costs and the complexity of data analytics. ‘huge amounts of financial data, according to OnFinance’s Srivastava.
“Creditworthiness assessment, for example, still relies heavily on traditional models that do not always take into account all risk factors, leading to inefficiencies in lending and underwriting. Likewise, compliance processes often remain manual, time-consuming and prone to human error, exposing companies to regulatory risks,” he said.
Additionally, the fintech sector also faces challenges such as systemic risks related to NBFC over-indebtedness and ineffective credit assessments. By streamlining or automating these tasks, vertical AI can deliver tangible business value, enabling the fintech industry to unlock new efficiencies.
Damani of Artha Ventures believes that vertical AI solutions have immense potential to alleviate these concerns. “AI tools that improve credit assessments, optimize customer segmentation and streamline compliance processes can improve profitability and reduce systemic inefficiencies,” he said.
The road ahead
Earlier this year, Inc42 predicted that 2024 would be a pivotal year for vertical AI, with growing enterprise adoption opening up opportunities for a new generation of entrepreneurs. And this is what seems to be happening on the ground.
Unlike the horizontal approach taken by global tech giants like OpenAI and Anthropic, Indian fintech-focused GenAI startups are solving industry-specific challenges. Even though GenAI vertical startups have managed to alleviate some of the concerns facing the fintech sector, gaps remain.
The Indian fintech ecosystem still faces significant hurdles such as data privacy concerns, integration with existing systems and the need for more granular local solutions, according to Srivastava.
“In the future, vertical AI solutions will likely be even more integrated into the core functions of fintech companies. These solutions will not only automate existing tasks, but also provide predictive capabilities, allowing institutions to proactively address issues such as fraud, regulatory changes and emerging financial risks before they escalate,” said said Srivastava.
In addition to this, there have also been cases of AI hallucinations, which have negatively impacted the reputation of this emerging technology and the actors deploying it.
While Indian GenAI startups have a long way to go in creating trust among businesses, the growing adoption of the emerging technology and its many use cases could pave the way for a gradual ascension of the ecosystem to the ‘future. For now, Indian GenAI startups will need to focus on high-quality products that resonate with their customers and are globally applicable.
(Edited by Vinaykumar Rai)