Emerging FinTech Market in India : Daily Current Affairs

Relevance: GS-3: Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment, Inclusive growth and issues arising from it.

Key Phrases: FinTech, Gig and Platform Economy, Core Banking Solution, Regulatory sandbox regime, JAM trinity.

Context:

Over 67 percent Fintech companies in India have been set up in the last five years. India's Fintech segment has also seen exponential growth in funding; investments worth more than US$8 billion were received across various stages of investment in 2021. This brought into discussion the evolution and growth potential of the fintech market in India.

Background

FinTech or financial technology refers to software, mobile applications, and other technologies created to improve and automate traditional forms of finance for businesses and consumers alike.

Facts and Figures w.r.t. FinTech evolution in India

The IMF's World Economic Outlook suggests that India shall become a $5 trillion economy by 2026-27. A large part of this growth is attributed to the exponential growth expected in digital infrastructure for services, especially financial.
FinTech-driven Gig and Platform Economy is helping India achieve its $5 trillion target - Niti Aayog report.
India has the potential to create over $1 trillion in economic value from the digital economy, including services as per the Ministry of Electronics and IT.
Indian fintech market shall reach about $160 billion by 2025 as per Finance Ministry estimation.
India is already the world's third largest fintech market as per BLinc Invest report of 2022.
India’s fintech adoption rate is 87%, as against the global average of 64%, second only to China – Ministry of Commerce.

Regulation of FinTech Sector in India

The Payments and Settlement Systems Act of 2007.
Peer-to-peer lending guidelines of 2017.
National Payments Corporation of India regulations for payments via UPI.
Regulations governing NBFCs under the RBI Act of 1934.
Regulations governing payment banks under the Banking Regulations Act of 1949.

Potential of the Fintech Sector

Financial Inclusion: It can address the accessibility gaps in financial services in India through digital financial services such as Core Banking Solution e.g. JAM (Jan Dhan-Aadhar-Mobile trinity)
Empowering women: FinTech firms help meet challenges arising from restrictions on the in-person mobility of women and loss of employment at a time of financial distress owing to covid. Ease of signing up, making transactions and obtaining credit offered by fintech services etc. have increased the consumer base of women.
Financial Assistance to the MSMEs: It can assist small-scale industries in addressing the credit gap problems, especially in rural areas e.g. maintaining online transaction records of small vendors may help in availing credits without collateral from banks. FinTech helps in making the process seamless e.g. psbloansin59minutes initiative.
Enhancing Customer Experience by bringing transparency and making processes more convenient, accessible, and easy to use.
Solving other challenges: By developing unique and innovative models, FinTech assesses risks, leverages big data, machine learning, and alternative data to underwrite credit and develop credit scores for customers with a limited credit history.

Related terms

Core Banking Solution (CBS) is the networking of bank branches, which allows customers to manage their accounts, and use various banking facilities from any part of the world. There is no need to visit the home branch to do banking transactions.
Gig and Platform Economy: gig workers are those engaged in hourly or part-time jobs in everything from catering events to software development. A platform worker implies a worker working for an organization that provides specific services using an online platform directly to individuals or organizations e.g. Ola or Uber drivers.
Regulatory sandbox regime is a framework set up by a financial sector regulator to allow small-scale, live testing of innovations by private firms in a controlled environment under the regulator's supervision.

JAM trinity revolution: a success story

Digital financial services have become a key driver of credit disbursement via digital platforms. The Jan Dhan-Aadhaar-Mobile (JAM) trinity has brought a revolution in the sector as –
- It acted as the foundation of credit accessibility and direct benefit transfers.
- It enabled the penetration of under-banked and unserved segments of our vast market that brick-and-mortar banks failed to reach.
- It provided transparency due to its adaptability, multilingual options of access and robust interface, leading to an expansion of the consumer base.
- Easing friction between financial institutions and retail customers has drawn capital flows into the Indian economy.

RBI’s financial inclusion agenda

RBI set up an internal fintech department in 2022 to promote orderly growth in the digital financial services sector, identify issues and challenges, facilitate constructive innovation, boost incubation, and regulate the fintech industry for its smooth working.
It has rolled out a number of favourable policies for credit facilitators like small finance banks and payment banks which has fast-tracked the usage of UPI, internet-based banking and mobile banking.

Challenges faced by FinTech sector

Cyber Threats: Automation and digitization collect a lot of personal data from customers which makes fintech systems vulnerable to attacks from hackers e.g. recent instances of hacks at debit card companies and banks.
Issue of Data Privacy: In absence of personal data protection law in India, it raises concern of data privacy especially in the context of cyber threats. Reasonable restrictions must be in place where data protection, privacy and security are a threat.
Difficulty in Regulation: The data collected by FinTech giants is often stored abroad due to availability of cost efficient cloud servers there. It makes regulation difficult in the source country e.g. with data localization, RBI aims to protect personal data of citizens by restricting data on servers outside the country's geographical boundaries.
Other challenges: The FinTech sector is very young and many technologies related to it are still in the development phase. This makes it difficult to formulate a single and comprehensive approach to these problems.

Way Forward

The Indian market has witnessed an upward trend in fintech unicorn and soonicorn valuations. Setting up a modern fintech hub in Gift City, Gujarat is a right step in this direction. It is important for the regulator in India to strike a balance between product innovation and consumer protection. While enhancing services, the innovators must not compromise security. Digital India and Atal Innovation Mission have been helping Indians in our financial inclusion and re-emerge from a pandemic.

Sources: Live-Mint

Mains Question:

Q. Digital India Mission has contributed to the growth of the FinTech sector in India. Critically analyze. [150 Words].