FinTech's scoial disruption in India

Can FinTech be a tool to address social issues like poverty and inclusion?

A resounding YES is the answer to the growing disruption in the market. Financial services and inclusion have the potential to address major social problems and issues in many countries including India. Digital financial services can reduce the cost of receiving payments, put the power in the hands of the person (irrespective of the gender) to manage his/her finances, reduce corruption.

Look at FIndex computed by world bank.

• 69% of the adult population own an account
• usage of mobile accounts have been very widespread in the low income countries.
• Half of the 1.7 billion unbanked adults live in developing countries China, India, Bangladesh etc.
• 56% of the unbanked adults are women.

One of the NABARD surveys says the following w.r.to our rural sector

• 88.1 % of the households have a bank account.
• 33 % households have more than one savings account
• 26 % of Households have women with institutional (including Self-Help Groups) savings account
• About 26% of agricultural households and 25% of non-agricultural households reported to have been covered under one or the other type of insurance
• More than half the agricultural households in India have outstanding debts

Digital FinTech, in India, through manifestation in multiple ways, is disrupting the Indian markets, to increase financial inclusion. That alone is not enough. We need to have a proper eco-system of payments, regulations, infrastructure and consumer protection mechanisms. More important, these digital pushes should result in tailored services for the marginalized.

FinTech brings in more efficiency and enables roll out of customized products and services. It also can act as a platform for the new players and bring in more competition. The cost of remitting through mobile phone is more than 50% cheaper than conventional method. But, the challenge lies in understanding and monitoring the risk to the financial system as a result of FinTech disruption. A consistent and predictable legal and regulatory framework is the need of the hour. Many countries like Mexico, Colombia, Indonesia have passed new regulation to support the adoption of FinTech and foster innovation. Some countries like ours are going for “Sandbox” approaches to test and learn. Whatever be the case, a clear framework is required that will not only address current challenges but help bring FinTech to the doorsteps of every citizen.

India has the potential to leap frog in this space. India should take the opportunity to incentivize the players to sustain innovation and help establish interoperability with the rest of the world. Data protection, peer-to-peer lending, mobile money, access to payment infrastructures for non-banks, robo-advisory services, algorithmic/automated trading, and lending activities using artificial intelligence and machine learning offer tremendous opportunities to reducing poverty, increasing women empowerment and promoting shared prosperity with the appropriate regulatory framework in place.

These are interesting times.

Potential introduction of a digital currency called e-Krona by Swedish Central Bank

Usage by % of Households in Sweden

As the markets change rapidly, one important aspect is the movement towards a cashless society. Sweden is at the forefront of technological changes in terms of electronic money and payment systems. The Swedish Riksbank has started a project on the feasibility of introducing digital currency e-krona in place of the usual cash krona.

But once the population moves away from cash, will it rob them of flexibility? Will it make them more dependent on private players and payment systems? What roles does the central bank want to play? All these conundrums are being studied by the central bank. Digital money, by itself, is not something new. The Riksbank already deals with digital money with its participant banks but not the public.

Two important factors of Swedish market are as follows:

The cash to GDP ratio is the lowest in the world for Sweden. Most people do not use cash at all so much so that the tourists have started complaining!

The growth of alternative payment solution providers like Swish. Created by the Nordic banks and used by > 50% of Swedes, this is challenging the unicorns in the field.

“Just Swish it to me” will be the familiar phrase in Sweden when sharing bills or sending payments.  The steps are so simple in Swish – Open the landing page, enter the counterparty’s phone number, amount and comment, Mobile BankID app opens to authenticate payment, confirm with an option to send a text to the recipient and actual transmission without any fee. The transfer is instant and free of charge for private users. No wonder, the swedes have fallen in love with it. 6.5 million users! Norway and Denmark too use similar systems called Vipps and MobilePay. Look at its amazing growth...

Given these, no wonder, the Riksbank doesn’t want to introduce e-Krona without doing a feasibility study and its impact. It will be worth the wait to see how the payment systems and related settlement systems will be reconfigured.

References:

https://www.riksbank.se/en-gb/payments--cash/e-krona/

https://www.thelocal.se/20181016/sweden-leads-the-world-in-cashless-digital-payments

https://www.thelocal.se/20180527/tourists-complain-as-sweden-becomes-more-cash-free

https://medium.com/@etiennebr/swish-the-secret-swedish-fintech-payment-company-created-by-nordic-banks-and-used-by-50-of-swedes-cfcf06f59d6f

https://www.getswish.se

Where is the Financial Services market heading?

Where is the financial services heading?

FinTechs are giving a run for the money to the traditional players. The biggest conundrum how the service and revenue mix will look like in the next 5 years. It is highly probable that majority of the revenue will come from services that do not exist today. Based on our observations and experience, the following areas of the financial services see major disruption.

1. Deposits and Lending witness shifting customer preferences. Alternative sources dominate the market. New platforms are transforming loan origination and credit evaluation. Customers are also exposed to new sources of capital.

2. Disaggregation is happening in insurance markets like sharing economy, autonomous vehicles etc. Connected insurance is becoming the norm involving IoT, advanced sensors etc.

3. Cashless markets and new payment rails are visible in Payments area. Some of the initiatives are integrated billing, mobile and streamlined payments. Mobile Money and Crypto currency are the emerging rails. As new customer functionalities are built on existing payment systems, customer behaviour changes. This is where the incumbents are likely to lose control of the customer experience arising from transactions.

In general, which areas of FS lend themselves highly to innovation and facilitate entry of FinTechs?
- Areas that have the greatest customer friction resulting in disengaged customers
- Areas that are less capital intensive and more data intensive
- Areas that are more regulation-free

What does this mean to the IT landscape of the FinTechs?

They are more likely to deploy that platform based IT solutions that give more control and flexibility in delivering a service E2E are dominating the market. Making use of Gartner’s terms, the % of systems that innovate, differentiate and records is in the range of 60%:30%:10% respectively thus giving high nimbleness to the platforms as compared to an incumbent whose spread is in the range of 10%:25%:65%.