FinTech In India Ready For Breakout - Deloitte

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FinTech in IndiaReady for breakoutJuly 2017

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FinTech in India Ready for breakoutContentsForeword by IAMAI04Message by Deloitte05Introduction06Indian FinTech segments09Indian FinTech Scenario: To stay and to grow11Breakout of FinTech companiesKey factors leading to success of FinTech companiesBreakout FinTech Segments131314Alternate Lending16Payments22Investment Management27Banktech30InsurTech32Personal Finance Management33Key challenges for Indian FinTechRegulations: Balancing Act to foster innovationGain trust and improve perceptions through literacyFinancial Infrastructure and utilitiesCyber and Data 39About IAMAI40About Deloitte41Acknowledgements4203

FinTech in India Ready for breakoutForeword byIAMAISince it’s formation, IAMAI has workedextensively with our industry members to fostera more inclusive and enabling digital ecosystemin India. Through the efforts of the PaymentsCouncil of India (PCI) and IAMAI’s FinTechCommittee, we are excited to work towardsIndia’s transition towards a less-cash, morediverse and financially inclusive economy thatis geared towards introducing an ever wideningpopulation to Digital financial services.will follow it up with a series of deeper diveanalyses which will get into more details aboutthe underlying causes and regulatory / industrychanges required to usher in the FinTech age inIndia.Our belief is that this transition will be bestbrought about through deep partnershipsbetween incumbent banks, new world disruptersand the government. The structure of ourorganization and all our efforts echoes this belief,which is why we eschew an ’us versus them’mentality in favor of a close-knit, partnershipbased model.This report explores some of the most pertinenttrends that are at the root of the FinTechrevolution currently underway in India. We04Subho RayPresident, IAMAI

FinTech in India Ready for breakoutMessage fromDeloitteFinTech is one of the fastest emergingareas in banking and financial services. Itis making the experience of banking andfinance more intuitive, personalized andempowering. The convergence of financialservices and exponential technologies willbe key to build a strong digital economy,and lead India’s transformation. Armed withnew data and analytics capabilities, assetlight platform and almost zero processingcosts, FinTechs are complementingand in some cases challenging thetraditional banking and financial servicesinstitutions globally.Indian FinTech is one of top five markets byvalue of capital funding and investmentsin the sector with nearly 270 million offunding in 2016. India remains one ofthe largest markets where the structuralenablers to setup and incubate fintech havecome together strongly and at an apt time.Combination of steady economic growthwith low penetration of financial servicesand availability of supporting infrastructuresuch as internet data access, smartphonesalong with utility infrastructure includingAadhaar based authentication and IndiaStack capabilities are likely to provide therequired impetus to India’s FinTech sector.We have analyzed the breakout potential ofIndia’s Fintech sector across six segments Payments, Credit, Investment Management,Personal Finance Management, BankTechand InsurTech and across twenty subsegments. Expectedly payments andlending are the likely candidates forbreakout in the short term as the newFinTechs target the quest for offeringcashless digital payments services. Onthe lending side, low penetration ofretail and MSME credit along with thepromise of better experience and fasterturnaround time have created strongpropositions for customers. Fintechs inmost of the other segments includingInvestment Management, Personal FinanceManagement, BankTech and InsurTechhave initiated the market making processand currently target specific market niches.We believe that armed with right valueproposition and by gaining confidenceof customers, these segments are likelyto witness their own break out momentsand it’s just a matter of time, and someentrepreneurial energy and creativitybefore it happens.We hope that the industry finds thisreport useful in charting direction fora sustainable, and scalable FinTechsector in India.Monish ShahPartner – Financial Services05

FinTech in India Ready for breakoutIntroductionTechnology has been a key enabler inthe growth of a digital economy. Overthe years, Indian banks and financialservices providers have gradually adoptedtechnology to improve reach, customerservice and operational effectivenesswith evolving market and technologicaladvances. However, the pace of technologyadoption has not been commensuratewith it's potential and hence there havebeen gaps in the penetration of financialservices. For example, there is a creditdemand supply gap in the Micro and SmallEnterprise (MSE) segment particularly formicro enterprises. We estimate the creditgap in the MSE segment (with annualrevenue upto INR 3 crore) to beINR 833,000 crores.Exhibit 1: Credit gap in the MSE segmentRevenue Segment(INR)No. of Units(Mn)Credit Demand(INR 000 crore)Bank Credit Supply Credit Gap(INR 000 crore)(INR 000 crore) 15 Lakh41.44149232215 - 30 Lakh5.61686210630 lakh - 1.5 Crore4.54772032741.5 Crore - 3 Crore1.32341031313 Crore - 18 Crore1.8720357363Total54.620138171196Note: Credit Demand is calculated based on revenue using appropriate multipliersSource: Deloitte Analysis, MSME Annual Report, RBI, Industry Reports06Credit gap in the targetsegment isINR 833k Crore or 60%of credit demand oftarget segment

FinTech in India Ready for breakoutTraditional Banks and Financial Institutionshave viewed technology as an enabler tobusiness propositions, rather than creatingnew business propositions themselves.Financial Technology (FinTech) Companieshowever are changing that role byleveraging digital technologies to createnew business propositions and target newmarket segments which hitherto were notpossible.FinTech in the truest sense is theapplication of technology to offer newfinancial products and services to newmarket segments in an economicallyviable manner. From a business modelperspective, the FinTech sector is markedby technology companies that eitherintend to disintermediate, or partner withincumbent Banks and Financial Institutionsdepending on strategic narrative andmarket landscape. Hence, FinTech isincreasingly becoming an important focusarea for all the key stakeholders in India’sFinancial Services industry – Regulators,Traditional Banks, NBFCs, Payment Banks,Investors, Payment Service Providers,Broking and Wealth ManagementCompanies, Insurance providers and pureplay FinTech players.Exhibit 2 FinTech – Convergence of Financial services and TechnologyBankPaymentsNBFCSecurity BrokingHardware ProvidersFinanceWealth ManagementFinTechTechnologySoftware providersCloud providersPlatform providersDistributionSource: Deloitte Internal AnalysisArmed with advanced data and analyticscapabilities, asset light platforms andalmost zero processing costs, FinTechcompanies are complementing, and insome cases challenging the traditionalbanking and financial services institutions.The immense potential of this sector isclearly apparent in the global FinTechfunding scenario. With more than 17 Bn funding and over 1400 deals in2016, Fintech is one of the most promisingsectors globally. With nearly 270 Mnfunding in 2016, India is ranked amongstthe top ten FinTech markets globally.07

FinTech in India Ready for breakoutExhibit 3 Global funding to FinTech sector in 2016Netherlands 20mBelgium 28mDenmark 32m NorwaySweden 4mGermany 62m Czech 384mRepublic 6mRussia 7mIndia 272mChina 7.7bnPoland 1mU.K. 783mIreland 524mCanada 183mLuxembourg 2mFrance 68mSwitzerland 12mUS 6.2bnMexico 72mBrazil 161mSpain 12mJapan 87mTaiwan 6mTurkey 17mThailandIsrael 19m 173mItaly 9mMalaysia 4mSingapore 86mIsrael 173mSouth Africa 15mGlobally, 17.4 Bn invested over 1,436 deals in 2016 500m 100m 10m 10mSource: PitchBookCompiled by: DeloitteIn India, most of the FinTech companiesincluding the exponentially growingm-wallets have been complementingexisting financial services providers, ratherthan completely disintermediating them.Traditionally, the Indian financial servicessector is characterized by brick andmortar - branch banking, labor intensivebanking services, manual and paper basedprocesses with limited straight throughprocessing-despite continuous investmentsin technology and systems by Indian Banks1and Financial Services Institutions. Hence,there is a very high degree of customerfriction in the areas of customer onboarding, KYC and branch banking services.This inefficiency in the system presentsan inherent opportunity for data-drivenanalytics led FinTech business models inreducing cost of acquiring and servicingcustomers, eventually leading to a greaterpenetration of financial services andinsurance products in the market. s-450-million-by.html08Hong Kong 170mIndonesia 5mAustralia 91mNew Zealand 7m

FinTech in India Ready for breakoutAlthough Demonetization provided a boostto the payments sector in the short term,but we now expect investments in personalfinance and wealth management to risegoing forward.There are a number of new businessmodels that are being introduced in urbancenters. There are a limited number ofplayers that are focused outside urbanand metro centers due to infrastructurechallenges (E.g. rural India has only17% internet penetration compared to60% in urban India)1. We believe that inthe medium term FinTech players willconsolidate their position in urban andmetro centers and will extend to rural andsemi-urban areas over the next 3-5 years.The purpose of the paper is to analyzethe Indian FinTech Landscape, the likelybreakout of different FinTech segments inthe Indian context, their likelihood to scale,and implications on the Indian FinancialServices and Insurance market.Indian FinTech segmentsIn the Indian context, FinTech can bebroadly aligned across the following twentysegments, across six broad financialservices areas. The twenty segments aredescribed in Exhibit 4. The contours ofthese segments are broadly in line withthe findings of Deloitte global researchon “Future of Financial Services”, whichwas jointly conducted along with WorldEconomic Forum and highlights theemerging areas of innovations in thefinancial services sector. As inferred inthe study, these innovations are alsoclustered around specific areas withunique underlying characteristics. FinTechcompanies are leading the charge atpioneering these innovations and arecontinuously re-shaping the marketlandscape, even in India.Within these segments, Digital Paymentshave been at the forefront of leadingIndia’s FinTech sector. Correspondingly,digital payments have also garnered thelion’s share of VC funding as compared toother segments. Post the Government'sdemonetization initiative in November2016, the spotlight on digital payments isunique, as payments remain an innovationcluster where penetration is extremelylow and there are still areas of friction thatnew FinTech players can remediate to offervalue.The retail lending segment, where thereis a convergence to the regulated regimeas most of the FinTech players in this area,including P2P lenders, Alternative CreditScoring platforms and Crowd Sourcingplatforms, are eventually being broughtinto the regulatory ambit. The MSMElending area is witnessing new FinTechplayers addressing the structural issuesof information asymmetry and reducingturnaround times for underwriting loans tosmall businesses.Expectedly, the asset side of the bankingbusiness remains a white space wherethere have been limited innovations,with the exception of Peer-to-peerlending platforms.09

FinTech in India Ready for breakoutExhibit 4AreasFinTech SegmentsBrief DescriptionA. Credit01. Peer-to-Peer Lending02. Crowd Funding03. Market Place for Loans04. Online Lenders – on-book lending byNBFCs05. Credit Scoring Platforms All forms of lending market places including Peer-to-Peer lendersand market places that connect borrowers with both, institutionaland lenders;06. M-wallets and PPIs07. Merchant Payments and PoS Services08. International Remittance09. Crypto Currencies Services that enable transfer of funds for various use cases- P2P (Person-to-Person), P2M (Person-to-Merchant), G2P(Government-to-Person) etc.10. Robo Advisors11. Discount Brokers12. Online Financial Advisors Wealth advisory services delivered through technology governedrules and investment strategiesB. PaymentsC. InvestmentManagement Also includes crowd funding and equity funding platforms NBFCs that use alternative scoring and digital channels foracquisition Services targeted at both Payees and Merchants by enablingrequisite payment infrastructure through mobile or othertechnologiesD. P ersonal Finance 13. Tax Filling and ProcessingManagement14. Spend Management and FinancialPlanning15. Credit Scoring Services Tools and services for active management of individual financialprofiles (e.g. spend, investments, credit profile, etc.)E. Bank tech Services that utilize many data points such as financialtransactions, spending patterns to build the risk profile of thecustomer. This provides an alternate to traditional underwritingmethods that are unable to serve people with limited credit data.16. Big Data17. Blockchain18. Customer Onboarding Platforms There is significant value in unstructured data. However, itis difficult to derive value from unstructured data, owing tochallenges in analyzing it. A number of new tools are beingdeveloped to derive value from large data sets.F. InsurTechSource: Deloitte Analysis1019. Insurance Aggregator20. IOT, Wearables and Kinematics Small business insurance Usage based insurance

FinTech in India Ready for breakoutIndi

entrepreneurial energy and creativity before it happens. We hope that the industry finds this report useful in charting direction for a sustainable, and scalable FinTech sector in India. FinTech in India Ready for breakout 06 Introduction Technology has been a key enabler in the growth of a digital economy. Over the years, Indian banks and financial services providers have gradually adopted .