Finance- Transformed by Tech

Summary

Numerous startups, as well as established firms, are battling in the fintech space. They are targetting India’s estimated 820 mn internet users in 2022- mostly on smartphones. Their focus is on speed, convenience, transparency, and lower costs. Also, on financial inclusion for the underserved e.g. MSMEs, millenials, and unorganized workers. This is transforming the financial sector and will create long-term benefits for all customers.

2020- The Fintech surge in India

As lockdowns were imposed during 2020, and movements curtailed, the Indian consumer relied on digital technology for making financial transactions. Payments to vendors and local shops were made digitally, banking transactions moved online, securities trading took place on electronic platforms, insurance policies were bought on mobile apps and even mutual fund investments were transacted remotely. This represented a huge upsurge in the adoption of fintech- defined as the use of technology in financial services. Further adoption and a torrent of new applications are expected. India’s financial sector is poised for sweeping changes in the years to come.

The US experience

The US has a well-developed, regulated, and mature financial services sector.  But in late January 2021, the world was mesmerized by the fortunes of GameStop. Shares in the beleaguered brick-and-mortar purveyor of video games soared from a few dollars in 2020 to above $480 on January 28th, before sinking as low as $81 on February 2nd. A firm that was worth $200mn in April 2020 was briefly valued at $30bn before falling back to Earth. The gyrations were fuelled by an army of day traders that dwells on Reddit, a social media site, with many using an online zero-fee broker like Robinhood. This incident illustrates how online low-cost brokers are enabling retail customers to rewrite the rules of trading in numerous fields.

Information technology is being used to make trading free, shift information flows, and catalyze new business models, transforming how markets work. In 2019, total venture capital funding for private U.S. fintech ventures reached $18 bn, compared with $13 bn in 2018. Numerous innovative ventures are being funded- in areas like Insurance, Banking, Lending, and Payment processing. Increasingly, there is cooperation and partnerships between banks and fintech companies- combining the strengths of both worlds.

So far, payments in the USA have been dominated by a credit card duopoly (Visa and MasterCard) working with banks and charging over 2% transaction fees. Thanks to the pandemic, there has been a surge in online payments and experimentation by consumers with new services provided by digital payments firms like PayPal, Square, Adyen, and Stripe. But costs remain over 2.5% – far higher than 0.5% in China. The key to slashing costs is to create a new interbank-payment system allowing for near-instant and cheap transfers. Swathes of Europe and Asia have already done this. Banks and fintech firms can then build an overlay of products, standards, and services. America’s own effort at instant payments, backed by the Federal Reserve and known as FedNow, is to launch in 2023.

The main factors driving the adoption of fintech are convenience, speed, and user experience. Further, there is a major thrust on inclusion- reaching out to the unbanked or the underserved.

China- Leading in Fintech

With over 900mn internet users in 2020, China is leading the world in the adoption of fintech. Two of the largest players are outlined below:

• Ant Financial: The largest fintech firm in China had revenue of $17.3 bn in 2019, and a net profit of $ 2.6 bn. Its businesses cover:
  1. Payments: Similar to PayPal, Alipay processes payments between any two users, whether they’re shoppers, small businesses, roommates, street performers, or commuters. Alipay has over 700mn active users, 80 mn merchants, and completed over $17 trillion in transactions in 2019. Ant Financial has used its Alipay customer base to create multiple interlocking platform businesses like lending, insurance, and investing.
  2. Lending: Consumers paying with Alipay also start borrowing from it. The balance of its consumer loans stood at $262 bn as of June 2020, with 98% of the credit extended by its 100 partner banks or securitized by the company. Last year about 500 mn customers took loans.
  3. Insurance: It owns and operates an open insurance marketplace with over 80 insurance companies on the platform that reaches over 400 million users.
  4. Investment: Ant Fortune has brought all of China’s 116 mutual fund managers on its platform that reaches 180 million users and has assets under management of $632bn. Ant offers both platform (Ant Fortune) and its own (Yue Bao) asset management services. Either way, the user remains within Ant’s financial and data ecosystem.
  5. Ant has become a digital supermarket of others’ offerings, letting users buy on credit, invest in mutual funds, and obtain insurance through established players.
• Ping An: It is one of China’s largest life and property insurers with a net profit of $22 bn in 2020 and a market cap of $236 bn in December 2020. Its business model has three distinctive features:
  1. A wide platform of Services: Its main businesses are Insurance (life, health, and property), Banking, and Asset management-the largest being insurance. Customers can park their cash with Ping An’s bank or invest it through Lufax, its wealth-advisory arm. They may buy a health service from Good Doctor or a car from Autohome, its car-purchasing app, or sign up for education services, and then finance the payments through Ping An’s consumer credit unit.
  2. Customer base: It has 204 mn retail customers of financial products and 534 mn users of its apps and platforms. Ping An is also cross-selling customers more products from other parts of the group.
  3. Technology: It has a 110,000-strong technology development team including 3,000 scientists. It uses data analytics and AI extensively- for the recruitment of agents, developing credit risk models, or pricing insurance products based on customer’s habits. Its cloud-computing technology for hosting its banking and insurance systems now serves 630 banks and 100 insurers across China.

Large parts of China’s financial system have been reorganized around technology platforms. In the bargain, the banks and service providers lose their direct relationship with the customer- all of it is mediated by the platform. Much of the decision-making, data analytics, risk analysis, and financial products is done by the tech company. However, fintech firms in China are currently under regulatory scrutiny relating to micro-lending practices and market power.

India- Ripe for Fintech Growth

The demonetization in 2016 made Indians familiar with net banking and the use of UPI (Unified Payments Interface) based fund transfers. Today, with about 700 mn internet users, 63 mn businesses, and over 200 mn unbanked or underserved citizens, India is ripe for rapid adoption of fintech. The lockdowns during 2020 gave a huge impetus to the use of digital technology across all types of financial services e.g. payments, insurance, investing, and lending. Indeed, fintech emerged as the sector attracting the highest venture funding during 2020 in India raising about $2.1 bn across 131 deals.

The growth of fintech in India is expected to be driven by payments followed by personal finance. The estimated number of users of these two services (in million) is shown in the Table below. (Source: Statista)

Number of Fintech Users (Mn)

 

 

Indian firms- Plans and Options

The number of internet users in India is likely to cross 820 mn by 2022 and reach 975 mn by 2025- mostly using smartphones. Credit Suisse has estimated that digital payments in India are likely to reach $1 trillion by 2023. This growth will create huge opportunities and challenges- for startups as well as established players.

Numerous fintech ventures are jostling for customers across a range of financial services as outlined below:

• Payments: Besides PayTm, players like PhonePe, Google Pay, Mobikwik, BharatPe, AmazonPay, and WhatsAppPay are competing in UPI-based payments. With zero fees on UPI transactions, all of them will have to add new services and features for viability e.g. a small-bank license, microloans, stockbroking, distribution of MFs, and insurance. They will seek to evolve into platforms with a single mobile app for a wide range of financial services with appropriate partnerships. Further, there are firms like Pinelabs and Razorpay providing point of sales solutions for retail transactions covering all major payment modes, including credit and debit cards.
• Lending: Startups e.g. Lendingkart, MoneyTap, and Shubh Loans help process small business and personal loans quickly and digitally, in association with banks.
• Investment: Online brokerages e.g. Zerodha and Groww have expanded rapidly. Zerodha with zero charges for equity delivery orders has become India’s biggest stockbroker and disrupted the stockbroking field.
• Neobanks: Digital-only banks with no physical bank branches, such as Razorpay X, NiYo, Open, and InstantPay operate in partnership with established banks. They target millennials, workers, and SMEs.
• Aggregators: Platforms like PolicyBazaar, PaisaBazaar, and Coverfox compare all competitors in a service (e.g. insurance or loans), in terms of prices, after-sales service, and claims.
• Cryptocurrency: The gyrations of Bitcoin and other cryptocurrencies have attracted a lot of attention and investment. However, until there is regulatory clarity, they will remain in the realm of speculation and untraceable financial transactions.

The established financial institutions too have been launching online services and have ambitious plans for fintech. Some examples:

• HDFC Group: All companies in India’s largest private-sector financial services group- e.g. HDFC, HDFC Bank, HDFC Securities, HDFC AMC, HDFC Ergo, HDFC Life- have independent websites and mobile apps to facilitate customer interaction and transactions. HDFC Bank has launched a host of highly successful digital banking products. These include 30-minute paper-less auto loans using biometric technology, 10-second personal loans on NetBanking,  Missed Call Recharge, and Instant loans at ATM. It also provides back end and banking support to payment firms and Neobanks e.g. Open and InstantPay.
• SBI: India’s largest bank already has a website for online banking transactions. Further, it launched YONO (You Only Need One), an integrated digital platform designed to be a one-stop solution for banking, lifestyle, insurance, investment, and shopping. SBI is planning to make YONO an independent entity and allow other banks (e.g. cooperative banks, and rural banks) to use its services employing a pay-per-use model.
• Bajaj Finance: The leader in consumer finance has announced the launch of BajajPay- a payments app targetting its customer base of 45mn with an integrated solution covering UPI transfers, prepaid instruments, monthly installments, and credit cards. It plans to leverage its distinctive capabilities in data analytics, credit scoring, and AI.
• New Umbrella Entities (NUEs): The Government intends to award NUE licenses for pan-India payment networks which will compete with UPI as settlement mechanisms for eCommerce and online transactions. Several consortia have applied e.g. Tata’s, Reliance, PayTm, and Axis-ICICI Bank.

All financial services firms have to decide how to harness technology to serve online customers. Some may create their own apps and compete for customers. Others may choose to partner with fintech firms or operate on platforms set up by others. With the rapid proliferation of players, intense competition is likely in all segments of fintech leading to a shakeout and consolidation by stronger firms.

Conclusions

Earlier waves of technology in financial services addressed the back office and core enterprise applications while providing web-based services to business and retail customers. The current wave of fintech is aimed at the rising number of smartphone users. The focus is on speed, convenience, transparency, and lower costs with the intent of cross-selling a range of services and creating lasting relationships. Further, the objective is to target underserved segments like MSMEs, blue-collar workers, millenials, informal sector workers, etc. – using tech for financial inclusion.  This is transforming the financial sector and will create long-term benefits for all customers.