Today's Editorial

Stocktaking on the fintech revolution

Relevance: GS Paper III

Why in News?

The editorial explores the potential and challenges of financial technology (fintech) in India in comparison to the current financial system. It argues for a shift in financial and economic policies to empower fintech to realize its full potential in catering to the diverse requirements of the Indian economy.  

Beyond Editorial: What is Fintech? The word “fintech” is simply a combination of the words “financial” and “technology”. It describes the use of technology to deliver financial services and products to consumers. This could be in the areas of banking, insurance, investing – anything that relates to finance. Fintech sector in India: The Fintech sector in India has witnessed funding accounting to 14% share of Global Funding. India ranks #2 on Deal Volume. The Fintech Market Opportunity is estimated to be $2.1 Tn by 2030. Indian fintechs were the 2nd most funded startup sector in India in 2022. Indian Fintech startups raised $5.65 Bn in 2022. The total number of unique institutional investors in Indian fintech almost doubled between 2021 and 2022, rising from 535 to 1019, respectively. Growth drivers of Fintech: India stack: Open API platforms i.e. Aadhar, UPI, Bharat Bill Payments, GSTN. Technological Innovation: Implementation of new business models driven by technologies such as Artificial Intelligence and Machine Learning. Increasing internet & smartphone penetration: India already has the 2nd highest number of smartphone users globally and is the 2nd largest Internet user market. ~1 Bn Internet Users by 2026. The number of households with internet connections with an increase by 46%, reaching 233 Mn households by 2026, compared to 160 Mn in 2021. Favourable Demographics: 68% of India’s population is young and 55% of its population is in the age group of 20-59 (working population) in the year 2020 and is estimated to reach 56% of the total population by 2025. By 2030, India will add 140 Mn middle-income and 21 Mn high-income households which will drive the demand and growth of Indian FinTech space. Financial Inclusion Initiatives: Financial inclusion programmes such as PMJDY, DAY-NRLM, Direct Benefit Transfer, Atal Pension Yojana among others have accelerated the digital revolution and brought more citizens, especially in rural areas, within the ambit of digital financial services. Way forward: Streamlined Regulatory Regime: An efficient regulatory regime that balances innovation and growth while safeguarding consumer interests is the need of the hour. It will foster confidence among consumers as well as investors. Digital Infrastructure and Literacy: A resilient digital infrastructure should be built, proving vital for fintech companies to deliver their services. Also, digital literacy initiatives should be promoted to enhance fintech services adoption. Access to Funding: Venture capital firms and angel investor networks dedicated to fintech and foreign investments should be encouraged in the sector. Strengthening Cybersecurity: Robust cybersecurity policies and regulations should be formulated for evolving cyber threats.

Infirmity of the current financial system:

• Financial economic policy is organised as a central planning system where products, processes, and government-controlled monopolies are imposed from the top.
• It is characterized by bureaucratic, banking and state control of products and processes, which hinders the process of discovery and innovation.
• Further, state control is deepened through government-controlled monopoly systems.
• Limitations in the rule of law make financial firms cautious about innovating.
• The uniquely Indian-style know your customer (KYC) and Prevention of Money Laundering Act restricts the firms. 
• The incumbent financial system has weaknesses and is not adapting to the diverse needs of the country's population.

Fintech Revolution:

• The fintech revolution, which aims to replace traditional banking with technology-driven firms, has been a positive development for India, mainly because -
• Banking is a source of systemic risk in India, and a smaller banking system improves stability.
• The incumbent banks are weak in innovating and serving users, so the financial system better serves the real economy when more finance is done without banks in the loop.
• Fintechs can play a crucial role in India, as innovation and risk-taking are required to experiment with many new business models and process designs that can better serve the people.
• For example, mobile phone companies and technology giants like Google can readily make payments, a business that was once a preserve of banking.

Challenges faced by fintech:

• Government protectionism towards traditional banks:

• The levers of the central planning system were used to block competition from new kinds of firms. Policymakers chose to defend banks; they wanted -
• Fintech companies to be service providers to banks
• The main business and profit to be with banks.
• The terms “innovation”, “risk-taking”, and “failure” do not sit well with bankers and the authorities.

• Regulatory hurdles:

• The rule of law provides for checks and balances on the discretionary power of launching an investigation or a prosecution. Most of these guard rails work poorly, making the firms vulnerable and submissive.

• Constraints imposed by the central planning system:

• The government and its agencies specify much about the products and processes. In many aspects, prices are also controlled, making the job of each financial firm a division of a big public-sector system where the basic decisions come from above.
• The central planning system can disrupt a successful business model, or a national champion can come up and eject all private firms.

Conclusion:

Finance is the most important of all industries. It is “the brain of the economy”. The fintech revolution can do a lot for India. But this requires changing the present arrangement of financial economic policy. The future of Indian finance lies in reorienting financial economic policy.