fresh thinking

Demographics suggest disruption needed in financial services in India

Soumik Roy, 25th July 2016

With a million young people a month joining the workforce in India, and rapid growth in the country's numbers of High Net Worth Individuals, demand for banking is booming. While disruptive, digital innovation has been prevalent in the financial services sector in the US and the UK Indians have yet to experience its benefits.

Companies like Wealthfront, Betterment, Nutmeg, and Square, regarded as pioneers in the field have struggled to cater to customers in markets outside their home territories. In part this is because their offerings are customized in scope, and range, to suit customers in developed financial markets. It also reflects a willingness on the part of regulators in those markets to welcome digital disruption.

In an emerging market such as India, financial service regulators continue to struggle with technology-based retail offerings. Truly disruptive financial service providers have different challenges, and need to tread more carefully than their counterparts in other markets. On one hand, providers need to cater to the globetrotting millennial Indian who wants the best that the banking industry has to offer. On the other hand, the providers struggle to make sense of the archaic, complicated, and contradictory laws, such as, the provisions of the Foreign Exchange Management Act, the Usurious Loans Act, the Banking Regulations Act, and the Maharashtra Money-Lending Act, among many others (note 1).

India is a growing economy, and Indians are becoming wealthier every year. According to the 2015 World Wealth Report by Capgemini and RBC Wealth Management, annual growth in India's HNWI population was reported to be 26% in 2013-14 (note 2). More than 12 million people join the workforce in India every year (note 3), and many, if not all of them, need access to convenient banking and financial services. Payments, remittances, savings and investment products, tax management instruments, and protection and indemnity contracts are all popular. There is a great opportunity in the Indian market for digital disruption of financial services, and there are many players. Existing providers have many advantages, but new players with a start-up mentality benefit from their propensity to take risk.

Disruptive Financial Services, Made in India

Launching innovative financial services in India, capable of solving real problems, requires an understanding the local market. Many of the successful firms with a strong foothold in the country are of Indian origin. Paytm, MobiKwik, LendingKart, Faircent, and Mswipe are among those that have cracked the code with their payment, remittance, or lending platform. The financial services industry is enormous, and there are plenty of opportunities for those looking to innovate. Wealth management services, for example, need an overhaul. Innovators like FundsIndia, ScripBox, and PolicyBazaar make a compelling offer, but I believe there is plenty of room for improvement - especially in comparison to international peers such as Motif and Wealthfront.

According to Nasscom, there are close to 400 companies in India that are focused on the fin-tech market. They attracted about USD450 million in investments in 2015 alone. According to Business Standard, a daily newspaper, the global fin-tech industry will grow at a CAGR of 7.1% and be a USD45 billion opportunity by 2020. At present the total Indian fin-tech market is about USD8 billion, with fin-tech software worth USD1.2 billion and expected to grow 1.7x by 2020 (note 4). To aid this growth, giants in the financial services, technology, and venture capital industries, are coming together to form fin-tech incubation labs. Yes Bank recently announced a collaboration with T-Hub to create one such incubation lab. Barclays has established an accelerator in Bangalore.. Societe General and Axis Bank have also launched fin-tech startup accelerators, and the State Bank of India has set up a USD30 million fund dedicated to support Indian fin-tech startups.

The future is exciting for firms looking to disrupt the financial services space in India.

Note 1: Regulatory challenges to fintech in India, published by YourStory on 17 Feb 2016: http://yourstory.com/2016/02/fintech-india-regulatory-challenges/, accessed on 20 May 2016

Note 2: 2015 World Wealth Report, Top 25 HNWI Populations, 2014 (by Market): https://www.worldwealthreport.com/Global-HNWI-Population-and-Wealth-Expanded, accessed on 20 May 2016

Note 3: The Numbers - India's Labour Force, published by WSJ Blogs on 2 July 2015: http://blogs.wsj.com/briefly/2015/07/22/indias-labor-force/, accessed on 20 May 2016

Note 4: India emerging as a hub for fin-tech startups, published by Business Standard on 18 May 2016: http://www.business-standard.com/article/companies/india-emerging-a-hub-for-fintech-start-ups-116051700397_1.html, accessed on 20 May 2016

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