Synopsis: In today’s blog, we highlight some key factors, trends, and developments that have catapulted the Indian financial sector to a high growth trajectory.

The Indian financial sector has undergone a dynamic transformation over the last decade, particularly post-pandemic. Supported by a surge in digital adoption and the startup revolution, India today supports the 3rd largest fintech ecosystem.

With over 2,000 startups, the Indian fintech industry’s market worth is set to surpass $150 billion by 2025; lending, payments, and insurance constitute most of this growth. Besides, the financial landscape is shining with evolving partnerships between traditional banks, fintechs, and financial aggregators.

So, what has brought about this blitzkrieg of growth in the Indian financial sector, and which trends and developments are likely to persist? Let’s understand.

Key Developments that Redefined the Indian Financial Sector

The Indian financial landscape is increasingly becoming innovation and tech-driven, with India Stack, artificial intelligence (AI), embedded finance, and robotics playing an instrumental role in its transformation. Conventional lenders have been reevaluating their role and collaborating with fintechs to offer bespoke loans, savings, insurance, and other credit products.

1. IndiaStack: The Foundation for Financial Revolution

The roots of digital transformation can be traced to the launch of Aadhaar, a unique, unified identification system which now forms a part of IndiaStack. Aadhaar, along with the launch of Jan Dhan Yojana in 2014, accelerated financial inclusion by massively improving bank account enrollments and offering overdraft facilities.

Additionally, the government and RBI pulled no pit stops while advancing financial literacy through several educational initiatives and campaigns launched over the years. (Remember, “RBI Kehta Hai”?)

IndiaStack, which is a decentralized public utility, has enabled several financial sector players, including fintechs, to offer paperless and cashless service solutions to India’s biggest payment and data-management challenges. On using its sets of open APIs, lenders have managed to lower loan costs, making credit accessible and affordable.

2. Digital Payments for Cashless Economy

With an 87% fintech adoption rate, there is no doubt that consumers have taken to digital payments as fish takes to water. They have also been integrating other digital solutions, such as online-only insurance, digital wallets, and investment tech, into their lifestyles. Of course, a significant portion of this growth can be traced to the pandemic days when going cashless was the safest option.

Not to be left behind, even MSMEs have jumped on the digital payments bandwagon. For instance, in FY22 alone, 74 billion UPI payments worth Rs. 125.94 trillion were processed, making it the most popular person-to-merchant (P2M) payment method.

This growth is expected to sustain for a while, with lenders looking to further link UPI to credit cards and integrate it into the global payments system (10+ countries today accept UPI). In fact, RBI aims to raise digital payment transactions 3x by 2025, per its “Payment Vision 2025” report. 

3. Digital Banking and Neobanks

Digital banking has taken off with customer onboarding transitioning from physical papers to online processing. Supplemented with AI/ML-driven algorithms, several large incumbent banks have been striving for digitalization, thus lowering processing and interest costs, while ensuring superior customer engagements.

This trend also explains the soaring popularity of neobanks, i.e., digital-only banks. For the uninitiated, neobanks are financial companies that behave like banks but have no physical branches. With smartphone penetration, cheap data rates, and consumers’ preferences for digital solutions, neobanks have soared in popularity. Best of all, they offer personalized financial solutions, fueling their growth further.

According to Inc42, neo-banking is forecasted to expand by 281%, accounting for nearly 9% of India’s fintech market. This is despite the introduction of stringent digital lending guidelines by RBI. In fact, another Inc42 report states that these guidelines will spur the growth of niche regtech startups in the financial sector. 

4. The BNPL Trend in Consumer Lending

Buy Now Pay Later (BNPL) is a novel consumer lending product where banks extend credit to their consumers by spacing out interest-bearing installments over a short period. While concerns have been raised about financially illiterate people taking on BNPL loans without understanding the financial arrangements, this product continues to grow.

Indeed, according to GlobalData, the BNPL market is expected to grow at 32.5% CAGR between 2022-2026, totaling Rs. 1.1 trillion by 2026. This growth is driven mainly by the growing inclination toward shopping online. 

5. The Rise of Embedded Finance

Embedded finance is the practice of integrating financial services by digital-first, non-financial firms. As a result, consumers can directly pay on the platform, discounting the need for the involvement of third-party payment providers. Cab payments and e-commerce payments are some examples.

6. Blockchain, CBDC, and e-RUPI

Unless you’ve been living under a rock, blockchain took the world by storm during COVID-19, including the financial landscape. Many central banks, including RBI, have mulled over expanding their use cases by building a central bank digital currency (CBDC) over the blockchain.

While a completely digital money product is still in piloting, RBI has introduced an e-RUPI, which is a contactless and secure method of availing of benefits by redeeming the government voucher. However, it is likely to expand further into the retail payments space over the next 2-3 years.

7. Evolving Regulatory Landscape: Open Banking and AA

In addition to issuing digital lending guidelines, RBI has introduced an Account Aggregator (AA) framework for an equitable regulatory ecosystem. It has given a fillip to open banking by empowering individuals to share their financial data with lenders on a consent basis to avail of easy credit options.

Furthermore, with India set to accede to The UN’s Responsible Digital Payments principles, the financial sector is set to become more secure.

8. Engineering Finance

Some lenders, like Protium, have adopted engineering finance, a refreshing approach to finance where they use their proprietary lending models for evaluating a borrower’s creditworthiness. Engineering finance is a cohesive collaboration between tech, data science and analytics and risk. This helps ascertain the customer’s requirements through data analytics, build best-in-class risk models and create innovative products using cutting-edge technology.

As a result, business loans are no longer dependent on CIBIL scores. Instead, lenders now utilize their own credit scoring models, including cash-flow-based lending, to sanction tailored and affordable loan products.

Bottom Line

Financial sector players have been capitalizing on technology to generate value and transform India’s financial ecosystem. While the trends of AI/ML-driven digital banking, digital rupee, engineering finance bode well for borrowers, they have also raised some security and data privacy issues. The government should continue to enhance financial literacy to enable the masses to gain from this momentous financial transformation.