FINTECH, a Facilitator or an Unwanted Middlemen

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Financial technology, commonly known as FinTech, has emerged as a dynamic industry in India, with companies leveraging technology to provide a range of financial services, including insurance, asset management, and payments. The growth of FinTech in India has been propelled by robust government reforms, driving the country towards a digital economy. Factors such as increased internet and smartphone penetration have further accelerated the adoption of digital technologies in various sectors. However, some experts call FINTECH as an Unwanted Middlemen. Given its importance, “FINTECH, a Facilitator or an Unwanted Middlemen” is a hot GD Topic, Essay Topic and Interview Question for MBA Admissions and other entrance exams. MBAUniverse.com presents a complete report.

 

Fintech in India - One of the largest and fastest-growing FinTech ecosystems globally
India, according to Ernst & Young (EY), boasts one of the largest and fastest-growing FinTech ecosystems globally, ranking second after China with an impressive adoption rate of 87%. In 2021, the estimated value of the FinTech market in India reached $50 billion, underscoring its significant impact.

 

India is among the most significant operating countries for hosting a thriving cluster or fintech headquarters, a WEF study said on January 18, 2024. Releasing the report during its Annual Meeting 2024 in Davos, the World Economic Forum said fintechs are increasingly expanding operations across borders, mainly in the same region as their headquarters. "The study reveals that vibrant hubs such as Singapore, the UK, the US, and India have hosted a thriving cluster of fintech corporate headquarters. "Among the countries surveyed, the most significant operating countries for fintechs include the US, the UK, Singapore, Mexico, and India," it added. 

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FinTech Start Ups Drive Ecosystem
The Rise of FinTech in India has been marked by a surge in startup numbers, growing from 733 in 2016–17 to over 14,000 in 2021–22. Of these, around 6,600 operate in the FinTech space, collectively valued at $31 billion in 2021. This remarkable growth can be attributed to a large talent pool, favorable regulations, and increased venture capital investments over the past decade.

 

FinTech startups in India have attracted substantial funding, with over $8 billion invested across approximately 1,000 deals between 2015 and mid-2020. In 2021 alone, an additional $8 billion was invested, signaling an exponential rise. Key players in this surge include Pine Labs, BharatPe, Razorpay, and Of Business.

 

Several drivers have contributed to the success of FinTech in India:

  1. Increased Funding: A surge in investments from venture capital, private equity, and institutional sources has provided crucial support to FinTech startups.
  2. India Stack: The adoption of India Stack, a set of APIs facilitating digital infrastructure, including Aadhar, Unified Payments Interface (UPI), and Bharat Bill payments, has played a pivotal role.
  3. Innovation in Technology: The development of new business models utilizing technologies like Machine Learning and Artificial Intelligence has been a key factor.
  4. Smartphone and Internet Users: With over 550-600 million smartphone users and 795 million internet users as of December 2020, India ranks among the top globally.
  5. Government Initiatives and Regulators: Initiatives like Jan Dhan Yojana, Startup India, and Digital India, coupled with regulatory frameworks by RBI, IRDAI, and SEBI, have fostered a conducive environment for FinTech growth.
  6. International Collaboration: Initiatives like Startup India have facilitated collaboration between Indian and global startup ecosystems, encouraging knowledge exchange and fund support.

The startup landscape in India has witnessed a significant milestone, with 44 startups achieving 'Unicorn' status in 2021 alone, bringing the total to 83, valued at over $277 billion. Notably, 15 of these unicorns belong to the FinTech sector, collectively valued at around $60 billion.

 

To support and consolidate business infrastructure, several FinTech hubs, including Fintech Valley Vizag, O-hub Bhubaneswar, Bandra Kurla Complex, FinTech Hub Kolkata, and Mumbai Fintech Hub, have been established by respective governments. 

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FinTech Sectors – From Digital Payments to P2P to BNPL…

  1. Digital Payments: The digital payments sector has experienced significant growth, with a CAGR of around 60% from FY2016 to FY2020. Factors such as demonetization and the COVID-19 pandemic have accelerated the shift towards digital transactions.
  2. Alternative Lending: FinTechs in alternative lending aim to address the credit demand-supply gap. With a growth rate of 29%, alternative lending has become the second-largest recipient of FinTech investments.
  3. Buy Now Pay Later (BNPL): BNPL solutions offer short-term financing, and the sector has gained popularity, especially in scenarios where traditional lending processes face complexities.
  4. Peer-to-peer (P2P) Lending: P2P lending facilitates direct monetary transactions between individuals, eliminating the need for intermediaries. Key players include Faircent, Lendbox, RupeeCircle, and i2iFunding.
  5. MSME Financing: FinTechs addressing Micro, Small, and Medium Enterprises (MSMEs) credit needs have become crucial contributors to India's economy. LendingKart, Flexiloans, KredX, and C2FO are prominent players in this space.
  6. InsurTech: The insurance sector is witnessing a surge in technology-driven innovations, including wearables and IoT-linked products. Notable InsurTech companies include Acko, easypolicy, turtlemint, Policyboss.com, PolicyBazaar, and Digit Insurance.

Regulating Fintech: RBI Draft Guidelines (January, 2024)

To regulate the Fintech sector in India, Government is taking the necessary steps. The draft guidelines from the Reserve Bank of India (RBI) for Self-Regulatory Organizations in the Financial Technology sector (SRO-FT) present a comprehensive framework, outlining the desirable attributes these entities should embody while allowing some flexibility. Emphasizing the importance of independence for credibility, the framework suggests that an SRO-FT should operate autonomously, free from the influence of any single member or group, avoiding conflicts of interest and ensuring impartial oversight. Independence becomes pivotal for establishing the SRO-FT as a neutral and trustworthy entity, crucial for gaining the trust of industry participants and regulators. Ensuring a robust information technology infrastructure and the ability to deploy technological solutions within a reasonable timeframe is deemed essential. The SRO-FTs should possess sufficient net worth and a demonstrated capability to establish the necessary infrastructure. Motivating members to align with regulatory priorities, fostering a culture of compliance, and empowering the SRO-FT to investigate and take disciplinary action against non-adherence are key aspects. This approach aims to shape a regulatory environment conducive to innovation while safeguarding consumer protection. Although membership is voluntary, fintech companies are encouraged to join.

 

The draft allows flexibility for the sector to decide on having one or multiple SROs for fintechs, subtly leaning towards the latter due to the diverse nature of fintechs. However, this decision requires industry consensus, considering the balance between addressing concerns and maintaining representative self-regulation. The guidelines provide leeway for different SRO-FTs to achieve goals in their unique ways. Structurally, the SRO is recommended to be a not-for-profit company under Section 8 of the Companies Act, 2013, representing the fintech sector with diverse membership. The RBI retains veto powers on fit-and-proper status, board of directors, and key managerial persons. It can nominate observers on the board and inspect or audit the SRO-FT, with associated costs borne by the entity under scrutiny. The fast-growing fintech industry, a catalyst for financial inclusion, faces the challenge of incentivizing SRO membership. The sector's adoption of optimal governance and operational practices is paramount. The drafted guidelines provide a balanced approach, offering broad guidelines for fulfilling tasks without imposing rigid processes. 

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Conclusion

In conclusion, while the debate over whether FinTech acts as a facilitator or an unwanted middleman persists, its transformative impact on India's financial landscape cannot be denied. FinTech, as a facilitator, has propelled financial inclusion, fostered innovation, and democratized access to financial services. The surge in FinTech startups, coupled with substantial investments and regulatory support, underscores its pivotal role in shaping the nation's digital economy. The recent RBI draft guidelines further emphasize the need for responsible self-regulation within the industry, striking a balance between innovation and consumer protection. As India continues its journey towards a digital economy, the role of FinTech as a facilitator is poised to remain a driving force in fostering financial accessibility and innovation. 

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