Fintech is the marketplace where new technology is used to provide more convenient, faster and cheaper access to the financial system. Indian fintech initially targeted cost-optimisation, but the country’s fintech companies subsequently shifted their focus to maximise revenue. Focusing on costs meant working on innovations in processes and finding technological efficiencies. Focusing on revenue meant developing ways to increase access and offer a greater selection.
In terms of financial activities, fintech is making an impact on how customers make payments, hold savings, and access credit. The extent of the impact so far and the latent market opportunity indicates possible areas where Israel can help to take Indian fintech to the next level.
Current successes in India
India has already seen the introduction of several online payment platforms and robust payment interfaces like UPI, IMPS, and so on. Looking at mobile payment apps, the combined user-base of the three largest apps—PayTM, Mobikwik and Freecharge—was approximately 13% of India’s population before demonetisation. Recent numbers suggest that this has grown to around 22% of the population or about 280 million people.
The convenience of the interface offered by fintech businesses has helped many cash-only customers to shift online. Security features have also provided some comfort to those who use fintech services for critical transactions. Working with a wide network of offline merchants has substantially expanded the fintech sector. The growing investor interest in the sector can be gauged by the fact that China’s Alibaba Group is now the largest investor in PayTM. However, discount marketing schemes threaten the profitability of fintech businesses, just as happened to the early e-commerce sites.
Challenges to India’s fintech sector
The price-point of fintech services is low, hence it is a continuous battle for businesses to expand their user-base. Given this, further consolidation in the industry is to be expected, but only a niche value-added service can offer a rationale for industry consolidation.
The first phase of expansion in the industry was driven by PE/VC investors and the first-generation start-ups. However, the next phase of expansion must come from strategic investors, such as industry-expert fintech companies, rather than secondary sales to further PE/VC funds. Only strategic investors can bring in tested business strategies to expand the market to the next stage in a profitable manner.
Israel’s fintech players may have a role to play in the large Indian market which is still relatively untapped. In the area of savings, India has seen few robo-advisory platforms on the market so far. Also, the rate of financial savings in India have historically been low, given a traditional preference in the country to save in real estate and gold. However, new regulations have made property transactions more transparent, which has reduced the incentives that drive the black market. Meanwhile, recent price trends in both property and gold have not been attractive compared to other assets such as equities.
Thus, the ratio of financial savings to total household savings in India has accelerated from around 31% in 2012 to around 41% in 2016 and from around $134 billion in 2012 to around $165 billion in 2016. This has occurred during a time when total household savings as a portion of GDP dipped slightly from 24% to 19% or from about $431 billion to about $399 billion.
Customer confidence is key
Automated robo-advisory platforms are working to meet the demand from India’s growing middle-class, which makes up nearly half of the population. While these platforms use profile-based and goal-based advice to sell mutual funds, the assessment of each individual’s situation is not customised in-depth, rather individuals are grouped by their behaviour as ‘aggressive’, ‘conservative’ or ‘medium’. These assessments suggest that equity and debt funds should be based on a proportion of 75-25,25-75 or 50-50 respectively for each of the buckets.
However, each individual is different and risk acceptance may vary even between two people in the same ‘bucket’. Most automated platforms are not yet effective at addressing the causes that keep financial savings low—such as investor acceptance of equity funds, the ability to suggest the correct product according to the customer’s situation and resources, and so on. In most cases, the financially illiterate client has to make these calculations himself.
Indians, including millennials, still prefer human interaction when it comes to investment advice, if only for a second opinion. Thus, most automated advisory platforms struggle to grow their user base. Israel’s fintech investment players may sense an opportunity here to build a hybrid automated-human advisory model that evaluates profile information in a more in-depth and customised manner, yet in a way that can be made practical for a large user-base.
Credit for small borrowers
In terms of credit, the lack of access to this for the middle or lower income groups is a huge challenge. Indian banks have been guilty of lending billions to high-income business-people, often losing a large portion in bad loans, while resisting lending mere thousands to middle or lower income people, most of whom repay in time. The result—Indian banks are reeling under a $150 billion bad loan problem.
The Modi-government’s new MUDRA scheme, which disburses micro-loans, lent approximately $24 billion in the financial year 2017, which was only about 62% of the targeted $37 billion. The share of microloans offered by the banks also dipped.
This banking paralysis apart, a key challenge to the availability of credit for small borrowers is the difficulty in conducting credit analysis of such clients in a cost-effective and timely manner. After all, the cost of acquiring a large client is always lower relative to returns. Despite this, micro-small-medium enterprises (MSMEs) contribute approximately 35-40% of India’s $2 trillion GDP, so they cannot be ignored.
Technologies from Israel’s fintech analytic firms can help conduct large-scale credit analytics of this sector in a cost-effective manner. Ariel Resnik of Paretix, an advanced data analytics firm in Tel Aviv, highlighted how machine-learning could transform credit analysis during the recent IMC Chamber conference in Mumbai. Apart from machine-learning, even transaction analysis and social media profiling are being used. India needs more of these new approaches if it is to deepen credit penetration.
In terms of information reliability and security, agents from India’s private insurance players have often been guilty of bungled sellings for chunky commissions. This has created resistance from buyers as they perceive that they are being fleeced. While automated platforms have been developed which help businesses to protect their analytics, and comparison and purchase information, the drop in confidence ominous.
Just like investments, insurance is hardly understood by the general population, hence the importance of human advice for customers cannot be ignored. Automated platforms have to marry human intervention in key areas of the product chain. That would give more comfort to users that they are getting the right product. A hybrid model can combine lower-cost automated elements with higher-cost human elements. Israel’s fintech insurance players have the expertise necessary to help them build such hybrid models.
Israel may have the answers
In conclusion, today’s age is mainly about B2I (Business to Individual), not B2B or B2C. That means a level of customisation far advanced of anything that has ever been envisaged before. Is this easier said than done? At the same the IMC Chamber conference in Mumbai was discussing these challenges, Tal Sharon of Equitech Financial Consulting, an innovation advisory consulting firm in Tel Aviv, highlighted how Israel has been developing new fintech innovations. The value that Israel’s fintech players offer provides latent opportunities in India’s critically large market.