According to the KPMG/NASSCOM report on Fintech in India – powering a digital economy, the Asian fintech market is currently dominated by two growing economies: China and India.
Fintech investments strengthened in H1 of 2018 in China compared to the end of 2017, while the Indian market experienced large investments in fintech with 31 deals in Q2 of 2018, propelled by strong government reforms aimed at steering the country towards a digital economy. India’s goal of a digital economy has led to government and regulator backed initiatives. This, together with the growing internet and smartphone penetration has facilitated the adoption of digital technologies with the financial services system moving from a general services approach to banking to a more personalised offering.
While financial institutions can adopt these technologies via fintech collaboration and in-house experts, according to Gayathri Parthasarathy, Head of Financial Services – Advisory KPMG in India, the real impetus of digital transformation is likely to be catalyzed by the adoption of open banking, AI-driven data intelligence and distributed ledger technology (DLT).
The KPMG India report in collaboration with NASSCOM 10 000 start-ups identify three emerging technologies driving the digital landscape – open banking, artificial intelligence (AI) and DLT.
Traditionally, banking used a closed ecosystem with data accessed in silos and limited data sharing with the customer offering limited to the institution’s specific products. The new open banking model is a shared ecosystem where information and data is accessed via a network of financial institutions, sharing information via application programming interfaces (APIs). This allows third parties to access banking or financial information data in real-time which translates into customized offerings according to the needs of the particular consumer.
India’s journey from UPI to UPI 2.0 has used this collaborative environment to establish a payments ecosystem.
This journey started with the implementation of a set of APIs in 2016 called India Stack. This aims to move towards a presence-, paper- and cash-less service financial ecosystem. Starting with the first API as an identity layer, Aadhaar, India Stack’s API network provide a wide spectrum of data from biometric identification to instant payments system that enables peer-to-peer (P2P) transfer of money between bank accounts with the help of open APIs and enablers using them. Bankingtech states that today, taxes, bank accounts, pension funds, academic scholarships, farming insurance, cooking gas and food subsidies, driving licenses, financial support schemes and mobile phone connections are linked to Aadhaar, helping governments have a single, transparent view of the consumers’ needs and also helping to handle issues around money laundering, corruption and terrorism.(2)
Thus Aadhaar is only one of the enablers within the stack which fintechs, developers, banks, healthcare providers, non-profit organisations and others can use to build offerings and value-added services that benefit the end consumers.(2)
Fintech in India – Powering a Digital Economy reports that the Reserve Bank of India (RBI) recommended providing a non-mandatory environment for developing fintech innovations and testing of APIs. As a result of reforms relating to India Stack, UPI – Aadhaar Payments Bridge, recorded growth in transaction volume from 0.1 million in October 2016 to 312 million in August 2018. Transaction value grew from INR 0.5 million to INR 542 billion in the same period.
AI refers to the ability of machines to perform cognitive tasks such as thinking, perceiving, decision making and problem solving, which normally would have required human intelligence.
The KPMG report notes that the current AI environment in India is gaining momentum, with over 400 AI-related start-ups and attracting investments of USD150 million, just over the last five years.
The Indian financial services sector is currently addressing some of its persisting challenges such as shrinking margins and rising non-performance assets (NPAs). Additionally, the entry of non-traditional finance players, shift in consumer preferences and rise in regulations and compliance obligations is paving the way for the Artificial Intelligence (AI) revolution in the country.
Added to this is the push from government to converge the public data systems and movement of banks towards open frameworks, laying the foundation for usage of AI to drive strategic decision making in financial institutions. Furthermore, some of the use cases such as AI led credit scoring, micro insurance and distribution models can play a key role in addressing the unbanked population in rural areas.
By 2035, AI is expected to add USD957 billion to India’s economy. (This can be viewed in the context of global AI adoption, with total AI spending is expected to grow at a CAGR of 46.2% over 2016-21 to USD52.2 billion in 2021. And in 2018, worldwide AI spending is expected to grow 54.2% y-o-y to USD19.1 billion.)
Blockchain gained visibility in India in 2016 resulting in financial institutions and fintechs to start investing heavily in the technology. In fact, within the next 5 years, blockchain has a potential to create value of USD5 billion across all sectors in India.
According to the KPMG report, blockchain development in Indian financial services is in line with its global counterparts. Many industry specific consortia are prototyping blockchain for numerous use cases and players are also joining international consortia to gain exposure. Many other players are joining the banking sector’s adoption of the technology, including many insurance players and a leading Indian stock exchange. Since 2016, trade finance, cross-border payments, bill discounting, digital identity and supply chain financing have been the top blockchain application areas in India.
The report states that India’s government sees blockchain technology being implemented in areas such as land records, supply chain management, identity management, benefit distribution, educational certificates, power distribution and cross border finance. To facilitate this, the government is providing infrastructure and institutions to help in developing blockchain skills, piloting the technology in its internal systems, and developing interoperable platforms.
Skill development and educational initiatives are furthering blockchain adoption as follows:
- NASSCOM collaborated with a research institute in Canada
- Blockchain hackathon organised by Government of Karnataka
- Blockchain academy set-up in Kerala10
Government departments have implemented pilot projects using blockchain as follows:
- Andhra Pradesh has become the first Indian state to start testing blockchain for governance, piloting two key projects: (1) Managing land records to curb property-related disputes and (2) Streamlining vehicle registrations. The state plans to implement blockchain across its entire administration
Andhra Pradesh government aims to develop a thriving blockchain ecosystem and has also partnered with a New York-based blockchain software technology company. The partnership looks promising for its Fintech Valley Vizag initiative, which aims to attract investors and multinational corporates to establish business in the state.
- The Government of Chhatisgarh has taken initiatives to deliver proactive e-governance by leveraging blockchain for a pilot in identity management, e-health records, land records management, in collaboration with NITI Aayog
- Many other states such as Maharashtra, Karnataka and Telangana are also gearing up for blockchain in their governance.
Platform development initiatives
- Niti Aayog has launched IndiaChain, a blockchain project similar to Unified Payments Interface. It is an interoperable platform for both the government and private entities to build scalable blockchain solutions. An aim of the project is to develop a system that minimises frauds, speeds up enforcement of contracts and increases transparency.
Blockchain technology players
Blockchain startups in the country raised over USD5.3 million between January 2016 and April 2018. This is underpinned by the Indian government’s constant efforts towards building India as a world-class digital hub.
Fintech Valley Vizag was successful in raising USD900 million and creating more than 5,500 jobs until December 2017. The government, academia, entrepreneurs, and investors are hosting blockchain, data analytics, artificial intelligence, machine learning, cyber security and cloud computing as a part of this initiative. Banking Financial Services and Insurance Use Case Repository Program and Fintech Valley Accelerator Program in Vizag25 were launched by the state government in 2017 to develop fintech infrastructure in India.
India’s current technological landscape is laying a fertile foundation for the growth of fintech and other industries, providing new opportunities for investors and startups to provide new offerings. The impact of technology continues to bring new changes, reshaping opportunities and industries in its wake. In this way business and services will be redefined and new groups of the population will be included in the financial ecosystem, providing opportunities of financial inclusion and bringing India further in line with its global counterparts.