The COVID-19 pandemic has ushered in a golden age for fintech, accelerating the global adoption of fintech products of all stripes. Contactless and cashless payment methods have been encouraged at all levels due to contagion concerns. The lockdowns have put pressure on household finances, forcing consumers to take out loans from digital banks. Central banks have once again cut interest rates to near zero, with no end in sight. Cryptocurrencies have reached all-time highs and Bitcoin has gained a foothold in the mainstream financial sector, even being adopted as the national currency in El Salvador and the Central African Republic. Consistently low yields and exorbitant US stock prices have spurred investors into new markets, and emerging market fintechs are suddenly brimming with money and resources. World, $125 billion venture capital was invested in fintech in 2021.
Most of that $125 billion went to mega rounds in the US and Europe, but $14 billion traveled to the pearl of fintech emerging markets: India, which is now 21 fintech unicorn out of 2,000, 6,000 or 10,000 fintech companies, depending on the source. On the consumer side, the pace of fintech adoption in India is breathtaking. In 2019, 75 percent of all point-of-sale payments were made in cash. By 2020, this figure was only 38 percent, and the rest of the funds were sent through payment systems, wallets, credit and debit cards. Fitch. Indian Prime Minister Modi said in May this year that 40 percent digital transactions in 2021 were made in India, home to 16 percent of the world’s population.
Governments around the world are encouraging the growth of fintech ecosystems for several reasons. First, the digitalization of the economy makes it easier to track and tax (in case you haven’t heard, tax inspector appropriate for your Venmo account). The expansion of the digital payment infrastructure has contributed to half or the informal economy of India, according to the chief economist at the State Bank of India. Secondly, from a security point of view, payment systems and systems that are owned and operated are preferred. Third, shorter payment and settlement times mean a faster cycle of capital, which revitalizes the economy.
Few major governments have been as passionate about fintech as India, which laid the groundwork for its state-of-the-art fintech infrastructure in 2014 by linking the so-called JAM trio: zero-minimum bank accounts for non-banking banks (known as Jan Dhan) linked to Aadhaar (the national Biometric Identification System of India) associated with mobile phone numbers. In the past decade, the government has funded fintech-friendly initiatives including e-RUPI, India Stack and the Unified Payments Interface (UPI), and supported the fintech sector with 15 billion Indian rupees ($200) in guarantees, grants and reforms. million) to further stimulate digital payments Union budget for 2021.
Indian fintech companies are becoming more systemically important to the overall financial system. Indian banks and fintech companies are collaborating to maximize their benefits. Banks provide regulatory know-how and balance sheet weight; fintechs offer new underwriting and risk assessment analytics, better UX and more flexibility. But as foreign capital pours into the fintech coffers, and new products and partnerships blur the lines between banks and non-banks, the Reserve Bank of India (RBI), initially a staunch supporter of fintech, has begun to make an impact on the other side.
Fintech services are evolving on a spectrum consistent with consumer general financial sophistication, spending and borrowing habits, and smartphone penetration. Rich countries are dominated by investment and non-banking fintechs (Ally, SoFi, Robinhood), but payment digitization is the starting point for fintech in low-income countries. Breaking consumer exclusive trust in cash (typically through payment services) is the first hurdle to fintech adoption, usually followed by other services.
India’s fintech space is especially unique. India is home to UPI, the world’s busiest real-time payment system. Launched by RBI in 2016 and operated by major banks in the country, UPI allows real-time transfers of customer funds between member banks using a mobile phone, even a flip phone. UPI is an open network that allows non-bank technology companies to build applications on top of it, creating an ecosystem of interconnected networks that are even used for interbank transfers and IPO placement, in addition to sending an SMS to a friend about your share of the dinner bill. By all accounts, it was a wild success, so much so that Google urged Federal Reserve System to create a similar system.
UPI has opened up a huge digital payments market in India and spawned thousands of payment startups. This caught the attention of American corporate heavyweights, and two largest payment systems India today has Google Pay and PhonePe Wal-Mart, which together have 83 percent market shareahead of the offers of Amazon, Facebook, Alibaba and local players (federal antitrust investigation against Google Pay).
However, being a payment provider in India just doesn’t “pay off”. By government order, all UPI transactions are free; This means that payment fintechs (including those run by Google and Wal-Mart) have additional revenue offerings, typically lending and buy-now-pay-later (BNPL) services. Credit issuance in India is highly regulated, so payment providers and other non-banking fintech companies partner with licensed lenders to provide digital consumer loans, which are typically small, short-term and one-time.
India’s digital loan market has exploded over the past few years. Total lending doubled from 2017 to 2021, but total digital lending grew astonishingly twelvefold for the same period, according to RBI 2021 Digital Lending Working Group Report. In particular, unsecured (not secured) loans has doubled as fast as secured loans over the same period. The Boston Consulting Group estimates that digital loans will represent 50 percent of all retail loans by 2023, the total market size will be $300 billion. The same RBI task force found that out of 1,100 digital lending apps available on app stores, 600 were illegal under RBI definitions. A number of these illegal applications were controlled Chinese shell companies (India is not a favorable environment for Chinese applications. 273 apps blocked at last count, including TikTok).
Unlicensed fintechs were originally limited to issuing one-off consumer loans. But in recent years, fintech companies have entered the credit card market by loading prepaid purchasing instruments (PPIs) with lines of credit provided by licensed lenders. These tools are often skirt certain Know Your Customer (KYC) rules and charge above market rates. According to the Payments Council of India, 600 000 such cards are issued every month, mainly to young Indians who would not otherwise be able to access credit.
These enterprises, which technically operate in legal gray area, because PPIs were not defined as lending instruments, suspended operations in June 2022 when the RBI banned the issuance of lending PPIs. Taken on its own, this is a minor event (although directly affected fintechs have raised over $700 million mostly from US investors), but the move indicates a cooler relationship between the fintech community and the government.
There are many theories about the expected tightening of regulation. First, there is suspicion that the RBI shows the scale of India’s traditional banking system. There is assumption that as the fintech market matures, participants will take the form of traditional banks and be subject to comparable rules. Most importantly, given the explosive growth of digital credit, there is a sense that consumer lending could spiral out of control, saddling consumers with bad debts originating in legal gray areas and outside the watchful eye of the RBI.
The Government of India is among friends as it is more critical of digital lending. The crackdown in China at the end of 2020 was outpacing, sending a clear signal of the destruction of the credit giant at the eleventh hour. Ant Group IPO and subsequently disappearance its founder Jack Ma. In October 2021, the Indonesian police raided in lending to fintech offices and closed 5,000 illegal lending operations since 2018, according to Fitch. Kenya adopted a law regulating lending practices in February 2021, supported by the financial services industry. Even IMF called for increased oversight of fast-growing fintech companies.
So far, restrictions elsewhere have supported Indian fintech investment as investors prioritized markets with less risk of regulatory disruption. But even the worm will turn, and the RBI’s rumble of increased lending regulation in February 2022 crystallized into their first meaningful action. The bank’s shares rose after the June announcement, indicating expectations of future restrictions.
“The Treasury is based on mining, the army is based on the treasury; He who has an army and a treasury can conquer the whole wide earth. This is what Kautilya wrote in the Arthashastra, a treatise on political economy written during the Mauryan Dynasty of India (321-185 BC). Overall, this crackdown is a reminder that while high-profile fintech companies may have a treasury, they don’t have an army – and until they get one, they are subservient to them.