Banking the unbanked – India's race to digital

Following my story around the learnings from China, I was tempted to do a similar one around my learnings from her fast-growing neighbour and rival, India! India has also made great strides in digitizing the financial services industry in the last three years.  Prime Minister Narendra Modi has been a champion of the “Digital India” program since coming to power in 2014. The "Digital India" program aims to transform the nation into a digital empowered society and a knowledge economy.

However, unlike my experience in China, I do have to exchange some money before leaving for India.  It is not as easy for me to get set up on one of the local payment wallets.  I was told I needed to get a local phone number to set this up!  Here are some perspectives from the view of an outsider into the Indian financial services industry.

Three distinct trends mark the incredible growth of financial services industry in India:

  1. The government’s digital push   
    • India would possibly rank highest in terms of government initiatives to bolster the growth.  The demonetization of the currency in 2016 was a huge stimulus that accelerated digitization.  This was followed up with several other government programs to bring financial inclusion to this largely unbanked country.  
    • The local central bank, RBI has set a vision to quadruple the digital transactions in a three-year period by 2021.  It encourages the participation of new players with focus on customer experience as a key driver. Over the last 4 years, India has seen the emergence of the Fintech industry and has been a hotbed for some of the largest investments in Fintech. The digital payments market in India is expected to reach $1 trillion in value by 2023 and is expected to form a significant portion of the global digital payments market. 
    • Central to the innovation in India’s digital landscape is the development of “IndiaStack” by the government.  It is an open API based technology stack that will change the way the country will function moving forward.  It consists of 4 layers or technology stacks – An Identity /Presence Layer, A Paperless layer to digitize all forms of records (E-KYC, Digilocker, E-Sign), the Cashless layer (Unified Payments Interface) and Consent layer (allowing the user to give consent to various parties to access his/her data).  Each layer takes away considerable friction that citizens faced when accessing government or other regulated personal services.  
    • The Unified Payments Interface (UPI) enables the user to power multiple bank accounts into a single mobile app.  It merges several banking features including merchant payments in one interface.  It has been a great success story and does about 800 million transactions a month with a value of US$19 billion–in just three years of launch.  
  1. The exploding activity amongst startups and global tech giants 
    • Unlike its next-door neighbor, India has been quite receptive of the global tech giants who have made big bets in this market.  Estimates from research firm Twimbit suggests that close to US$1.9 billion of investments were made in 2018 alone. 
    • The majority of the investments were in the payments sector led by PayTM, the pioneer as well as leading platform.  Global giants Amazon, Google are quite active in this sector.  Out of the 2,035 FinTech startups in India, most belong to the Payments segment (375 startups), which amounted to 18.43% of the total number of startups. I am constantly amazed at the high number of television adverts from competing providers offering lucrative cashbacks for using their payment services. (just over 5 years ago, all I remember was adverts on soaps and detergents) Lending and insurance are the other dominant sectors which have attracted the bulk of the venture funding.  
    • The ability for startups to access a platform such as UPI discussed earlier, will further accelerate the pace at which new startups will be founded and funded.     
  1. The digitization efforts of the existing industry participants 
    • India is home to some of the best performing as well as worst performing banks. The sector is gigantic and is home to about 99,000 banks (public, private, urban/rural co-operative banks). A recent government drive to bring citizens into banking (Pradhan Mantri Jan Dhan Yojana) saw the opening of 355 million accounts and deposits increased by US$14 billion.  This is still day one of banking in India!!!  Imagine the potential.  
    • The ICT spending by the banks have grown to reach US$9.8 billion in 2018, a growth of 10 percent over the previous year as per research firm Twimbit and API / Open Banking is high on the agenda of every CEO.  
    • The co-operative banks (1551 urban and 96,612 rural) have embarked on a major digitization initiative including moving their applications onto the cloud, sidestepping the process of investing in traditional IT infrastructure.  An effective digital transformation program can greatly contribute to enabling financial inclusion to all sectors of the economy.  

Whilst so much has been done in the last three years, I cannot but fathom the opportunity ahead.  India will be the land where we will see the full spectrum of competition in the financial services sector, which includes the tech giants, the financial institutions of the world, Fintech startups as well as the local banks.  The stage is getting ready for digital enabled partnerships to usher in incredible growth to this economy.  “Incredible India”– it certainly will be!


The Future of Banking

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