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Context

FinTech is rapidly changing the face of the banking industry, as several banks are now switching to digitization as well as paperless and cashless processes.

Fintech in India: A backgrounder

• With the establishment of two institutions in 2009, India’s fintech journey began.
• The National Payments Corporation of India was the first to take over ATM networks in India in order to modernize retail payments and settlements.
• The second step was the establishment of India’s Unique Identification Authority.

What are fintechs?

• Fintech, the word, is a combination of “financial technology”. 
• Financial technology (Fintech) is used to describe new tech that seeks to improve and automate the delivery and use of financial services. ​​​
• At its core, fintech is utilized to help companies, business owners and consumers better manage their financial operations, processes, and lives by utilizing specialized software and algorithms.

Key fintech products

• Digital Public Infrastructure (DPI): DPI refers to digital solutions that enable basic functions such as collaboration, commerce, and governance, which are critical for public and private service delivery.
• Digital Public Goods (DPGs): DPGs refer to open source software, open data, open AI models, open standards, and open content that adhere to privacy and other applicable best practices.  They’re an important tool for constructing infrastructure in ways that avoid some of the drawbacks of proprietary software-based solutions.

Why in news?

• India is one of the largest and fastest-growing markets in the world with more than 2100 fintechs.
• It has the third largest fintech ecosystem in line after the US and China.
• As of December 2021, India has over 17 fintech companies which have gained Unicorn status with a valuation of over USD 1 billion.

FinTech industry in India: A closer look

• Banks have conventionally served as the gateway to payment services in India.
• However, with the rapid advancement of technology, this no longer appears to be the case, as the monopoly of banks in this area is gradually weakening.
• In recent years, India’s payments infrastructure has seen substantial improvements, particularly with the introduction of new payment mechanisms and interfaces such as Immediate Payments Service (IMPS), Unified Payments Interface (UPI), Bharat Interface for Money (BHIM), and others.
• The government’s “Make in India” and “Digital India” projects also played a significant role in accelerating the adoption of Fintech.
• It is commendable that the Reserve Bank of India (RBI) has also pushed the growing use of electronic payments to establish a truly cashless society in recent years.

Key initiatives: India Stack

• The India Stack is a set of APIs that allow the government and private sector to deploy cashless and paperless technology.
• Although the owners of these APIs are responsible for their upkeep, the India Stack encourages developers to use them by hosting events.

Components of the India Stack

• Unique Identification Number: The UIDAI makes up the India Stack, also known as the Aadhaar Stack. This is the individual’s unique identification number, which is linked to their biometric readings.
• E-KYC: The e-KYC project allows businesses to obtain instant customer verification.
• AEPS: AEPS expands financial inclusion by allowing government entitlements and bank-to-bank transfers to be disbursed at retail outlets that can go cashless.
• UPI: A payment request and a customer can use the Unified Payment Interface to send funds to a beneficiary and collect payment requests from customers.
• E-Sign: eSign is enabled through an API that facilitates an Aadhaar cardholder to electronically sign documents. This is authenticated through biometric readings and through an OTP.
• DigiLocker: DigiLocker is used as a Government of India repository for documents.
• Digital Signature: Digital Signature provides the capability that allows individuals to electronically sign contracts with any entity without a pen or paper.

FSCA – The Governing Body

• The IFSCA was established under the International Financial Services Centres Authority Act of 2019.
• In India, the IFSCA is the single body in charge of the creation and regulation of financial goods, financial services, and financial institutions.
• India’s first international financial services centre is the GIFT IFSC.
• IFSC serves as a unified authority for the development and regulation of financial products, financial services, and financial institutions.

Data and standards

• People and small businesses can now retrieve and use their data thanks to digitised infrastructure.
• To make this open-banking system work, a standard language will be needed, similar to how UPI created a payment protocol.
• The National Payments Corporation of India (NPCI) is launching an Open Credit Enablement Network (OCEN) to connect lenders and marketplaces.

Challenges to FinTech in India

• Despite being a vastly diversified and populated country, a huge portion of India remains underbanked, underserved and subject to a constantly changing regulatory environment.
• And for these very reasons, the nation’s financial landscape and unsolved challenges are no easy hurdles to overcome.
• This is where Fintech enters the equation, with its ability and power to fundamentally alter and transform India’s financial and banking services sector.

Conclusion

• FinTech companies’ growing partnerships with traditional banking, insurance, and retail sectors, where they are actively catering to evolving customer needs, will further accelerate FinTech’s expansion in India.
• All these factors indicate a positive shift towards FinTech and present a huge growth potential for the industry, with the country gearing towards massive adoption.