The battle for the Indian consumer - FinTech companies transform the financial services landscape in India October 2017 - EY
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The battle for the Indian consumer FinTech companies transform the financial services landscape in India October 2017
Contents
Foreword 2
FinTech adoption in India 6
Key Themes 10
Unmet financial needs 10
Increasing investment in FinTech 11
Conducive environment 13
Responsive Incumbents 14
Payments 16
Overview 16
Emerging trends 17
The road ahead 19
Financial Planning 20
Overview 20
Emerging trends 21
The road ahead 23
2 The battle for the Indian consumer
Savings & Investments 24
Overview 24
Emerging trends 25
The road ahead 27
Lending 28
Overview 28
Emerging trends 29
The road ahead 33
Insurance 34
Overview 34
Emerging trends 35
The road ahead 37
Conclusion 40
The battle for the Indian consumer 3
4 The battle for the Indian consumer
Foreword
FinTech firms are transforming the financial services landscape in India. Our recently
concluded research (the EY FinTech Adoption Index 2017) shows that India has leapt to
the second place, only behind China, in the adoption of FinTech services across an array
of industry segments. FinTech adoption in India is astonishingly high — more than half of
our sample of Indian consumers claim to have used more than two FinTech products in
the last 6 months.
Not surprisingly, the payments space leads this trend. Driven by mobile wallets, and
more recent innovations including the Unified Payment Interface (UPI) platform, Indian
consumers have embraced the use of mobile payments for day-to-day transactions. Other
FinTech services are also gaining rapid adoption. Consumers are flocking to insurance
aggregator and bank aggregator sites for comparison shopping. Peer-to-peer (P2P)
platforms for high interest investments and online stockbroking and investment sites are
becoming increasingly popular. Borrowing is also being transformed — “digital lenders”
are providing consumers with a simpler, less–paper borrowing experience while leveraging
alternate data as a credit surrogate to provide credit to non-traditional borrowers.
Our analysis indicates that India will ascend to the top of the global FinTech league tables
in the future. Several factors are driving this trend. Indian consumers are hungry for new,
simple and personalized digital experiences. The level of affinity with existing financial
services providers (especially for younger Indian consumers) is low and this is spurring
interest in new FinTech service providers. Over the last few years, India has also built
a world-class enabling architecture for financial services that is spurring innovation.
Almost all FinTech challengers are leveraging the Aadhaar ecosystem (India’s universal
biometric identity with linked mobile number and bank account) and related services to
simplify account opening and servicing.
A conducive regulatory regime (across the financial sector) is also aiding the FinTech
agenda. Newly licensed payments banks will drive an “ecosystem approach” toward
banking, helping to integrate a large network of financial services providers where
FinTech could potentially play a large role. P2P guidelines are imminent and the RBI has
recently issued a master circular regulating P2P lending. In addition, it has also release
a thought paper on account aggregation with a proposed consent-based open API
banking architecture. India also has a deep pool of technical talent that is well placed
to exploit advances in technology from chatbot-based artificial intelligence (AI) to
blockchain-based collaboration paradigms.
These changes have significant implications for incumbents. As has been demonstrated
in the payments ecosystem, FinTech firms are capable of rapid innovation and have the
capability to unbundle parts of the financial services value chain, often those relating to
basic customer engagement processes. Incumbents would do well to understand these
challenges and put in place models to collaborate with these challengers. For their part,
FinTech firms will indeed struggle to match the customer base and scale of operations of
existing providers. While they are innovative and nimble, many of them are yet to prove
that they have sustainable business models.
In this report, we delve deeper into the current FinTech ecosystem in India and how it
is shaping the emerging trajectory of Indian financial services. Using the EY FinTech
Adoption Index 2017 as the base, we provide insights into the FinTech trends that we see
across key segments of the financial services ecosystem. We hope this report provides a
ringside view of one of the most exciting FinTech markets across the globe.
The battle for the Indian consumer 5
FinTech adoption in India
FinTech adoption in India has increased significantly over the last two years and according to EY’s FinTech Adoption Index
2017, India has progressed to become the market with the second-highest FinTech adoption rate (52%) across 20 markets
globally. This holds true for each of the five categories of services with digitally active Indian consumers displaying 50%—
100% higher adoption rates than global averages
FinTech adoption among digitally active consumers
$
Money transfer Financial Savings and
Borrowing Insurance
and payments planning investments
India 72% 20% 39% 20% 47%
Global 50% 10% 20% 10% 24%
Source: EY FinTech Adoption Index 2017 Country Dashboard.
6 The battle for the Indian consumer
As with global consumers, usage of FinTech is highest among the 25—34 years age group, followed by 35—44 years, and it
declines with customers aged 45 years and older. However, unlike in global markets, FinTech adoption in India is lower in the
18—24 age bracket than in the 45—54 age bracket. This could be because a large section of India’s population is in the young
adult category and there is significant unemployment in this age group.1
India’s FinTech adoption statistics across demographics
Across age brackets (%) Across income* brackets (%) By gender
49 18 to 24 years old 55 Less than 15
74 25 to 34 years old 71 15-30
70 35 to 44 years old 69 30-50
64%
54 45 to 54 years old 64 50-80
46 55 to 64 years old 68 80-120
27 65 to 74 years old 82 120-150 58%
9 75 years old or older 85 More than 150
Source: EY FinTech Adoption Index 2017 Country Dashboard; Note: *Income in (US$ ‘000).
India’s FinTech adoption rate exceeds the including poor literacy, limited access to telecom / delivery
global averages platforms and the inability to pay for even the relatively
lower costs of FinTech services. However, this is expected
to change over the next few years on account of a number
52% 33%
of digital initiatives being undertaken by the Government to
drive financial inclusion and direct delivery of benefits.
Adoption by region
India Global
Regional adoption of FinTech services in India mirrors
66% 51% 33%
global trends. FinTech usage is significantly high in large
cities in India, with a 66% adoption rate (42% globally).
Small and
As FinTech firms expand their focus to tier-III and IV cities, Large
they have started witnessing increased adoption and usage Medium Rural
Cities
(51%). Cities
Rural India currently continues to lag behind with an
adoption rate of 33% on account of a number of factors,
1. “Smaller proportion of India’s youth employed,” Mint, 25 May 2016“; The sad illusion of India’s demographic dividend,” Financial Times, 17 October 2016.
The battle for the Indian consumer 7
FinTech adoption in India - the affinity for traditional service providers (especially among
younger consumers), has allowed FinTech firms to build
consumer perspective presence and mindshare, driving acceptance and usage.
The relative ease of setting up an account with FinTech However, the EY FinTech Adoption Index 2017 indicates
providers as compared to traditional financial services, and that as adoption increases, and traditional players start
the ability to access a wide range of services conveniently to address the inefficiencies exposed by FinTech, Indian
are the primary motivators for adoption of FinTech in India. consumers are likely to start demanding ‘bank grade’
services like 24x7 access and more attractive rates and
The demand for simple, convenient services and a better fees.
customer experience, compounded with low levels of
India and Global motivators of adoption (%) India and Global barriers to adoption (%)
31
Easy to set up an account 5
30 Was not aware they existed 14
Access to different 19
products and services 17 Did not have a need to use 4
them 10
13
Better quality of service
8
Don't understand how they 4
Better online experience 11 work 8
and functionality 8
More innovative products
11 Prefer to use a traditional 3
than available from traditional
7 financial services provider 10
financial institutions
Access to services 24 hours 10
a day, 7 days a week 16 Don't see the advantage of Fin- 2
Techs over traditional services 6
More attractive rates and 4
fees 13
2
Greater level of trust than 2 Do not trust them 5
with traditional institutions 2
India Global
8 The battle for the Indian consumer
The battle for the Indian consumer 9
Key Themes
Unmet financial needs However, despite this wide branch network, the financial
services ecosystem still lags in terms of coverage. Over
40% of the population is not connected to banks and an
India is one of the fastest growing economies in the world,
estimated 90% of small businesses are not linked to formal
and according to a recent report by the United Nations,
financial institutions (FIs).
its GDP is expected to grow at 7.1% in 2017 and 7.5% in
2018.2 The country has a wide network of institutional These gaps in access to formal financial services have
credit, with scheduled commercial banks (SCBs) providing created a large untapped market potential for FinTech
significant domestic outreach through 138,294 branches startups to develop a variety of offerings. Underserved
(as of March 2016)3. by the incumbent banking and financial services system,
South
Indicator India Brazil Russia China# US France Germany
Africa
Commercial bank
branches per 100,000 13.6 20.7 32.9 8.5 10.5 32.9 37.5 14.1
adults
ATMs per 100,000
19.7 114 173 76.4 69.3 NA 107 121.1
adults
Outstanding loans from
commercial banks (% of 50.7 42.3 48.6 99.7 67.6 45.6 38.9 21.2
GDP)
Outstanding deposits
from commercial banks 65.8 33 46.2 157.3 43.4 59.5 36.6 28.4
(% of GDP)
#Mainland China Note: Data as of 2015
Source: IMF Financial Access Survey Data, 2016
2. “India to clock 7.1% growth this year, 7.5% in 2018: UN report,” Mint, 11 May 2017; “Fintech in India,” Swissnex Report, October 2016.
3. “Expanding Access to Finance for Small Businesses in India,” Microsave, May 2014.
10 The battle for the Indian consumerSeveral key factors are driving the growth of FinTech in India:
Unmet financial needs Increasing investments
Traditional service delivery models have not been able There has been a significant increase in FinTech
to address the financial needs of consumers. startups in India over the last two years, primarily in
the payments space (driven by regulatory changes and
FinTech, with its ease of usage and access, has allowed
market demand).
consumers to get access to these services, typically at
lower costs, driving its active adoption. In addition, there is increased willingness by domestic,
as well as international VCs/PEs and incubators to
heavily invest in this sector in India.
Conducive environment Responsive marketplace and incumbents
Regulators are interested in driving cashless / digital Globally, FinTech startup are disrupting the business
transactions for financial inclusion as well as control. models of incumbent financial services players.
The spread of broadband / telecom provides a platform In India as in other markets, incumbents are adopting a
for financial services delivery with low delivery costs and range of strategies to deal with the risk and opportunity
high outreach. afforded by FinTech paradigms. These include strategic
partnerships that provide the FinTech firm with access
to bank clients and infrastructure to acquisitions.
consumers (individuals as well as small and medium This has coincided with a shift in focus away from purely
enterprises) have already started turning to FinTech firms customer-acquisition innovation to newer business models
as alternative providers of access to payments, credit, (mobile payments, automated underwriting and processing
investments, insurance etc. Even in urban areas where of transactions etc.)
branches are ubiquitous , banks are often unable to live up
to the increasing expectations of demanding customers.
Younger customers do not have the patience to visit Number of Fintech companies launched
branches. They are looking for fully automated, simple to
use, digital products and services - an area where banks 390
are found lacking - especially when compared to the digital
offerings of ecommerce firms.
192
Increasing investment 125
186
108
in FinTech 60 65
FinTech has been growing steadily in India since 2010;
however, the past two years have witnessed a dramatic surge, 2010 2011 2012 2013 2014 2015 2016*
both in terms of companies being set up and VC / PE
investment in the sector.
The increasing interest in FinTech is evidenced by the near
doubling of the FinTech firms founded in India in the last
two years.4
4. Tracxn FinTech India Report – October 2016; “Fintech: no more the new kid on the block,” Mint, 28 December 2016.
The battle for the Indian consumer 11FinTech funding environment Tracxn, nine FinTech startups in India have the potential to
become unicorns with US$1b or more in valuation.7
remains promising5 The Indian FinTech sector has attracted capital from
India has a large ecosystem of startups, and in the APAC domestic as well as international investors. In 2016, VC-
region is exceeded only by China as measured by the backed FinTech companies raised US$388m across 50
quantum and value of deals.The transaction value in the deals, a five-year high for number of deals but a decline
FinTech market currently amounts to US$44b6 and is from the US$1.6b high in 2015, which was achieved
expected to increase at a CAGR of 20.2% during the period mainly on account of mega-rounds of funding to mobile
2017-2021 to US$92b in 2021. payment providers.
In terms of number of startups, it is the third-largest tech Payments and Lending Tech sectors in India rank high in
startup hub globally with 4,200 tech startups. According to terms of funding received.8
VC-Backed FinTech deals in India Popular areas by funding (US$m)
1,580 50 Mobile payments US$1.3b
47 Payments 360
Lending 345
30
Banking Tech 311
17 20 Insurance Tech 115
388 Software for IIs 64
163 Investment Tech 47
22 38
Consumer finance 37
2012 2013 2014 2015 2016 Enterprise finance 8
Funding (US$ m) Deals Forex 4
News stories
Global VC Quona Capital9 and Japanese IB Global incubators launch in India
Nomura10 invest in Indian FinTech
Several global incubators (Startupbootcamp, Swiss Re
Global VC firm Quona Capital recently launched a and Zone) have launched in India
US$141m FinTech-focused fund for emerging markets.
“Startupbootcamp11, which has FinTech accelerators
The fund plans to invest 30% of its corpus in India,
in New York, London and Singapore, expects around
making India its largest target market.
300 applicants specializing in alternate payments and
Nomura has set up an US100m global fund to invest in lending in the country. It has partnered with ICICI and
FinTechs in the capital markets and investment banking RBL Bank and takes a 6% equity stake in startups.”
(CMIB) space. Nomura has launched a global accelerator
Zone Startups India has partnered12 with Barclays
and co-creation platform called Voyager Nomura
and Axis Bank to start accelerator programs. Global
FinTech, where startups can develop products / services
reinsurer Swiss Re has launched13 “InsurTech,” an
in the CMIB space.
accelerator to help startups develop solutions for
Insurance. Key themes for the accelerator are IoT, smart
analytics & systems of engagement.
5. “Fintech in India,” Swissnex Report, October 2016; “Here’s what’s going on in India’s startup ecosystem,” TechAsia, 16 February 2017.
6. https://www.statista.com/outlook/295/119/fintech/india#
7. “9 fintech startups that could soon be unicorns in India,” TechAsia, 23 August 2016.
8. Tracxn FinTech India Report – October 2016; Institutional Investor reports.
9. “Quona to invest 30% of its $141 million fintech-focused fund in India,” The Economic Times, 15 March 2017.
10. “Nomura Services launches fintech accelerator,” Business Line, 19 April 2017.
11. “Global accelerators & incubators look to cash in on India’s fintech goldrush,” ET Tech, 19 October 2016.
12. “Zone Startups to manage Barclays’ Rise accelerator programme in Mumbai,” ET Tech, 16 June 2016.
13. “Swiss Re launches ‘InsurTech’ startup accelerator,” The Economic Times, 02 May 2016.
12 The battle for the Indian consumerConducive environment credit information bureau coverage and inter-bank
payment systems are expected to further strengthen the
financial services infrastructure in the country.
Unmet financial needs and customer demographics have
been key demand drivers for FinTech services in India. From Impact of demonetization
a supply perspective, however, the support provided by
regulators as well as the spread of best-in-class underlying India has traditionally been a cash-based economy, with
platforms (telecom / broadband) have been equally critical. the country’s preference for cash being reflected in its high
cash-to-GDP ratio of 12.04% (as against Brazil’s 3.93%,
Regulatory changes Mexico’s 5.32% and South Africa’s 3.72%).15
For the Indian Government and financial sector regulators In November 2016, the Government of India undertook a
— Reserve Bank of India (RBI), Insurance Regulatory demonetization drive, scrapping high-denomination notes
Development of India (IRDAI) etc. — financial inclusion is a (accounting for 86% of the country’s currency notes).
critical objective. Given India’s geographical spread and the This provided a significant boost to FinTech startups
challenges inherent in creating physical (financial services) (mobile wallets and digital payments), pushing citizens to
infrastructure, the regulators have been pushing the use of use to digital modes for payments.
digital modes of transaction.
• “Paytm’s traffic increased by 435%, app downloads grew
The Government of India launched the Pradhan Mantri Jan 200%, and there was a 250% rise in overall transactions
Dhan Yojna14 in 2015 with the aim of opening basic bank and transaction value.”16 In February 2017, the firm
accounts for every Indian. The scheme envisages providing announced17 an investment of INR6b over the next 10
an overdraft facility after six months, as well as a debit card months to expand its QR-based payment network along
with inbuilt accident insurance. with plans to add 10m merchants enabled with these
RBI has also been steadily promoting a digital agenda to codes.
deepen and broaden financial services in the country. • In February 2017, MobiKwik18 announced an investment
Digital initiatives such as UPI, Unstructured Supplementary of INR3b for expanding its user base. This is expected to
Service Data (USSD), Bharat Interface for Money (BHIM), increase the annual gross merchandise value (GMV) to
Bharat QR, Aadhaar Enabled Payments System (AEPS), US$10b by 2017-end from the current US$2b.
Yearly M-wallet transaction value (INR b) Monthly M-wallet transaction value (INR b)
619.8
Demonetization
83.5
74.5
205.8
33.8 33.1
81.8
10.0 29.1
FY13 FY14 FY15 FY16 9MFY17 Oct'16 Nov'16 Dec'16 Jan'17
14. “Prime Minister to Launch Pradhan Mantri Jan Dhan Yojana Tomorrow: To Dedicate Mobile Banking Facility on Basic Mobile Phones to the Nation,” Public
Information Bureau 27 August 2014.
15. Report by Committee on Digital Payments, Ministry of Finance - Government of India, December 2016.
16. “Mobile wallets see a soaring growth post-demonetisation,” Hindustan Times, 01 January 2017.
17. “Paytm to invest Rs600 crore over 10 months to expand QR code payment system,” Mint, 20 February 2017.
The battle for the Indian consumer 13Penetration of telecom /
broadband Telecom subscriber base (m)
1151.8
The number of telecom and internet subscribers has 996.5 1058.9
increased significantly over the past few years as the 898.0 933.0
telecom industry’s growth has been propelled by liberal
government policies, increased private sector participation
and low mobile tariffs.
Smartphone adoption is growing in the country. In early
2016, India overtook the US to become the second largest FY13 FY14 FY15 FY16 Dec'16
smartphone market in the world. According to a report by
Counterpoint, India’s smartphone user base grew to over
300m in December 2016, growing at 18% compared to the
global growth rate of 3% (for year-ended December 2016).19
A leading telecom player’s20 announcement of a 4G feature
phone on payment of a three-year refundable deposit,
Internet subscriber base (m)
along with a low-priced unlimited usage plan, is expected to 391.5
double21 the number of data subscribers (mobile internet 342.7
302.4
users) to 900m and increase penetration to 80%.
251.6
India’s e-commerce sector is also on a strong growth path 164.8
— According to a report by Kotak Institutional Equities22,
India’s e-commerce market could reach US$28b by FY20
driven by an increase in the number of buyers (110m,
assuming one person per urban household shops online) FY13 FY14 FY15 FY16 Dec'16
and stable annual average spends (around $260 per
consumer). Continued investment by Amazon23 (total
investment planned US$5b) in building warehouses and
developing its logistics unit will continue to drive growth in
this sector.
Responsive incumbents Over the past two years, there has been a visible trend
in collaboration between incumbent players (banks and
The Indian financial sector is highly regulated with insurers) and FinTechs. FinTechs benefit from not being
significant capital and other constraints on firms interested constrained by capital / licensing aspects, which the bank
in delivering financial services. While this level of regulation or insurer manages. The incumbent player benefits by
is aimed at protecting the interests of consumers, it being able to lower its costs and target competition with
has had the unintended effect of creating large entry cutting-edge solutions in payments, mobile wallets, lending,
barriers for FinTechs. However, in areas that are relatively AI, analytics, chatbots and blockchain technology.
lightly regulated (mobile wallets, customer acquisition
and comparison), FinTechs have been able to disrupt, or
significantly impact, the business models of incumbent
players as a result of lower cost structures, and more
effective technology design and implementation.
18. Demonetisation boost helps fintech start-ups; The Indian Express, Mar 3, 2017
19. “With 220mn users, India is now world’s second-biggest smartphone market,” The Hindu, 03 February 2016; “Number of Internet users in India could
cross 450 million by June: report,” Mint, 02 March 2017.
20. “Rs0 to Rs 3.3 trillion, the big numbers from Mukesh Ambani’s RIL AGM speech,” Mint, 21 July 2017.
21. “Reliance Jio Phone impact: Rating agencies Icra, Crisil split over effect on industry,” Financial Express, 25 July 2017.
22. “Indian e-commerce market could reach $28 bn by FY2020: Report,” Business Standard, 9 September 2016.
23. “Amazon’s losses jump 5-fold on India investment,” Mint, 29 July 2017.
14 The battle for the Indian consumerNews story: Indian banks collaborating with FinTech firms24
HDFC Bank Kotak Mahindra Bank
Payments Automation
• MoneyView: Expense tracker on mobile • Decimal: Mobile-based sales tool with segmentation,
targeting and positioning capabilities
• C
► hillr: Instant money transfers, recharges and
merchant payments
Online customer durable finance
Machine learning • CashCare, SmartMint and FastBanking: Instant loan
approval on the basis of the borrower’s profile
• Zumigo: Real-time fraud detection; nearest ATM /
• P
► erfios: Personal finance management for customers
branch location via SMS; operator identification for
and non-customers
missed call recharge
Credit Score
AI
• C
► reditseva: Customer credit analytics and management
• Asimov Robotics: Humanoid robot at branches
tools
• N
► iki.ai: Chatbot on Facebook
• I► nteraction One: IoT-based solutions for customer Social banking
engagement
• Interface business solutions: Hashtag banking and
• vPhrase Analytics Solutions: Analysis of mobile banking
Twitter commerce
and net banking reports
• Absentia VR: Augmented reality (AR) / virtual reality
(VR) solutions for HDFC bank mobile apps; AR-based Marketing
heat maps for branch efficiency
• Experience Commerce: Content and community based
web destination
• Net core: Marketing automation
24. “Banks and FinTech startups see more value in cooperation than in rivalry,” The Economic Times, 26 March 2017.
The battle for the Indian consumer 15Payments
Overview
Payments has been the front-runner in the large-scale According to the EY FinTech Adoption Index
consumer adoption of FinTech in India, aided by the spread
of smartphones and mobile internet at affordable price
2017, money transfer and payments as
points. Most FinTech players started out by identifying a a sub-domain has the highest consumer
niche/use case for building a customer base (e.g., Paytm
adoption rate globally at 50%, with India
with Uber25, OlaMoney for cab payments26 and Airtel
Money for phone bills27) and then expanding onto other leading the way at an impressive 72%.
services.
FinTech players now cover the entire payment value chain,
including prepaid instruments/wallets, bill payments, peer-
to-peer payments (remittance), merchant payments and
payments processing/gateways. While ease of use remains
at the core of the customer proposition for payments, there
is increasing focus on aspects such as acceptability of cards/
other payment forms at merchant points (mobile point of
sale [mPOS]) and contactless payments.
25. “Paytm to go global with Uber tie-up,” The Times of India, 04 May 2016.
26. “What is Ola money?,” Olacabs.com.
27. “Goodbye cash, hello airtel money,” Airtel media center.
16 The battle for the Indian consumerEmerging trends
Since payments is perhaps the easiest area for large segments of customers to understand and adopt, the payments
industry is at a more mature stage compared to other domains within FinTech in India. It also continues to lead in innovation
with evolving use cases and associated solutions
Key drivers that are redefining the payments space
Minimalist user Interoperable and Value-Add Services
experience real-time
• Deep integration of Payments • Solutions not restricted to • Solutions offering value added
with the use-cases and a single payment method functionalities along with
purchase experience. allowing users to make payments for merchants and
transaction from cards or customers are redefining the
• Evolving from a single click
accounts directly. business and operating model
transaction to instances where
for players
a customer doesn’t even know • Interoperability and real time
that payment has happened. processing of transactions is • Offers, loyalty, credit at
becoming a hygiene. point of sale are some of the
• Operates seamlessly and
emerging use-cases aligned to
securely in the background. • UPI and BharatQR are driving
payments
interoperability and real time
processing.
Regulators & Institutional support These initiatives have created an interoperable structure
wherein customers having accounts with different banks or
is playing an enabling role payments solution providers can transact with each other
(using a virtual address) easily.
The National Payments Corporation of India (NPCI) was set
up jointly by the RBI and the Indian Banks Association (IBA) RBI on its part has liberalized the Know Your Customer
in 2007 as the umbrella organization for retail payments (KYC) requirements for low-value wallets and customer
and settlement systems. Over the past five years, NPCI authorization mechanism for low value retail payments,
has led substantial effort and investment in developing thus keeping intact the core proposition of ease and
the national payments infrastructure and technology simplicity. A new set of differentiated banking licenses
platforms, be it Instant Money Transfer System (IMPS), (payments banks) have been issued to a host of players
Unified Payments Interface (UPI), Bharat Interface for from diverse areas such as wallets / pre-paid instruments,
Money (BHIM), Bharat BillPay (BBP), and Aadhaar Enabled telecom players as well as India Post, to democratize
Payment System (AEPS). payments for mass adoption.
UPI An instant payment system which uses IMPS infrastructure to enable seamless Push (sending money using a virtual
address) and Pull (requesting money) transactions between multiple bank accounts through a single app
BHIM An app which allows users to transfer funds between accounts in different banks (leveraging UPI) using a single
identifier (mobile number or virtual address) and without the need to create additional accounts / wallets
BBP Interoperable payment platform which allows users to make bill payments across multiple
channels and payment modes, and provides instant receipts through SMS
BharatQR A common QR code specification developed jointly by NPCI and other card schemes; Allows mobile based Person to Merchant
(P2M) payments from any BharatQR enabled mobile banking app using Aadhaar, IFSC & account or a card linked account
AEPS Making payments using Aadhaar number authenticated using biometric scan; the
payment is directly processed from the Aadhaar linked bank account
The battle for the Indian consumer 17Merchant payments is
undergoing a transformation
The penetration of traditional POS devices at merchant This huge opportunity (under 5% of merchants and
payments is low in India due to high setup and usage costs SME businesses have POS machines28) has given rise
(expensive POS devices and high merchant discount rate to a number of business models, ranging from lower
[MDR]) and the preference for cash transactions (generally cost alternatives to POS machines (mPOS providers) to
among the older generation) over cards (debit or credit). eliminating the POS machines completely in order to
digitize the long tail of merchant payments.
Prohibitive economics of traditional POS deter merchants
0.25% - 1% MDR 1.6% - 2.5% MDR Monthly transaction Non-transacting Annual maintenance
For debit cards For credit cards charges of INR 150- charges per monthly charge of
200 per terminal of INR 200-300 INR 2500-5000
per terminal per terminal
(estimated for transactions (applicable for low (depending on type
worth INR 10,000) transacting or inactive of POS; may include
merchants) annualized rental value )
Paytm: Merchant payments from smartphone
In October 2015, Paytm launched a QR code based payment option allowing merchants to receive payments
without using the internet. Merchants would need to use a pre-generated QR code (for selecting the merchant)
or a dynamic code (merchant details and payment amount), which a customer would need to scan to make a
payment. The confirmation of payment would be provided to the merchant via text message.
Paytm launched a P2P payment solution for merchants wherein merchants can send secure payments links to
customers over SMS. Customers can then make the payment on their phone, eliminating the need for merchants
to capture their credit/debit card details.
“Paytm launches QR code payment option for wallet app,” Mint, 15 October 2015.
“Paytm replaces its app PoS feature with P2P payment system for merchants,” The Economic Times, 01 December 2016.
Proximity payments is taking off ‘Tez’ a UPI based mobile payment service with AudioQR
capabilities30 and a proximity based “Cash Mode” solution
Tap and go payment mechanisms have been deployed which allows funds transfers without the need to share
in India across a number of use cases (toll payments, private details.
public transport etc.). However, other modes of proximity
payments are gaining popularity as a result of a number of
changes in the market.
NFC capability is steadily becoming a common feature,
even in budget smartphones, and leading global providers.
Samsung Pay has already launched in India and Apple
Pay29 plans to launch. Google has also entered the fray with
28. “How a Human Touch Agent Can Make a Difference in Promoting Digital Financial Services,” A Report on Center for Financial Inclusion Blog, 10 July 2017.
29. “Looking to bring Apple Pay to India, open to operator billing: Tim Cook,” The Indian Express, 23 May 2016.
30. “Listen hard, Mark. Google’s turned up the audio in India”, Economic Times, 23 September 2017.
18 The battle for the Indian consumerProximity Payments
Proximity payments can be broadly classified in the following categories:
Near Field Communication (NFC) payments enable offline merchants to accept payments via
contactless cards and mobile payment modes such as Samsung Pay using NFC enabled PoS terminals.
Most new terminals are NFC enabled and this is expected to increase NFC transaction volumes
Toll & transit payments through smartcards, RFID tokens and mobile applications. A recent
government mandate for inclusion of FASTag in new vehicles is expected to provide a boost
Magnetic Secure Transmission: smartphones emit magnetic signals mimicking a card magnetic strip
allowing for cardless payments even at non-NFC POS terminals
Other key emerging modes for proximity payments are BharatQR codes, UPI, and Aadhaar enabled
payments
Samsung Pay Hike
Samsung launched its “Samsung Pay” service in India-focused mobile messaging service Hike has
India in March 2017. Users are required to install launched mobile payments service integrated with
the app and link their bank or credit / debit card its messaging app. Hike has started out with P2P
accounts to their Samsung Pay account. The service and bank-to-bank payment options, the former being
works with both NFC (near field communication) an in-app wallet that is not dependent on a bank
and MST (magnetic secure transmission) terminals. account and the latter a service powered by India’s
Users select their card and bring the phone near the Government-backed UPI payment system.
terminal. Once the merchant enters the amount in
the terminal, the user authenticates the payment via WhatsApp
fingerprint or a four-digit PIN in the app.
WhatsApp is expected to use UPI, a cross-bank
payment system backed by the Government, to
“Samsung Pay to launch in India today: All you need to know,” Hindustan enable P2P payments between users within the next
Times, 23 March 2017. few months. WhatsApp has its largest market in
India with over 200m users.
Contextual payments:
“Chat app Hike launches UPI payments, wallet,” Mint, 20 June 2017.
Social media and messaging platforms are being increasing
“WhatsApp will reportedly launch peer-to-peer payments in India within
used by companies to run product promotions and drive 6 months,” Tech Crunch, 03 April 2017.
commerce. In order to allow consumers to complete the
transactions seamlessly, these platforms are extending
their capabilities to allow consumers to make payments. Even as the POS and card based payments continue to
This will make it easier for individual service providers and grow at a steady pace over the next 4-5 years, alternate
small business owners to connect with their customers and form factor payments are likely to gain further traction
receive payments. with platforms like UPI enabling the entry of new players
or existing players developing new and unique payments
use cases. Adjacencies around payments such as credit for
merchants and customers will become a natural extension
The road ahead for large players. In the long run players which develop
scalable and sustainable business models and stay ahead in
The accelerated innovation in payments has resulted in the the product lifecycle and adapt to changes will remain most
launch of a large number of similar solutions by various relevant to customers and merchants.
players. As the industry matures, a consolidation in the
number of players is likely and Innovation will be a key
differentiator in this crowded payments market.
The battle for the Indian consumer 19Financial planning
Overview
With the exponential growth in the adoption of Emergent financial planning and advisory capabilities
FinTech / digital financial services, the domain are allowing the industry to revise old business
of financial planning / advisory has undergone a models and start reaching out to new sets of
transformational change. In just a few years, the customers with completely different needs, e.g.,
role of a financial advisor (FA) is moving away from millennials. The traditional model of targeting
being a portfolio manager / sales person calling large total assets under management (AUM) and
occasionally (and at the end of the financial year) monetizing through a management fee (% of AUM)
to sell a series of “recommended” products. The will not work for this segment as they are starting
expectation is for the FA to be a collaborative life on their financial journey and have limited assets.
planner, available on demand through omni-channel FinTech allows these customers to be targeted with a
capabilities and augmented by technologies such as direct-to-customer digital model, with automated risk
AI, big data and virtual assistants. profiling and robo-advisory led portfolio management
at extremely low costs, or even free. This is based
FinTech is now levelling the playing field for large
on a “freemium” model with more premium features
financial players (with deep pockets, large sales
such as a human advisor and financial planning advice
and marketing teams) and nimble startups that can
being provided on payment of a subscription fee.
leverage technology to provide equivalent outreach
(through digital channels) and quality of financial
advice.
20 The battle for the Indian consumerThe EY FinTech Adoption Index 2017
demonstrates that while globally FinTech
adoption for financial planning is much
FinTech-led financial planning and advisory in India is lower (at 10%) compared to other sub-
still at a nascent stage but has tremendous potential
categories, the adoption index for India is
for growth, fueled by its discovery of new customer
segments and product / service offerings. much higher at 20%. Interestingly, the
same index for future adoption stands at
16% globally and a significantly higher
26% for India.
Emerging trends Financial planning software of the past, present and future
With the rapidly changing customer Past Present Future
preferences, particularly the adoption of
online and mobile channels, coupled with Advisor Advisor-Client meeting Client
the younger customers’ behavioral shift
toward “do it yourself,” the business model
of financial planning is also undergoing a
fundamental change.
In order to respond effectively to the
changing customer preferences and stay
relevant in the mind of the customer,
banks and financial institutions are trying
to adapt quickly. Some of the key trends
are mentioned below:
Planning software as Planning software as Planning software as
advisor calculator collaboration tool client PFM
Planning software business
meta data
The battle for the Indian consumer 21Robo Advisors and the mass affluent Integrated account view
Today a very low percentage of investors access India’s Consumers today are overloaded with information and
equity and mutual fund markets. The key issue is investor prefer accessing only relevant information as and when
education. Robo advisors are beginning to address this they require it. However, they also need the ability to get a
issue by providing digital education and advice to a growing complete view of their financial portfolio (across savings,
segment of investors who cannot afford high end wealth investments, loans, credit cards, upcoming bill payments
and investment advisory services. etc.) and analysis (financial options, expense patterns
etc.) digitally. Given the increasing number of investment
Big data and AI for personalization options, consumers need the ability to undertake scenario
FinTech players as well as a section of traditional banking analysis, e.g., how their finances would be impacted if they
players are starting to leverage big data and AI to provide were to take a car loan with subsequent EMI payments. A
personalization and customization at the most micro level, number of FinTech players are in the process of building
i.e., creating a “market of one.” and deploying sophisticated, mobility-based portfolio
analysis tools. The RBI has already introduced a master
Big data layered with behavior-based predictive analysis direction on account aggregation that seeks to regulate
allows for targeted advice at the point of need, enabling the companies providing account aggregation services. A key
provider to be more integrated with the customer’s decision part of the direction aims at introducing a consent based
making and purchase journey. architecture that will begin to move the Indian financial
services eco system to an ‘open banking’ concept that is
Marriage between physical and digital increasingly prevalent in developed markets.
models
As the level of awareness increases, consumers are
demanding greater access and control (DIY). Financial
planning solutions will increasingly need to support this
1
demand.
8 Interactive Retirement
In the next few years, we believe that the winning formula dashboards planning 2
will be a combination of digital access and human advice,
both face-to-face and over electronic channels. Hybrid Digital storage Tax planning
models where automated financial planning and advisory of documents and filing
is supplemented with on-demand support from human
7 Financial
advisors are likely to prevail over purely human as well
as purely automated mechanisms. Incumbent brokerage Planning 3
Account Goal based
firms in developed markets have already implemented this
aggregation investing
hybrid approach, enabling their traditional financial advisor
community with intelligent tools to cater to diverse client
segments. 6 Expense Insurance
management planning 4
5
22 The battle for the Indian consumerCustomer-first approach
Walnut: Integrated planning tool
A number of FinTech players are building business models
based on sms around empowering consumers to take control of their
Walnut, a personal finance management app, financial planning and investments. Rather than focus on
allows consumers to track their spending, bills and the traditional approach of pushing consumers to invest
bank transactions across providers. It monitors the in products, these players are trying to create advisory-
customers’ SMS inbox for messages from businesses led, profile-based customized investment approaches.
such as merchants and banks, and captures The process starts with building a profile of the consumer
transaction data. The data is used to provide (typically through online, self-use tools) covering financial
customers with a comprehensive view of their goals, risk appetite and projected short and long term
finances along with analysis of inflows and outflows, needs. A mix of automated and expert advice is used to
expense patterns etc. The app also allows users to present investment options, and simplified tools allow
undertake transactions including paying visa credit consumers to monitor their portfolio and model the impact
card bills, sending and receiving money, and splitting of investments.
bills.
http://www.getwalnut.com/faq
MoneyFrog — Integrated platform for
financial planning
B2B services for integration of financial MoneyFrog is a financial advisory firm that uses
accounts a blend of technology (robo-advisory) and human
experts to help clients manage their investment
There is an emerging category of specialized players are
portfolios. It profiles customers using a number of
providing financial institutions with an integrated view of
parameters, including financial assets, goals and
all accounts of their prospects and customers. The services
risk appetite. Based on the profile, the firm helps
they provide include analysis of financial statements,
customers identify investment options using its
aggregation of client data, account level dashboards and
algorithms / robo-advisory capabilities and allows
advisor solutions.
customers to transact online, as well as reach out
to financial advisors for advice and resolution of
queries.
Perfios: real time analysis &
“Need Financial Advice? Check Out Moneyfrog.in,” TechStory.In, 29
decisioning September 2016.
https://moneyfrog.in/
Perfios is a financial product technology company
The road ahead
that provides B2B solutions for real-time decision
making, analysis and credit underwriting. It has
developed financial data aggregation APIs, which
financial institutions can leverage for money The adoption of financial planning is expected to go
manager / personal finance applications. It also up significantly in the near future as more and more
has a solution for independent financial advisors customers shift from investing in physical assets such as
(IFAs), which allows them to aggregate their clients’ gold and real estate to financial assets, in a planned and
data onto a single platform through direct retrieval systematic manner. Financial institutions and FinTech
of transactions as well as statement uploads, and players alike, working at the confluence of technology and
provides a single view of the information to the IFA relationship based models, can leverage this vast business
and customer. potential in the near future.
https://www.perfios.com/index.php/aggregation-api/
https://www.perfios.com/index.php/ifas/
The battle for the Indian consumer 23Savings and investments
Overview
Savings and investments form the core of a According to the EY FinTech Adoption
traditional retail banking relationship for a customer.
Therefore, a number of FinTech players are trying
Index 2017, savings and investments as a
to disrupt this space with innovative offerings (with category has one of the highest consumer
the humble savings account being enhanced with a
adoption rates, with a global adoption
number of value-added-services), even as traditional
banks try to adapt to this onslaught on their core rate of 20% compared to India’s 39%.
businesses. However, this increasing customer adoption
Banks have an inherent advantage in that they has also brought to attention the urgent
control access to customers’ savings account and
associated transactional information. As a result,
need for tightened cyber security to
FinTech players are choosing to collaborate rather protect customers’ financial and personal
than compete with banks.
information and money.
24 The battle for the Indian consumerEmerging trends Customer
Customers of today are much more aware and demanding.
They have a wide variety of choices available, and expect
their bank / financial institution to be able to address the
changing needs. !
In order to stay relevant in the mind of the customer, banks
and financial institutions are trying to adapt quickly, with a
few key trends mentioned below: Changing More More More
consumption demanding aware choices
pattern
Simpler and more secure customer Seamless integration between savings and
authentication investments
With the ubiquitous presence of smartphones across a Financial institutions are trying to inculcate the habit
large cross-section of customer segments, more and more of regular investments in financial asset classes among
customers want to access their savings and investment customers, by enabling them to save small amounts of
accounts online or through the mobile channel. surplus funds lying idle in savings accounts. This implies
the existence of an architecture to enable the frictionless
Traditionally, SMS-based OTP has been used as the primary ‘sweeping’ of low value balances from savings accounts into
mode of authentication, but with heightened cyber-security investment accounts. The payment bank ecosystem in the
concerns, financial organizations are starting to move to country is rapidly building out this sweep architecture as
alternate modes of authentication, e.g., facial and voice they cannot keep more than Rs 1 lakh of balances in their
recognition. In addition, advances in technology (as well as customer accounts at end of day.
the Government’s financial stack) now allow for real-time
biometric authentication, such as fingerprints (Aadhaar-
linked) to iris recognition.
The battle for the Indian consumer 25Paytm — Digital savings, payments and HDFC Bank SmartBuy
investments HDFC Bank has tied up with a large number of
Paytm, in partnership with MMTC-PAMP, launched merchants to offer deals, offers and information
an offering in April 2017 allowing customers to across categories such as e-commerce, flight and
convert their surplus balances into digital gold bus tickets, hotels and mobile recharge on its
assets, with a choice to get the digital gold in the SmartBuy marketplace. Customers can pay for their
account converted to minted coins and delivered at transactions directly from the range of payments
their doorstep. options from HDFC Bank, avail instant financing
for their purchases and also earn reward / loyalty
It is also planning to offer swipe in /swipe out
points.
facilities to liquid money market funds from a
customer’s savings account, similar to what its
“HDFC Bank to turn into a shopping-hub,” Business Inside, 11 May 2015.
strategic investor Alibaba offers in China through https://offers.smartbuy.hdfcbank.com/smartbuy/public/content/About-us
Yu’e Bao fund. The four-year old money market fund
has already overtaken JPMorgan’s US government
money market fund, with assets over US$150b. Gamification
A new crop of investment portals is trying to grow (and
“Paytm Launches Digital Gold, Makes Gold Investment Digital,” News18, 27
April 2017.
capture) the market by addressing new customer segments
“India’s Paytm Said to Seek License to Offer Money Market Fund,”
such as young middle class segments who are just entering
Bloomberg, 20 June 2017. into their professional lives. They are making investments
fun and engaging by using gamification techniques such
From investments to a regular mutual fund to even as peer review, benchmarking against peers and, reward
dematerialized gold investment, customers now have points for completion of milestones / goals.
a much wider range of investment avenues to choose
from, with redemption of funds possible with a few clicks.
Investment FinTech players are also offering virtual debit
cards, wallets etc. as a mode for redemption of funds. FundsIndia – online investment
platform
Financial marketplace Funds India is an online investment platform that
In order to gain a greater share of the customer’s wallet, offers financial products such as mutual funds,
financial institutions are extending their capabilities into equities, deposits and insurance. It has launched a
areas beyond the domain of traditional banking services, gamification-based tool for mutual fund investing —
such as information base, deals and offers across spend ranking investors with their peers (based on factors
categories like travel, hotels and real estate. The intent such as age, income and risk appetite) and providing
is to capture the eventual transaction and drive usage of badges for disciplined investing — to drive good
associated banking products and services such as auto investment behaviors and ensure that investors
loans, home loans and personal loans. For example, banks remain engaged
are leveraging historical transaction data to build up
customer profiles and create personalized offers at key “Play a game, turn into an ace investor,” DNA, Nov 17, 2016
moments in the customer journey. https://pages.fundsindia.com/pages/media/fundsindia-com-launches-
gamification-in-mutual-fund-investing/
26 The battle for the Indian consumerAPI banking
Faced with increasing disruption from FinTech, some banks are trying to compete by investing in (homegrown) FinTech or
partnering with FinTech startups.
Other incumbents, however, are trying to serve as platforms, by unbundling the production and distribution of banking
products and services. They remain the “owner” of the customer’s primary account, i.e., savings account, but provide access
to their banking platform through open APIs, allowing nimbler startups to access customers’ financial accounts information /
transactions (with explicit consent) and offer value-added products and services.
Mobile wallet
Lending
Marketplace
Retail
Branches
Investment
Trading
Bank Transactions
Social
Mobile payments
Stored value eMoney Customer
Savings
Ticketing
Payments
Crowd funding
APIs provide a modular extensible and standardized This concept is still at a nascent stage in India (unlike the
interface to the banks’ underlying infrastructure platform, western world, where providers such as ING Direct FIDOR
supporting a lot of functions around savings, investments offer a full suite of API services). However, FinTech players
and payment, as well as community features and third- in investments and payments are increasingly catching up
party services. with the trend.
The road ahead
Zerodha — Online broking and
As banks and traditional financial institutions become more
investment platform
and more active in adopting digital strategies in their battle
Zerodha was the first brokerage firm in India to for the customer’s mindshare and wallet share, they will
disrupt the existing pricing structure by introducing have an inherent advantage in the savings and investment
a flat fee of INR20 per trade and zero fees on equity domain as customer trust plays a critical role here. Also,
investments. Growing at over 100% year on year, the concept of savings account as the underlying master
Zerodha currently has more than 300,000 clients account with other value-added products and services built
and contributes to 5% of daily retail trading volumes around it is going to gain prominence. Hence, there will
across all the stock, commodity and currency be a greater degree of collaboration between banks and
exchanges in India. In order to expand beyond stock specialized FinTech players in this domain, with a win-win
broking services into areas such as mutual fund proposition for both.
investments, Zerodha has partnered with sister
FinTech companies such as “Coin” (mutual fund
platform), “smallcase” (thematic investing platform)
and “balance” (platform for personal finance and
savings). They are trying to commoditize investment
technology with their “platform as a service” APIs.
EY FinTech Adoption Index 2017
The battle for the Indian consumer 27Lending
Overview
Even today, many lenders in India adhere to manual The lending FinTech sector in India is still
and time-consuming loan processes such as collection
of post-dated checks and paper-based National
nascent, with the EY FinTech Adoption Index
Automated Clearing House (NACH) registration. In 2017 indicating a low customer adoption
addition to increasing the turnaround time, these
rate of 20% (although double the global
processes increase acquisition and servicing costs,
which are passed down to the customers. Coupled average of 10%), but has tremendous
with the reliance on an (limited coverage) credit potential for growth and disruption,
rating system, this results in either a poor customer
experience or denial of access to capital. fueled by its discovery of new customer
In developed markets such as the US and the UK,
populations and products.
inadequacies of institutional finance led to the emergence
of FinTech firms and other technology-enabled solutions.
India is ripe for similar disruption, as a low financial
literacy rate (estimated at 24%)31 and limited coverage
by established players give rise to the need for simple,
transparent and low-cost lending products.
31. S&P Global Financial Literacy Survey 2014.
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