Partha Ray, Ph.D., is Professor, Economics, Indian Institute of Management Calcutta. Prior to joining Indian Institute of Management Calcutta, Prof. Ray, a career central banker, was the adviser to Executive Director, International Monetary Fund, Washington D.C. during 2007-2011

Tautologically, FinTech has two parts, finance and technology. Globally, FinTech is gaining momentum and causing significant disruption to the traditional value chain. In fact, as per the 2015 Global FinTech Report of the PwC, funding of FinTech start-ups more than doubled in 2015 reaching $12.2bn, up from $5.6bn in 2014. Interestingly, apart from affordable technological innovations, globally new regulations in the post-crisis world have played a key role in development and emergence of the FinTech firms. Illustratively, stricter capital requirements leading to reduced credit availability, tighter scrutiny of risky lending, and changes in the consumer market all could have provided an avenue for FinTech firms. In fact, globally the FinTech sector has been seen as a rise of the new shadow banks (Goldman Sachs, 2015).[1]

            Perhaps in line with these global trends, payment system and the Indian banking sector have also been in the media headlines in recent times. Unlike the disturbing trends in non-performing loans by Indian banks, the news on spread of FinTech has been creating the right waves. There are media reports that technology has been disrupting the financial sector in its various segments – from bank transfers, to payments, to loans. Thus, it has various diverse elements – from replacing men by machines in the banking sector to financial inclusion.  How much are of such expectations in nature of hype and how much of it are in tune with reality?

Trends in FinTech Investment

            Interestingly, two recent reports – one by KPMG and the other jointly by BCG & Google have created huge interest in FinTech. The KPMG Report[2] noted that FinTech investment in India increased significantly from USD 247 million in 2014 to more than USD 1.5 billion in 2015. Admittedly, various diverse initiatives of the Government and the RBI have played a key role in enkindling the interest in FinTech; these initiatives and sops include: the January 2016 Start-Up India initiative of the Government establishing a fund of USD 1.5 billion; Jan Dhan Yojana (adding over 240 million unbanked individuals into the banking sector as of September 2016) and various tax and surcharge relief.[3] In fact FinTech firms – the likes of Paytm to Billdesk – have all been attracting huge investments (Table 1).

Shape of things to come

The BCG-Google report is very optimistic about the usage of FinTech in India and noted, “over the last five years, digital transactions have shown steady growth of 50 per cent Y-o-Y, followed by ATM transactions growing at 15 per cent”.[4] A few specific forecasts from the study on the Indian digital payments industry is worth mentioning:

• India’s digital payments industry will grow to $500 billion by 2020;
• It will account for 15 per cent of the country’s GDP;
• More than 50 per cent of India’s internet users will use digital payments by 2020;
• the top 100 million users will drive 70 per cent of the gross merchandise value (GMV) for these payments; and
• India’s non-cash contribution (such as, cheques, demand drafts, net-banking, credit/debit cards, mobile wallets and unified payments interface) in the consumer payments segment will double to 40 per cent by the year 2020.

Hype or Reality?

            How much of this trend is hype? Divergent views exist. While industry bodies are normally very euphoric about the shape of the things to come in the FinTech sector, a look at the broad payment system indicators from the recently released RBI Annual Report of 2015-16  is instructive (Table 2).

            A look at Table 2 confirms one basic trend – while in volume terms, the lion’s share of the transaction are dominated by retail payments (around 98 per cent), in volume terms these small transactions account for only around 10 per cent of total transactions. In other words, payments system indicators are dominated by what is called “Systemically Important Financial Market infrastructures” (SIFMIs) or the bulky transactions. In fact, more than half of such SIFMIs are accounted for by transactions in the RTGS segment.

            It needs to be noted that these bulky transactions are already in electronic forms. So, the FinTech firms are perhaps looking for exploiting the retail sector, which is quite small in value term as of now. Admittedly, there are two ways of reading such existing numbers – the smallness of the retail segment could be indicative of the huge potential of the FinTech sector or this could connote the hype about the sector. Only the future can tell whether the glass is half-empty or three-fourth full.

            Many of the emerging market economies are now at the forefront of alternative payments system. Assets of M-Pesa, first launched in Kenya in 2007 by Safaricom, at US$24 billion is now equivalent to half of Kenyan GDP. In China, nearly one-in-ten of all payments are now made using Alipay – an online multipurpose banking service provider combining payment, lending, deposit and other functions. With the establishment of payments banks in India and the exuberance in the FinTech sector, in the days to come, it remains to be seen whether India follows this path of Kenya or China and the hegemony of banks are put to test.

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[1] Golaman Sachs (2015): The Future of Finance: The Rise of the New Shadow Banks.

[2] KPMG (2016): Fintech in India: A global growth story (Joint publication by KPMG in India and NASSCOM 10,000 Startups), available at https://assets.kpmg.com/content/dam/kpmg/pdf/2016/06/FinTech-new.pdf

[3] The major ones are: tax rebates for merchants accepting more than 50 per cent of their transactions digitally; 80 per cent rebates on the patent costs for start-ups. income tax exemption for start-ups for first three years; exemption on capital gains tax for investments in unlisted companies for longer than 24 months (from 36 months needed earlier).

[4] BCG and Google (2016): Digital Payments: 2020, available at http://image-src.bcg.com/BCG_COM/BCG-Google%20Digital%20Payments%202020-July%202016_tcm21-39245.pdf