Digital Transformation 2.0 in India: With Hope and Caution

Digital Transformation 2.0 in India: With Hope and Caution

In the past decade, Fintech startups have matured from novelty to niche and moved toward becoming considerable contenders by entering the mainstream in every major market around the world. Emerging markets, like China and India, have led the way as companies such as Alibaba, Tencent, and Paytm are flourishing. In both of these markets, the FinTech adoption rate stands at 87%, according to the latest EY Global FinTech Adoption Index.

Part of the evolution of the financial ecosystem in India is attributed to the Indian government’s demonetization effort in late 2016 to remove most paper currency in circulation. Great strides continue to be made, in the areas of digital payments, alternative lending, formalization of digital ID, and other ways to modernize banking. Various initiatives have been undertaken by the government and regulators to create a favorable environment for fintech innovation as the country continues to push for progress. According to Nidhi Prabhu, however, more proactive regulatory policies will still be needed by the RBI, for example, to provide guidance and enforce the true spirit behind open banking.

It quickly becomes very evident that Indian fintech is on the rise. Based on figures from CB Insights’ Q2 FinTech Report, India topped China in fintech deal activity for the first time ever, with 23 deals to VC-backed fintech companies (8 more than China). There is, however, still a small gap between the two countries in total Fintech funding, with China investing $375M, narrowly beating India, which saw $350M invested.

India’s economy is growing at more than twice the rate of the United States, and with 1.3 billion people, the country continues to develop some of the world’s most innovative minds in technology. Increased mobile and internet penetration – along with proactive government policies – has helped fueled the growth of digital transactions.

Unlike Singapore with a single regulator, the MAS (Monetary Authority of Singapore), there are several regulatory bodies at play in India, including the Reserve Bank of India (RBI), Securities and Exchanges Board of India (SEBI), Insurance Regulatory and Development Agency (IRDA) and Provident Fund Regulatory and Development Agency (PFRDA). Challenges of this multi-regulator environment notwithstanding, India is fast becoming an essential hub for international banks.

The biggest threats for Indian fintech growth may not necessarily come from the incumbent banks, however; but rather, from big tech firms and the complicated regulatory environment. The RBI restrictions on storage of financial information by account aggregators, for example, may hinder the adoption and ultimate viability of the account aggregator business model in the data economy. (For a quick background on the AA initiative, here is a quick synopsis by Arun Krishnakumar.)

What happens next remains to be seen; paradigm shifts require time, the right enabling ingredients, and patience. But the recent move by the RBI to establish a regulatory sandbox is certainly a step in the right direction. And for now, the future of global fintech – at least from an Indian perspective – remains very promising indeed.

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Tune in to a brand new episode of Red Envelope podcast on iTunes and Spotify – as we chat with Nidhi Prabhu on regulatory policies and innovation in India. 

See more by Theodora here.

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