If there is one sector in India that has witnessed an unprecedented transformation over the last few years, it is banking and financial services. Technology has almost completely changed the way that the financial sector works; it has also made day-to-day life easier by turning process-heavy transactions into on-demand and paperless.
As late as 2015, digital payments through application programming interfaces (APIs) were unheard of, but as of the time of this writing (June 2022), India is witnessing close to 6 billion API banking transactions a month, amounting to a value of about 10 lakh crore rupees ($130B), as per the statistics published online by the National Payments Corporation of India (NPCI).
Why is API banking important and powerful? Because it has changed operating models from manual to digital, which has in turn unleashed the reach and might of software on financial services for the common man. Digital banking is replacing the branch-centric transaction model with a near-instant on-demand experience. Core banking is no longer an esoteric function buried and protected deep inside data centres of big banks. Private enterprise can now interact with core banking services through programming interfaces – in a regulated manner – and innovatively create new capabilities that were not possible earlier. The resulting advances in Financial Technology (FinTech) have created several new high-growth business models in financial services (FinServ) world-wide.
FinTech has brought out the importance of creating open public platforms to attract private entrepreneurship, and using the power of the resulting partnership to solve complex challenges. As an analogy, consider how Global Positioning System (GPS), an open and free service, spurred the creation of new innovative digital business models from App-based taxis to safety tracking. The ensuing fusion simplified the day-to-day burdens of life ranging from travel to safety. A similar combination of private entrepreneurship and government-sponsored public infrastructure created Indian FinTech; its impact in solving formidable problems such as financial inclusion has already far-surpassed achievements from decades of policy making.
Let us chart India’s Fintech story so far.
Unique digital national Identification for citizens coupled with e-KYC (Know Your Customer) based identity verification enabled the opening of bank accounts instantly with finger-print or even iris scans. Offline KYC extended the identity verification ability beyond government agencies. The arrival of Unified Payment Interface (UPI) in combination with digital identity and verification changed the way payments are made, not only for the estimated 300 million Indians who belong to the middle class in terms of purchasing power, but also for the next billion.
When your customer base is rural India, you will see a mammoth amount of microtransactions; the challenges and design points are different from the market space traditionally catered to by corporates. Only if the cost per transaction is tiny, can private enterprise profitably enter and infuse technology into spheres such as microfinancing that tie in with the goal of achieving financial inclusion. That is where e-Sign and Digital Locker (DigiLocker) services came in. Their combination brought the ability to electronically record promissory notes. The technology behind these services could guarantee that an instrument has not been modified intentionally or inadvertently from the time it was signed. In combination with e-KYC and UPI, the e-Sign and DigiLocker services allowed paperless lending decisions in real time. This dramatically increased the business viability of microlending in scale to villagers with no credit history. Several institutions ranging from credit unions to commercial banks have made a foray into this erstwhile white space and are rendering it mainstream. And there is more to come. Consent APIs are enabling novel payment and lending methods that are privacy sensitive and predicated on trust guarantees.
Government initiatives continue to be important both to accelerate and regulate FinServ. The introduction of Bharat QR is helping to curb the balkanisation of QR (Quick Response) codes in the cashless payment system. India’s Goods and Services Tax (GST) regime launched in 2017 gathered businesses under an input tax credit chain and created an ecosystem where FinTechs are important players. It is also creating a valuable nation-wide data lake; insights extracted through analytics and machine learning from this massive pool of data are further improving FinServ design and execution.
The Indian FinTech industry is thriving thanks to the creation of these public platforms. Numerous companies that offer e-Wallet services, digital lending and on-the-fly insurance processing have sprouted; some are seeing triple digit revenue and user base growth annually. Many innovative business models that offer payment aggregation and redirection services are springing up. FinTech intermediaries that specialise in just-in-time immersing of digital finance technology into e-Commerce workflows have emerged. FinTech has now entered the realms of other industries as well – from telecom companies that operate payment banks to retailers who sell merchandise on credit. A substantial percentage of Indian start-ups that have achieved Unicorn status belong to the FinTech space.
Fintech in India is also becoming synonymous with technology for the public good. Because FinTech has the technology to serve sections of the population that are not natural targets of traditional financial services, it is hastening the overall economic and GDP (Gross Domestic Product) growth of the country. By reducing information asymmetry, improving efficiencies in the system and eliminating friction, FinTech is extending the reach of FinServ to Indians at the bottom of the financial pyramid.
Though several barriers to the full digitization of our payment systems remain, India has largely achieved the basic overall goal of transforming its financial operating model as well as influencing citizen behaviour in favour of digital transactions. India is well on its way to reinventing itself as a cashless and paperless economy.
Sreekrishnan Venkateswaran, CTO, Kyndryl India