FinTech - The battle for the Indian consumer - ey.com · The battle for the Indian consumer 7 FinTech adoption in India India’s FinTech adoption rate exceeds the global averages

October 2017

FinTech companies transform the financial services landscape in India

The battle for the Indian consumer

2 The battle for the Indian consumer

Foreword 2FinTech adoption in India 6Key Themes 10

Unmet financial needs 10

Increasing investment in FinTech 11

Conducive environment 13

Responsive Incumbents 14

Payments 16Overview 16

Emerging trends 17

The road ahead 19

Financial Planning 20Overview 20

Emerging trends 21

The road ahead 23

Contents

3The battle for the Indian consumer

Savings & Investments 24Overview 24

Emerging trends 25

The road ahead 27

Lending 28Overview 28

Emerging trends 29

The road ahead 33

Insurance 34Overview 34

Emerging trends 35

The road ahead 37

Conclusion 40



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.

Foreword


FinTech adoption in IndiaFinTech 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

India

Global

FinTech adoption among digitally active consumers

$

Money transfer and payments

Financial planning

Savings and investments

InsuranceBorrowing

72%

50%

20%

10%

39%

20%

20%

10%

47%

24%Source: EY FinTech Adoption Index 2017 Country Dashboard.


FinTech adoption in IndiaIndia’s FinTech adoption rate exceeds the global averages

52% 33%India Global

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.

9

27

46

54

70

74

49

75 years old or older

65 to 74 years old

55 to 64 years old

45 to 54 years old

35 to 44 years old

25 to 34 years old

18 to 24 years old

85

82

68

64

69

71

55

More than 150

120-150

80-120

50-80

30-50

15-30

Less than 15

India’s FinTech adoption statistics across demographics

Across age brackets (%) Across income* brackets (%) By gender

64%

58%

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

Adoption by region

51% 33%66%

LargeCities

Small and MediumCities

Rural

Regional adoption of FinTech services in India mirrors global trends. FinTech usage is significantly high in large cities in India, with a 66% adoption rate (42% globally).

As FinTech firms expand their focus to tier-III and IV cities, they have started witnessing increased adoption and usage (51%).

Rural India currently continues to lag behind with an adoption rate of 33% on account of a number of factors,

Source: EY FinTech Adoption Index 2017 Country Dashboard; Note: *Income in (US$ ‘000).

including poor literacy, limited access to telecom / delivery 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 of digital initiatives being undertaken by the Government to drive financial inclusion and direct delivery of benefits.


Was not aware they existed

Did not have a need to usethem

Don't understand how theywork

Prefer to use a traditionalfinancial services provider

Don't see the advantage of Fin-Techs over traditional services

Do not trust them

India and Global barriers to adoption (%)

52

62

103

84

104

145

Greater level of trust thanwith traditional institutions

More attractive rates andfees

Access to services 24 hoursa day, 7 days a week

More innovative productsthan available from traditional

financial institutions

Better online experienceand functionality

Better quality of service

Access to differentproducts and services

Easy to set up an account

India and Global motivators of adoption (%)

2

13

16

7

8

8

17

30

2

4

10

11

11

13

19

31

India Global

FinTech adoption in India - the consumer perspectiveThe relative ease of setting up an account with FinTech providers as compared to traditional financial services, and the ability to access a wide range of services conveniently are the primary motivators for adoption of FinTech in India.

The demand for simple, convenient services and a better customer experience, compounded with low levels of

affinity for traditional service providers (especially among younger consumers), has allowed FinTech firms to build presence and mindshare, driving acceptance and usage.

However, the EY FinTech Adoption Index 2017 indicates that as adoption increases, and traditional players start to address the inefficiencies exposed by FinTech, Indian consumers are likely to start demanding ‘bank grade’ services like 24x7 access and more attractive rates and fees.



Key Themes

Indicator India Brazil Russia China#South Africa

US France Germany

Commercial bank branches per 100,000 adults

13.6 20.7 32.9 8.5 10.5 32.9 37.5 14.1

ATMs per 100,000 adults

19.7 114 173 76.4 69.3 NA 107 121.1

Outstanding loans from commercial banks (% of GDP)

50.7 42.3 48.6 99.7 67.6 45.6 38.9 21.2

Outstanding deposits from commercial banks (% of GDP)

65.8 33 46.2 157.3 43.4 59.5 36.6 28.4

Unmet financial needsIndia is one of the fastest growing economies in the world, and according to a recent report by the United Nations, 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 credit, with scheduled commercial banks (SCBs) providing significant domestic outreach through 138,294 branches (as of March 2016)3.

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 estimated 90% of small businesses are not linked to formal financial institutions (FIs).

These gaps in access to formal financial services have created a large untapped market potential for FinTech startups to develop a variety of offerings. Underserved by the incumbent banking and financial services system,

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.

#Mainland China Note: Data as of 2015 Source: IMF Financial Access Survey Data, 2016


Key Themes

Several key factors are driving the growth of FinTech in India:

Unmet financial needs Increasing investments

Conducive environment Responsive marketplace and incumbents

Traditional service delivery models have not been able to address the financial needs of consumers.

FinTech, with its ease of usage and access, has allowed consumers to get access to these services, typically at lower costs, driving its active adoption.

There has been a significant increase in FinTech startups in India over the last two years, primarily in the payments space (driven by regulatory changes and market demand).

In addition, there is increased willingness by domestic, as well as international VCs/PEs and incubators to heavily invest in this sector in India.

Regulators are interested in driving cashless / digital transactions for financial inclusion as well as control.

The spread of broadband / telecom provides a platform for financial services delivery with low delivery costs and high outreach.

Globally, FinTech startup are disrupting the business models of incumbent financial services players.

In India as in other markets, incumbents are adopting a range of strategies to deal with the risk and opportunity afforded by FinTech paradigms. These include strategic partnerships that provide the FinTech firm with access to bank clients and infrastructure to acquisitions.

Increasing investment in FinTechFinTech has been growing steadily in India since 2010; however, the past two years have witnessed a dramatic surge,

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

60 65108 125

192

390

186

2010 2011 2012 2013 2014 2015 2016*

Number of Fintech companies launched

4. Tracxn FinTech India Report – October 2016; “Fintech: no more the new kid on the block,” Mint, 28 December 2016.

consumers (individuals as well as small and medium enterprises) have already started turning to FinTech firms as alternative providers of access to payments, credit, investments, insurance etc. Even in urban areas where 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 branches. They are looking for fully automated, simple to use, digital products and services - an area where banks are found lacking - especially when compared to the digital offerings of ecommerce firms.

This has coincided with a shift in focus away from purely customer-acquisition innovation to newer business models (mobile payments, automated underwriting and processing of transactions etc.)


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.

VC-Backed FinTech deals in India

22 38163

1,580

38817 20

30

4750

2012 2013 2014 2015 2016

Funding (US$ m) Deals

Popular areas by funding (US$m)

US$1.3b

360

345

311

115

64

47

37

8

4

Mobile payments

Payments

Lending

Banking Tech

Insurance Tech

Software for IIs

Investment Tech

Consumer finance

Enterprise finance

Forex

News storiesGlobal VC Quona Capital9 and Japanese IB Nomura10 invest in Indian FinTech

Global VC firm Quona Capital recently launched a US$141m FinTech-focused fund for emerging markets. The fund plans to invest 30% of its corpus in India, making India its largest target market.

Nomura has set up an US100m global fund to invest in FinTechs in the capital markets and investment banking (CMIB) space. Nomura has launched a global accelerator and co-creation platform called Voyager Nomura FinTech, where startups can develop products / services in the CMIB space.

Global incubators launch in India

Several global incubators (Startupbootcamp, Swiss Re and Zone) have launched in India

“Startupbootcamp11, which has FinTech accelerators in New York, London and Singapore, expects around 300 applicants specializing in alternate payments and lending in the country. It has partnered with ICICI and RBL Bank and takes a 6% equity stake in startups.”

Zone Startups India has partnered12 with Barclays and Axis Bank to start accelerator programs. Global reinsurer Swiss Re has launched13 “InsurTech,” an accelerator to help startups develop solutions for Insurance. Key themes for the accelerator are IoT, smart analytics & systems of engagement.

FinTech funding environment remains promising5 India has a large ecosystem of startups, and in the APAC region is exceeded only by China as measured by the quantum and value of deals.The transaction value in the FinTech market currently amounts to US$44b6 and is expected to increase at a CAGR of 20.2% during the period 2017-2021 to US$92b in 2021.

In terms of number of startups, it is the third-largest tech startup hub globally with 4,200 tech startups. According to

Tracxn, nine FinTech startups in India have the potential to become unicorns with US$1b or more in valuation.7

The Indian FinTech sector has attracted capital from domestic as well as international investors. In 2016, VC-backed FinTech companies raised US$388m across 50 deals, a five-year high for number of deals but a decline from the US$1.6b high in 2015, which was achieved mainly on account of mega-rounds of funding to mobile payment providers.

Payments and Lending Tech sectors in India rank high in terms of funding received.8


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.

Conducive environmentUnmet financial needs and customer demographics have been key demand drivers for FinTech services in India. From a supply perspective, however, the support provided by regulators as well as the spread of best-in-class underlying platforms (telecom / broadband) have been equally critical.

Regulatory changesFor the Indian Government and financial sector regulators — Reserve Bank of India (RBI), Insurance Regulatory Development of India (IRDAI) etc. — financial inclusion is a critical objective. Given India’s geographical spread and the challenges inherent in creating physical (financial services) infrastructure, the regulators have been pushing the use of digital modes of transaction.

The Government of India launched the Pradhan Mantri Jan Dhan Yojna14 in 2015 with the aim of opening basic bank accounts for every Indian. The scheme envisages providing an overdraft facility after six months, as well as a debit card with inbuilt accident insurance.

RBI has also been steadily promoting a digital agenda to deepen and broaden financial services in the country. Digital initiatives such as UPI, Unstructured Supplementary Service Data (USSD), Bharat Interface for Money (BHIM), Bharat QR, Aadhaar Enabled Payments System (AEPS),

10.0 29.181.8

205.8

619.8

FY13 FY14 FY15 FY16 9MFY17

Yearly M-wallet transaction value (INR b) Monthly M-wallet transaction value (INR b)

33.8 33.1

74.5 83.5

Oct'16 Nov'16 Dec'16 Jan'17

Demonetization

credit information bureau coverage and inter-bank payment systems are expected to further strengthen the financial services infrastructure in the country.

Impact of demonetizationIndia has traditionally been a cash-based economy, with the country’s preference for cash being reflected in its high cash-to-GDP ratio of 12.04% (as against Brazil’s 3.93%, Mexico’s 5.32% and South Africa’s 3.72%).15

In November 2016, the Government of India undertook a demonetization drive, scrapping high-denomination notes (accounting for 86% of the country’s currency notes).

This provided a significant boost to FinTech startups (mobile wallets and digital payments), pushing citizens to use to digital modes for payments.

• “Paytm’s traffic increased by 435%, app downloads grew 200%, and there was a 250% rise in overall transactions and transaction value.”16 In February 2017, the firm announced17 an investment of INR6b over the next 10 months to expand its QR-based payment network along with plans to add 10m merchants enabled with these codes.

• In February 2017, MobiKwik18 announced an investment of INR3b for expanding its user base. This is expected to increase the annual gross merchandise value (GMV) to US$10b by 2017-end from the current US$2b.


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.

Penetration of telecom / broadband The number of telecom and internet subscribers has increased significantly over the past few years as the 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 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, along with a low-priced unlimited usage plan, is expected to double21 the number of data subscribers (mobile internet users) to 900m and increase penetration to 80%.

India’s e-commerce sector is also on a strong growth path — 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) 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 incumbentsThe Indian financial sector is highly regulated with significant capital and other constraints on firms interested in delivering financial services. While this level of regulation is aimed at protecting the interests of consumers, it has had the unintended effect of creating large entry barriers for FinTechs. However, in areas that are relatively 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.

898.0 933.0 996.5 1058.9 1151.8

FY13 FY14 FY15 FY16 Dec'16

Telecom subscriber base (m)

Internet subscriber base (m)

164.8

251.6302.4

342.7391.5

FY13 FY14 FY15 FY16 Dec'16

Over the past two years, there has been a visible trend in collaboration between incumbent players (banks and insurers) and FinTechs. FinTechs benefit from not being constrained by capital / licensing aspects, which the bank or insurer manages. The incumbent player benefits by being able to lower its costs and target competition with cutting-edge solutions in payments, mobile wallets, lending, AI, analytics, chatbots and blockchain technology.


24. “Banks and FinTech startups see more value in cooperation than in rivalry,” The Economic Times, 26 March 2017.

News story: Indian banks collaborating with FinTech firms24

HDFC Bank Kotak Mahindra Bank

Payments Automation

Machine learning

Online customer durable finance

AICredit Score

Social banking

Marketing

• MoneyView: Expense tracker on mobile

• ►Chillr: Instant money transfers, recharges and merchant payments

• Zumigo: Real-time fraud detection; nearest ATM / branch location via SMS; operator identification for missed call recharge

• Asimov Robotics: Humanoid robot at branches

• ►Niki.ai: Chatbot on Facebook

• ►Interaction One: IoT-based solutions for customer engagement

• vPhrase Analytics Solutions: Analysis of mobile banking and net banking reports

• Absentia VR: Augmented reality (AR) / virtual reality (VR) solutions for HDFC bank mobile apps; AR-based heat maps for branch efficiency

• Decimal: Mobile-based sales tool with segmentation, targeting and positioning capabilities

• CashCare, SmartMint and FastBanking: Instant loan approval on the basis of the borrower’s profile

• ►Perfios: Personal finance management for customers and non-customers

• ►Creditseva: Customer credit analytics and management tools

• Interface business solutions: Hashtag banking and Twitter commerce

• Experience Commerce: Content and community based web destination

• Net core: Marketing automation


Payments

Payments has been the front-runner in the large-scale consumer adoption of FinTech in India, aided by the spread of smartphones and mobile internet at affordable price points. Most FinTech players started out by identifying a niche/use case for building a customer base (e.g., Paytm with Uber25, OlaMoney for cab payments26 and Airtel Money for phone bills27) and then expanding onto other 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.

Overview

According to the EY FinTech Adoption Index 2017, money transfer and payments as a sub-domain has the highest consumer adoption rate globally at 50%, with India leading the way at an impressive 72%.

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.


Regulators & Institutional support is playing an enabling role The National Payments Corporation of India (NPCI) was set up jointly by the RBI and the Indian Banks Association (IBA) in 2007 as the umbrella organization for retail payments and settlement systems. Over the past five years, NPCI has led substantial effort and investment in developing the national payments infrastructure and technology platforms, be it Instant Money Transfer System (IMPS), Unified Payments Interface (UPI), Bharat Interface for Money (BHIM), Bharat BillPay (BBP), and Aadhaar Enabled Payment System (AEPS).

Emerging trendsSince 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

These initiatives have created an interoperable structure wherein customers having accounts with different banks or payments solution providers can transact with each other (using a virtual address) easily.

RBI on its part has liberalized the Know Your Customer (KYC) requirements for low-value wallets and customer authorization mechanism for low value retail payments, thus keeping intact the core proposition of ease and simplicity. A new set of differentiated banking licenses (payments banks) have been issued to a host of players from diverse areas such as wallets / pre-paid instruments, telecom players as well as India Post, to democratize payments for mass adoption.

Minimalist user experience

Interoperable and real-time

Value-Add Services

• Deep integration of Payments with the use-cases and purchase experience.

• Evolving from a single click transaction to instances where a customer doesn’t even know that payment has happened.

• Operates seamlessly and securely in the background.

• Solutions not restricted to a single payment method allowing users to make transaction from cards or accounts directly.

• Interoperability and real time processing of transactions is becoming a hygiene.

• UPI and BharatQR are driving interoperability and real time processing.

• Solutions offering value added functionalities along with payments for merchants and customers are redefining the business and operating model for players

• Offers, loyalty, credit at point of sale are some of the emerging use-cases aligned to payments

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


Merchant payments is undergoing a transformation

The penetration of traditional POS devices at merchant payments is low in India due to high setup and usage costs (expensive POS devices and high merchant discount rate [MDR]) and the preference for cash transactions (generally among the older generation) over cards (debit or credit).

This huge opportunity (under 5% of merchants and SME businesses have POS machines28) has given rise to a number of business models, ranging from lower cost alternatives to POS machines (mPOS providers) to eliminating the POS machines completely in order to digitize the long tail of merchant payments.

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.

Proximity payments is taking offTap and go payment mechanisms have been deployed in India across a number of use cases (toll payments, 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

Prohibitive economics of traditional POS deter merchants

0.25% - 1% MDR For debit cards

1.6% - 2.5% MDR For credit cards

Monthly transaction charges of INR 150-

200 per terminal

(estimated for transactions worth INR 10,000)

Non-transacting charges per monthly of INR 200-300

per terminal(applicable for low

transacting or inactive merchants)

Annual maintenance charge of

INR 2500-5000 per terminal

(depending on type of POS; may include

annualized rental value )

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.

“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.

‘Tez’ a UPI based mobile payment service with AudioQR capabilities30 and a proximity based “Cash Mode” solution which allows funds transfers without the need to share private details.


Samsung Pay

Samsung launched its “Samsung Pay” service in India in March 2017. Users are required to install the app and link their bank or credit / debit card accounts to their Samsung Pay account. The service works with both NFC (near field communication) and MST (magnetic secure transmission) terminals. Users select their card and bring the phone near the terminal. Once the merchant enters the amount in the terminal, the user authenticates the payment via fingerprint or a four-digit PIN in the app.

Hike

India-focused mobile messaging service Hike has launched mobile payments service integrated with its messaging app. Hike has started out with P2P and bank-to-bank payment options, the former being an in-app wallet that is not dependent on a bank account and the latter a service powered by India’s Government-backed UPI payment system.

Contextual payments:

Social media and messaging platforms are being increasing used by companies to run product promotions and drive commerce. In order to allow consumers to complete the transactions seamlessly, these platforms are extending their capabilities to allow consumers to make payments. This will make it easier for individual service providers and small business owners to connect with their customers and receive payments.

WhatsApp

WhatsApp is expected to use UPI, a cross-bank payment system backed by the Government, to enable P2P payments between users within the next few months. WhatsApp has its largest market in India with over 200m users.

Proximity payments can be broadly classified in the following categories:Proximity Payments

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

“Chat app Hike launches UPI payments, wallet,” Mint, 20 June 2017.

“WhatsApp will reportedly launch peer-to-peer payments in India within 6 months,” Tech Crunch, 03 April 2017.

“Samsung Pay to launch in India today: All you need to know,” Hindustan Times, 23 March 2017.

The road aheadThe accelerated innovation in payments has resulted in the launch of a large number of similar solutions by various 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.

Even as the POS and card based payments continue to grow at a steady pace over the next 4-5 years, alternate form factor payments are likely to gain further traction 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 for large players. In the long run players which develop scalable and sustainable business models and stay ahead in the product lifecycle and adapt to changes will remain most relevant to customers and merchants.


Financial planning

With the exponential growth in the adoption of FinTech / digital financial services, the domain of financial planning / advisory has undergone a transformational change. In just a few years, the role of a financial advisor (FA) is moving away from being a portfolio manager / sales person calling occasionally (and at the end of the financial year) to sell a series of “recommended” products. The expectation is for the FA to be a collaborative life planner, available on demand through omni-channel capabilities and augmented by technologies such as AI, big data and virtual assistants.

FinTech is now levelling the playing field for large financial players (with deep pockets, large sales and marketing teams) and nimble startups that can leverage technology to provide equivalent outreach (through digital channels) and quality of financial advice.

OverviewEmergent financial planning and advisory capabilities are allowing the industry to revise old business models and start reaching out to new sets of customers with completely different needs, e.g., millennials. The traditional model of targeting large total assets under management (AUM) and monetizing through a management fee (% of AUM) will not work for this segment as they are starting on their financial journey and have limited assets. FinTech allows these customers to be targeted with a direct-to-customer digital model, with automated risk profiling and robo-advisory led portfolio management at extremely low costs, or even free. This is based on a “freemium” model with more premium features such as a human advisor and financial planning advice being provided on payment of a subscription fee.


FinTech-led financial planning and advisory in India is still at a nascent stage but has tremendous potential for growth, fueled by its discovery of new customer segments and product / service offerings.

The EY FinTech Adoption Index 2017 demonstrates that while globally FinTech adoption for financial planning is much lower (at 10%) compared to other sub-categories, the adoption index for India is much higher at 20%. Interestingly, the same index for future adoption stands at 16% globally and a significantly higher 26% for India.

Emerging trendsWith the rapidly changing customer preferences, particularly the adoption of online and mobile channels, coupled with 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:

Financial planning software of the past, present and future

Past

Advisor ClientAdvisor-Client meeting

Present Future

Planning software business meta data

Planning software as advisor calculator

Planning software as collaboration tool

Planning software as client PFM


Robo Advisors and the mass affluent

Today a very low percentage of investors access India’s equity and mutual fund markets. The key issue is investor education. Robo advisors are beginning to address this issue by providing digital education and advice to a growing segment of investors who cannot afford high end wealth and investment advisory services.

Big data and AI for personalization

FinTech players as well as a section of traditional banking players are starting to leverage big data and AI to provide personalization and customization at the most micro level, i.e., creating a “market of one.”

Big data layered with behavior-based predictive analysis allows for targeted advice at the point of need, enabling the provider to be more integrated with the customer’s decision making and purchase journey.

Marriage between physical and digital models

As the level of awareness increases, consumers are demanding greater access and control (DIY). Financial planning solutions will increasingly need to support this demand.

In the next few years, we believe that the winning formula will be a combination of digital access and human advice, both face-to-face and over electronic channels. Hybrid models where automated financial planning and advisory is supplemented with on-demand support from human advisors are likely to prevail over purely human as well as purely automated mechanisms. Incumbent brokerage firms in developed markets have already implemented this hybrid approach, enabling their traditional financial advisor community with intelligent tools to cater to diverse client segments.

FinancialPlanning

1

2

3

4

5

6

7

8 Interactivedashboards

Retirementplanning

Tax planning and filing

Goal based investing

Accountaggregation

Digital storage of documents

Insuranceplanning

Expense management

Integrated account view

Consumers today are overloaded with information and prefer accessing only relevant information as and when they require it. However, they also need the ability to get a complete view of their financial portfolio (across savings, investments, loans, credit cards, upcoming bill payments etc.) and analysis (financial options, expense patterns etc.) digitally. Given the increasing number of investment options, consumers need the ability to undertake scenario analysis, e.g., how their finances would be impacted if they were to take a car loan with subsequent EMI payments. A number of FinTech players are in the process of building and deploying sophisticated, mobility-based portfolio analysis tools. The RBI has already introduced a master direction on account aggregation that seeks to regulate companies providing account aggregation services. A key part of the direction aims at introducing a consent based architecture that will begin to move the Indian financial services eco system to an ‘open banking’ concept that is increasingly prevalent in developed markets.


Walnut: Integrated planning tool based on sms

Walnut, a personal finance management app, allows consumers to track their spending, bills and bank transactions across providers. It monitors the customers’ SMS inbox for messages from businesses such as merchants and banks, and captures transaction data. The data is used to provide customers with a comprehensive view of their finances along with analysis of inflows and outflows, expense patterns etc. The app also allows users to undertake transactions including paying visa credit card bills, sending and receiving money, and splitting bills.

Perfios: real time analysis & decisioning

Perfios is a financial product technology company 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 manager / personal finance applications. It also has a solution for independent financial advisors (IFAs), which allows them to aggregate their clients’ data onto a single platform through direct retrieval of transactions as well as statement uploads, and provides a single view of the information to the IFA and customer.

MoneyFrog — Integrated platform for financial planningMoneyFrog is a financial advisory firm that uses a blend of technology (robo-advisory) and human experts to help clients manage their investment portfolios. It profiles customers using a number of parameters, including financial assets, goals and risk appetite. Based on the profile, the firm helps customers identify investment options using its algorithms / robo-advisory capabilities and allows customers to transact online, as well as reach out to financial advisors for advice and resolution of queries.

B2B services for integration of financial accounts

There is an emerging category of specialized players are providing financial institutions with an integrated view of all accounts of their prospects and customers. The services they provide include analysis of financial statements, aggregation of client data, account level dashboards and advisor solutions.

Customer-first approach

A number of FinTech players are building business models around empowering consumers to take control of their financial planning and investments. Rather than focus on the traditional approach of pushing consumers to invest in products, these players are trying to create advisory-led, profile-based customized investment approaches. The process starts with building a profile of the consumer (typically through online, self-use tools) covering financial goals, risk appetite and projected short and long term needs. A mix of automated and expert advice is used to present investment options, and simplified tools allow consumers to monitor their portfolio and model the impact of investments.

The road aheadThe adoption of financial planning is expected to go up significantly in the near future as more and more customers shift from investing in physical assets such as gold and real estate to financial assets, in a planned and systematic manner. Financial institutions and FinTech players alike, working at the confluence of technology and relationship based models, can leverage this vast business potential in the near future.

https://www.perfios.com/index.php/aggregation-api/https://www.perfios.com/index.php/ifas/

“Need Financial Advice? Check Out Moneyfrog.in,” TechStory.In, 29 September 2016.https://moneyfrog.in/

http://www.getwalnut.com/faq



Savings and investments form the core of a traditional retail banking relationship for a customer. Therefore, a number of FinTech players are trying to disrupt this space with innovative offerings (with the humble savings account being enhanced with a number of value-added-services), even as traditional banks try to adapt to this onslaught on their core businesses.

Banks have an inherent advantage in that they control access to customers’ savings account and associated transactional information. As a result, FinTech players are choosing to collaborate rather than compete with banks.

OverviewAccording to the EY FinTech Adoption Index 2017, savings and investments as a category has one of the highest consumer adoption rates, with a global adoption rate of 20% compared to India’s 39%. However, this increasing customer adoption has also brought to attention the urgent need for tightened cyber security to protect customers’ financial and personal information and money.



Emerging trendsCustomers 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:

Simpler and more secure customer authentication

With the ubiquitous presence of smartphones across a large cross-section of customer segments, more and more customers want to access their savings and investment accounts online or through the mobile channel.

Traditionally, SMS-based OTP has been used as the primary mode of authentication, but with heightened cyber-security concerns, financial organizations are starting to move to alternate modes of authentication, e.g., facial and voice recognition. In addition, advances in technology (as well as the Government’s financial stack) now allow for real-time biometric authentication, such as fingerprints (Aadhaar-linked) to iris recognition.

Seamless integration between savings and investments

Financial institutions are trying to inculcate the habit of regular investments in financial asset classes among customers, by enabling them to save small amounts of surplus funds lying idle in savings accounts. This implies the existence of an architecture to enable the frictionless ‘sweeping’ of low value balances from savings accounts into investment accounts. The payment bank ecosystem in the country is rapidly building out this sweep architecture as they cannot keep more than Rs 1 lakh of balances in their customer accounts at end of day.

Changing consumption

pattern

More demanding

More choices

More aware

Customer

!


Paytm — Digital savings, payments and investmentsPaytm, in partnership with MMTC-PAMP, launched an offering in April 2017 allowing customers to convert their surplus balances into digital gold assets, with a choice to get the digital gold in the account converted to minted coins and delivered at their doorstep.

It is also planning to offer swipe in /swipe out facilities to liquid money market funds from a customer’s savings account, similar to what its strategic investor Alibaba offers in China through 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.

HDFC Bank SmartBuyHDFC Bank has tied up with a large number of merchants to offer deals, offers and information across categories such as e-commerce, flight and bus tickets, hotels and mobile recharge on its SmartBuy marketplace. Customers can pay for their transactions directly from the range of payments options from HDFC Bank, avail instant financing for their purchases and also earn reward / loyalty points.

FundsIndia – online investment platformFunds India is an online investment platform that offers financial products such as mutual funds, equities, deposits and insurance. It has launched a gamification-based tool for mutual fund investing — ranking investors with their peers (based on factors such as age, income and risk appetite) and providing badges for disciplined investing — to drive good investment behaviors and ensure that investors remain engaged

From investments to a regular mutual fund to even dematerialized gold investment, customers now have 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.

Financial marketplace

In order to gain a greater share of the customer’s wallet, financial institutions are extending their capabilities into areas beyond the domain of traditional banking services, such as information base, deals and offers across spend categories like travel, hotels and real estate. The intent is to capture the eventual transaction and drive usage of associated banking products and services such as auto loans, home loans and personal loans. For example, banks are leveraging historical transaction data to build up customer profiles and create personalized offers at key moments in the customer journey.

Gamification

A new crop of investment portals is trying to grow (and capture) the market by addressing new customer segments such as young middle class segments who are just entering into their professional lives. They are making investments fun and engaging by using gamification techniques such as peer review, benchmarking against peers and, reward points for completion of milestones / goals.

“Paytm Launches Digital Gold, Makes Gold Investment Digital,” News18, 27 April 2017.

“India’s Paytm Said to Seek License to Offer Money Market Fund,” Bloomberg, 20 June 2017.

“HDFC Bank to turn into a shopping-hub,” Business Inside, 11 May 2015.https://offers.smartbuy.hdfcbank.com/smartbuy/public/content/About-us

“Play a game, turn into an ace investor,” DNA, Nov 17, 2016

https://pages.fundsindia.com/pages/media/fundsindia-com-launches-gamification-in-mutual-fund-investing/


Zerodha — Online broking and investment platformZerodha was the first brokerage firm in India to disrupt the existing pricing structure by introducing a flat fee of INR20 per trade and zero fees on equity investments. Growing at over 100% year on year, Zerodha currently has more than 300,000 clients and contributes to 5% of daily retail trading volumes across all the stock, commodity and currency exchanges in India. In order to expand beyond stock broking services into areas such as mutual fund 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.

API 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.

APIs provide a modular extensible and standardized interface to the banks’ underlying infrastructure platform, supporting a lot of functions around savings, investments and payment, as well as community features and third-party services.

This concept is still at a nascent stage in India (unlike the western world, where providers such as ING Direct FIDOR offer a full suite of API services). However, FinTech players in investments and payments are increasingly catching up with the trend.

The road aheadAs banks and traditional financial institutions become more and more active in adopting digital strategies in their battle for the customer’s mindshare and wallet share, they will have an inherent advantage in the savings and investment domain as customer trust plays a critical role here. Also, the concept of savings account as the underlying master account with other value-added products and services built around it is going to gain prominence. Hence, there will be a greater degree of collaboration between banks and specialized FinTech players in this domain, with a win-win proposition for both.

Bank

Customer

Mobile walletLending

Marketplace

Branches

Trading

Social

Stored value eMoney

Ticketing

Crowd funding

Retail

Investment

Transactions

Mobile payments

Savings

Payments

EY FinTech Adoption Index 2017


Lending

Even today, many lenders in India adhere to manual and time-consuming loan processes such as collection of post-dated checks and paper-based National Automated Clearing House (NACH) registration. In addition to increasing the turnaround time, these processes increase acquisition and servicing costs, which are passed down to the customers. Coupled with the reliance on an (limited coverage) credit rating system, this results in either a poor customer experience or denial of access to capital.

In developed markets such as the US and the UK, 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.

OverviewThe lending FinTech sector in India is still nascent, with the EY FinTech Adoption Index 2017 indicating a low customer adoption rate of 20% (although double the global average of 10%), but has tremendous potential for growth and disruption, fueled by its discovery of new customer populations and products.

31. S&P Global Financial Literacy Survey 2014.


LendingEmerging trendsDigitization and automation of loans processes

To deal with competition from newer players and the rising customer expectations, incumbent banks and NBFCs are reinventing their existing processes32 through digitization and automation at each step of the lending value chain.

32. “Axis Bank & Suvidhaa roll out ‘Nano Credit’ - pre-approved, instant & unsecured loans,” BusinessLine, 11 Aug 2016.

• Typically with credit scores above 700

• Can get pricing of 10-18% from banks

• Existing business and credit history

• Credit scores below 600 or non-existent

• Pricing for >25-30% from niche/local lenders

• Typically need short term loans

• Scores 600-700 or default score – careful but quick evaluation needed

• Varied product needs – short term and medium term

• Lack of available suitable products from banks

• May not have sound financial history, past credit records or usage of credit card

Interest Rate25-30+%

Interest Rate10-18%

Interest Rate~16-24%

Banks and NBFCs

Able/ willing to address <5% of the market

Unaddressed market

~90% market unaddressed by existing financiers

Niche / Informal Lending

Able to address <5% of the market

Underwriting

• Digital customer acquisition

• Simplified documentation and data requirement from customers

• Simplified user-experience and credit delivery

• Lean IT infrastructure

• Loan Management System Agile decisioning engine

• Analytics engine to profile and target customers better

• Underwriting algo development & scoring

• Automated decisioning

• Behavioural scoring

• Social worth assessment

• Partnerships to source data or scores of customers

• Partnership for usage of digital credit

PartnershipsConsumer proposition Technology


The key enablers for lenders to improve customer experience and lower costs are as follows:

India Stack• India Stack is a complete set of API for developers which includes the

Aadhaar for Authentication, e-KYC, e-Sign , Digilocker, UPI and privacy-protected data sharing within the stack of API

Robotics for seamless back end integration

• Leveraging robotics to ensure seamless data movement between disparate technology platforms without manual intervention

• Leveraging BPM for integrated workflow management with external players such as Valuation agencies

• Leveraging OCR technology to read data from uploaded documents to minimize manual entry of data by customers

Aggregation for Income/Bank Statement Verification

• Partnerships with account aggregators such as Yodlee/Perfios to ensure real time bank statement verification

• Focus on ensuring the customer experience is seamless and secured to drive adoption which is currently low

• However aggregator tie-ups need to be revisited in light of new account aggregation guidelines by RBI

Faster document upload facility without size limitations

• No size limitations for document upload avoids the delay caused by customers trying to reduce the size of documents or dropping off the process

Integration with external partners for real time credit check

• Integration with external partners such as CIBIL will enable to conduct real time credit check and become a key driver for providing real time approval in principle to the customer

Real time Approval In Principle

• For positive scenarios with relevant documentation upload and positive real time credit check can drive real time approval in principle thereby leading to superior customer experience and greater leads to sales conversion ratio

Detailed MIS dashboard for tracking of TAT for each file

• Detailed MIS Dashboard view real time to operations manager to identify any bottleneck across each process step and take immediate remedial actions to avoid delays for sanctioning/disbursements

Artificial Intelligence led Servicing

• Leverage AI led servicing through chat-bot/video/co-browsing of application form during the application / customer onboarding process and answering client queries / complaints and service requests


The P2P lending marketplace

P2P lending platforms provide an online marketplace for lenders and borrowers in return for a fixed origination fee. P2P platforms use proprietary algorithms and scoring mechanisms to assess the risk of each borrower and provide a recommended “risk-adjusted return” to the lender33. The data points used originate from social media accounts and device history and are used to gauge reliability, spending power and likelihood of default of the borrower in place of traditional credit assessment models for which data might not be available. Their differentiators are greater speed and scalability and reduced costs (through efficiencies).

Taking cognizance of the growth in P2P lending (India already has ~30 P2P lenders34), and the consequent need for oversight, the banking regulator (RBI) has recently issued a master circular35 regulating P2P lending platforms.

In order to ensure that consumers are protected from issues arising out of cyber-security, fraud, money-laundering and operational challenges, P2P lenders have been directed to register as Non-Banking Financial Company within 3 months of issuance of the circular. In addition to other constraints, the circular requires NBFC-P2P applicants to demonstrate

• Capital adequacy - minimum capital of INR 2 Crore

• Viable business plan

• Robust and secure Information Technology system

Since P2P lenders which fail to get approval from RBI may be asked to wind down their business, the industry is likely to see consolidation among smaller or weaker players who will either be unable to satisfy RBI’s requirements for registration, or do not have the capacity to adhere to the other operational requirements outlined in the circular.

RBI has restricted the scope of activities of NBFC-P2Ps by prohibiting them from

• Raising deposits

• Lending on their own

• Providing or facilitating secured lending

• Providing credit enhancement or credit guarantees

• Cross selling any products other than loan specific insurance

In addition to restricting the role of the NBFC-P2P to a facilitator, RBI has also put in place a number of prudential norms limiting

• Lenders to an aggregate exposure of INR 10 Lakhs across borrowers and NBFC-P2Ps

• Borrowers to a cap of INR 10 Lakhs across all P2Ps,

• Exposure of a single lender to a single borrower (across P2Ps) at INR 50 thousand

• Tenure to a maximum period of 36 months

To protect borrowers and lenders, RBI has also mandated that the funds from lenders and borrowers be held in separate escrow accounts at a bank and not comingled with the NBFC-P2Ps own funds. The chosen bank will be required to promote a trustee which will be responsible for operating the escrow accounts on the basis of instructions delivered through the platform or otherwise. RBI has also prohibited cash transactions and directed Trustees to undertake funds transfers only between bank accounts.

While moving to a regulated regime is likely to increase operational (& compliance) costs for P2P lenders, the sector as a whole is likely to benefit from protection afforded to lenders and borrowers in addition to ensuring that only serious players with the capacity to build a sustainable business operate in this space.

33. “The dawn of P2P lending,” Business Today, 15 January 2017.

34. “Are the P2P lending platforms for you?,” Mint, 07 December 2015.

35. “Master Directions - Non-Banking Financial Company – Peer to Peer Lending Platform (Reserve Bank) Directions, 2017,” RBI, 04 October 2017.


Use of alternate data for credit scoring

Traditional credit scores rely on repayment data of loans and credit cards to determine credit worthiness. This denies an estimated 90% creditworthy individuals from access to credit.

The utilization of alternate data to enrich or replace traditional sources is the lodestone of FinTech lenders.

Data points are obtained from social sites, device data, digital footprints, social media accounts, bank account statements among others.

Proprietary algorithms are then used to assess the customer’s ability and willingness to pay. The underwriting decision is then taken by a rule-based decision engine.

Simpl — The “pay later” anti-walletSimpl, a technology platform, provides customers with credit at no additional cost and a consolidated bill for all their transactions on a fortnightly basis. Customers can use their Simpl wallet without needing to top it up or perform multiple card transactions at each point of purchase. Simpl has now partnered with online platforms such as BookMyShow, Faasos, FreshMenu and Nykaa.

Customer applies for credit

Loan processing via rule- based decision engine

Automated approval• Upto approval limit

• Approved transaction types

Rejection

Manual approval

Traditional source, like credit bureaus

Alternate data sources

Access customer information

What is the banking and financial history of the customer?

Has the customer been a responsible borrower in the past?

What is the social and professional profile of the customer?

What are the lifestyle spends and payment behaviour of the customer?

What are his spending patterns and payment preferences on e-commerce portals?

Can his identity be verified online?

Is the customers mobile device usage consistent? Does it confirm his social and professional profile?

Bank and financial statements • E-verification and analysis of bank statements, income tax returns , employer name, TDS etc. through

aggregators like Perfios & Yodlee • Aggregation of all financial transactions of a customer through SMS based aggregators like Walnut

Credit Bureaus • Real time credit scores and credit reports • Levels of indebtedness • Custom fields through tie-ups with credit bureaus

Social media portals • Educational & professional backgrounds on LinkedIn • Social media accounts- Facebook • Email – Gmail, Outlook, Yahoo!

Lifestyle apps for taxi , dining etc. • Behavioral scoring • Usage / default pattern • Address confirmation

E-commerce portals • Payment behavior ( cash on delivery / credit card/ wallet etc.) • Spend patterns • Return of goods

Mobile handset • Browsing history and app usage • Address book and call logs • Location based activity

Government databases / India Stack • Automated integration with AADHAAR • Automated integration with MCA, RoC etc. for profiling SMEs, self employed category

https://yourstory.com/2016/11/simpl/“Simpl Is an Anti-Wallet That Brings the Buy-Now, Pay-Later Model Online”, gadgets.ndtv.com, 01 December 2016.


The road ahead: Evolution of lending ecosystems An increasing number of FinTech firms are tying up with merchants and service providers to provide affordable financing options at the point of sale. Niche products are being developed in conjunction with these merchants, utilizing customers’ transactions histories and other available data points to evaluate their credit worthiness. Similar tie-ups for providing customers with flexible repayment options are being offered prominently across aggregator websites, retail chains, e-commerce players and travel portals, catering especially to customers without credit cards.

The evolution of SME lending platforms is an illustration of ecosystem lending. SMEs face challenges in getting access to capital for a variety of reasons, including the informal nature of business, poor infrastructure and limited assets. FinTechs36 such as LendingKart, NeoGrowth and CapitalFloat have developed innovative business models to cater to this underserved market. These models include partnering with e-commerce platforms such as Amazon, Snapdeal and Flipkart37 and leveraging their data on sellers (trading history, returns ratio, customer ratings etc.) to assess credit worthiness and offer loans.

Amazon and its lending program for SMEs in IndiaAmazon, in partnership with NBFC Capital First Ltd., has initiated a Seller Lending Program to provide working capital loans to small and medium businesses on Amazon.in. The program offers secured and unsecured loans ranging from INR5 lakh to INR2 crore to selected sellers.

Sellers are given pre-approved indicative offers with amounts and indicative rates and fees. The sellers can apply online with the amount and tenor of their choosing and submit their documents.

The loan will be approved and disbursed within five days of application. Sellers will be offered loans on the basis of various criteria including account tenure, selling history and customer feedback.

The growth of the “pay later” economy

India’s transaction-led credit economy offers consumers the convenience of a “pay later” lifestyle. Traditional financers have provided POS finance for consumer durables and consumer electronics for long. However, FinTechs are making available to consumers a variety of financing models across lifestyle purchases — many with the ease of being available online at the point of purchase.

IRCTCIRCTC has collaborated with ePaylater to provide transaction credit to customers after evaluating their CIBIL scores and transaction history. Customers who wish to opt for this service need to provide their PAN or Aadhaar details. If found credit worthy, they will be able to book tickets up to five days in advance with a service charge of 3.5% and repay it in the next 14 days.

Alternate data and credit ecosystems have allowed FinTechs to assess credit worthiness of segments that were hitherto untargeted and cater to digitally acquired customers at lower unit costs. Students and young adults are one such segment. FinTechs are offering students small ticket loans with flexible tenures to fund lifestyles (flights, movie tickets, cabs and phone recharges) and purchase of consumer durables with ticket sizes starting as low as INR500.38

Slicepay — Exclusively lending to studentsSlicePay is a micro-lending platform that uses a proprietary risk mechanism to offer students of select colleges credit lines of up to INR60,000 without collateral. The firm has tied up with on-campus merchants as well as a number of major online e-commerce platforms, including Amazon, Flipkart, Myntra, Snapdeal and Paytm, from where users are allowed to purchase products. Users select a payment plan (down payment and installments) and are billed on a monthly basis.

36. “Top 16 Fintech Startups in India changing the unorganized lending space,” The Hacker Street, 17 May 2017.

37. “Indian e-commerce platforms help sellers get easy loans to aid growth,” Business Standard, 10 December 2015.

38. “Startups offer credit lines for cab rides, movie shows,” Economic Times Tech, 08 April 2017.

https://slicepay.in/how-it-works

“Here’s how micro-lending startup SlicePay addresses students’ queries on lending”, CIOL.com, 05 June, 2017.

“Indian Railways to introduce “book now, pay later” option,” Economic Times, 01 June 2017.

“Amazon.in Launches Lending Program for SMEs in India”, Amazon.in, 10 February 2016.


Insurance

Insurance had traditionally been heavily regulated in India with significant controls around the business, (products, intermediaries, processes, commissions etc.), limiting opportunities to innovate. With the relaxation of rules in 2000, and the advent of private insurers, differentiation through convenience and service experience has become increasingly important.

The initial focus of InsureTech has been primarily around customer acquisition, with web aggregators engaging in activities such as raising awareness, and allowing policy (& provider) comparison and purchase of insurance through electronic channels. Some players have also focused on enhancing the effectiveness of sales teams through mobile / tablet based sales tools, including risk-profiling calculators, mobility-enabled CRM tools and training on effective selling using computer based training (CBT) tools.

Overview

According to the EY FinTech Adoption Index 2017, insurance as a domain has consistently high customer adoption rates (at least 40%) across all age groups, with adoption for the 75+ age group being the highest among all the five categories for FinTech. The expected adoption rate for insurance in India is a significant 73%, which is much higher than the global average of 39%.


Insurance

Key emerging trends in InsureTech In the past few years, India has witnessed a dramatic growth in the use of technology. Coupled with a young, tech-savvy population, and a continual push for digital by the Government, the market has created immense opportunities for InsureTech across the customer lifecycle. Funding from VC/PE and incubators has provided additional impetus to the sector.

Use of AI and machine learning

A number of insurers in India are investing in and have begun leveraging AI / machine learning techniques to service their customers.

These capabilities are being utilized in areas such as responding to emails, answering queries and driving sales.39

Focus on service experience

The increasing adoption of digital channels has improved outreach but has also reduced switching costs for customers. Therefore, InsureTech players are building solutions to drive customer stickiness by enhancing the service experience. This includes minimizing documentation (e-KYC through Aadhaar), reducing the time to underwrite (machine learning based underwriting rules), providing consistent on-demand service (chatbot / virtual agent layers above CRM) and optimizing the claims process (app-based login of motor claim with photos).

39. “Bots are welcome in the insurance sector,” Mint, 20 June 2017.

Growing population

Rise in technology usage

• 1.3 Bn People

• 520mn working age population

• 32% Urban population

• Median age of 29 by 2020

• Mobile subscriber base 1 billion

• 300mn+ active unique smartphone users in 2016

• 25% Internet penetration

• 6% Broadband penetration

Emergence of new pricing models

For the price-sensitive Indian market, InsureTech players are helping develop usage-based as well as performance-based pricing models. For example, there are mobility as well as telematics sensor based solutions that capture driver behavior, vehicle location and status in real time. These data sets can then be analyzed to predict a driver’s behavior, insurance price, customer retention and cargo safety, allowing insurers to model and price risk effectively.


iCareUiCareU is a cloud platform solution that captures car GPS data and analyzes driving behavior. These details are provided to insurers as business intelligence analytical reports, allowing them to reward drivers for good driving practices.

CarIQ It has developed a connected car ecosystem consisting of a hardware dongle for capturing car data, a cloud-based analytics engine that provides diagnostics as well as analyzes driving behavior, and tie-ups with service providers ranging from insurers to car workshops.

Its connected app provides access to roadside assistance and workshop billing / payments. In addition, the app allows users to get insurance quotes.

Leveraging IoT and wearables

With the reduced cost of sensors and data collection, InsureTech players have started focusing on risk mitigation and loss prevention, both for individuals and corporates.

For example, a wearable device provider tracks key health metrics and provides wellness / dietary advice, allowing insurers to reward healthy behavior. Aggregated data sets are being used to train AI to identify potential health event triggers and provide alerts to customers to get checkups and undertake preventive care.

GOQiiIn line with its focus on preventive healthcare, GOQii has tied up with a global re-insurer and a leading Indian health insurer to provide differentiated health offerings. As part of this tie-up, the insurer’s customers will get access to GOQii’s health management and coaching tools with a view to promoting healthier lifestyles.

The firms intend to work together to create digitally enabled health insurance solutions with reduced claims costs and hence better pricing for consumers.

Uses wearable devices to manage their health

outcomes

Policy-holder changes behaviour improving

health outcomes and lower premiums

Data is passed to insurer through wearable

interface

User Interface and communications link positive behaviour to insurance policy with price signal re-enforcing

benefits of lifestyle

Behavioural data is included for loyalty programs

and in policy pricing

Policy Holder User Interface Insurance

1

5

2

4

3

Data

Pricing

CRM

https://www.crunchbase.com/organization/icareu#/entity

https://www.bloomberg.com/research/stocks/private/snapshot.asp?privcapid=264524058

“GOQii enters into alliance with Max Bupa and Swiss Re for Health Offerings”, GOQii Blog, 20 April, 2017.


Similarly, sensors installed in logistics vehicles provide real-time alerts when the vehicles go out of pre-determined geographical boundaries, do not reach interim waypoints on time or even if the temperature in a refrigerated truck exceeds the pre-defined limits.

This allows for corporates to rapidly respond to breakdown or pilferage and reduce losses.

The road aheadHigh competition in telecom, the Government’s focus on digital services (Aadhaar, UPI etc.), relaxation of rules by the regulator and a more demanding young population are going to drive InsureTech usage and innovation in India.

In customer acquisition and servicing, we expect to see greater use of social media analytics and machine learning based customer interaction engines to target customers (based on life events). This is likely to be supplemented by automated advisory solutions to help potential customers understand their risks and propose insurance coverage (not just for individuals but also for small enterprises).

Cost management will remain critical for the players, and we expect to see InsureTech solutions leveraging mobile

data entry, scanning, OCR, automated image recognition and tagging, RPA and integration of third party data to capture policy and asset details from multiple sources and underwrite policies in an automated fashion. With advancements in sentiment analytics and natural language processing, chatbots or virtual agents are likely to play a greater role in managing customer requests.

The continued reduction in the cost of sensors and mobile data will drive enhanced usage of IoT and telematics for data acquisition (sensors, satellite imagery and drones). Coupled with better algorithms and increased computing power, we see greater use of real-time tracking and predictive data analytics to warn of potential risks and respond to loss events as they occur. This includes insurers calling for tow-trucks as soon as a crash is detected or doctors being informed in case of a health event (irregular heartbeat etc.). Telematics will also enable risk mitigation, e.g., sensors warning of likely machine failure (leading to business interruption) and sending alerts of potential crop failure (due to spread of insects or insufficient nutrition based on satellite imagery).

Indian insurers have already undertaken proof of concept projects leveraging blockchain. We expect to see blockchain used as industry-wide asset registers for fine arts and specie. As use of blockchain increases in India across government services (land records, motor vehicles etc.), we expected these to be leveraged for smart contracts and fraud prevention.

India is currently at an inflection point, with a critical mass of customers, falling technology costs and an increasingly connected and demanding customer base with growing incomes. We see InsureTech players partnering with insurers, industry players and the Government to radically transform the customer experience, and drive insurance penetration and density.

• GPS • Satellite Images • Geolocation data


ConclusionIndia provides an interesting opportunity for FinTech players. It has a vast market, but one that consists of multiple diverse segments from an access and adoption perspective. Consumers range from financially illiterate to extremely sophisticated global investors. Consumers may be multi-lingual or may only speak their native language. They may have access to the latest technology or may be limited to basic phones and limited internet connectivity. This creates a variety of use cases and needs.

The robust ecosystem of technology, underlying platforms and skilled people (programmers, data scientists, researchers etc. especially those with global experience or returning to India) and government / regulatory initiatives have provided FinTech players with the opportunity to identify specific niches and the capability to address their pain points, before growing to address other market segments.

The Government has also launched several initiatives to scale up the startup ecosystem, including a US$1.5b startup fund.40 Major global VCs and hedge funds are active in India and angel funding networks have also started coming up in both the established and emerging hubs of the country.

Outlook of the Indian FinTech industry

According to the EY FinTech Adoption Index 2017, India is expected reach an adoption rate of ~80%, making it the global leader in this regard.

This adoption will be driven by large increases in insurance, savings and investments and borrowing, even as payments remains the leading area of usage.

While adoption will continue to increase among young adults, usage is expected to increase drastically among older generations who are opening up to the idea of conducting financial transactions digitally.

40. “PM Modi launches $1.5 bln fund to support start-ups,” Reuters, 16 January 2016.

Current and future adoption rates (%)

5233

7851

India Global

2017 Future


The increasing competition is going to help differentiate FinTech startups with sustainable financial models. While they may learn from global models, we believe that indigenous models will win not just in the domestic market, but also in similar markets globally.

Future adoption by categories

India

Global

$

Money transfer and payments

Financial planning


InsuranceBorrowing

85%

65%

26%

16%

55%

30%

37%

18%

73%

39%

Future adoption by Indian users across age groups (%)

48

74 71

5447

25

0

73

89 8680 75

64 69

18-24 25-34 35-44 45-54 55-64 65-74 75+

Age

2017 Future


Contacts

Contributors

Rahul Shah | Associate Director | EY Knowledge

Gauravgajanan M Kayal | Manager | FS Performance Improvement

Rajdeep Roy Choudhury | Senior consultant | FS Performance Improvement

Pallavi Gurtoo | Senior consultant | FS Performance Improvement

Sreyasi Sarkar | Senior consultant | FS Performance Improvement

Mahesh MakhijaPartner, FS Performance Improvement and Technology, Advisory ServicesMobile: +91 96320 36633Email: [email protected]

Aditya KhannaDirector, FS Performance ImprovementMobile: +91 98677 16297 Email: [email protected]

Abonty BanerjeePartner, FS Performance Improvement, BankingMobile: +91 9930356123 Email: [email protected]

Sachin SethPartner, FS Digital TransformationMobile: +91 9867332539 Email: [email protected]

Rana GanguliPartner, FS Performance Improvement, InsuranceMobile: +91 96320 36633Email: [email protected]

Fali HodiwallaPartner, FS Performance Improvement

Mobile: +91 9820 139302 Email: [email protected]

Notes

Notes

Ahmedabad2nd floor, Shivalik Ishaan Near C.N. VidhyalayaAmbawadiAhmedabad - 380 015Tel: + 91 79 6608 3800Fax: + 91 79 6608 3900

Bengaluru6th, 12th & 13th floorUB City, Canberra BlockNo.24 Vittal Mallya RoadBengaluru - 560 001Tel: + 91 80 4027 5000 + 91 80 6727 5000 + 91 80 2224 0696Fax: + 91 80 2210 6000

Tower C, 3rd Floor, RMZ Infinity, Municipal No. 3, Old Madras Road, Survey No: 1477/2 & 10, Benniganahalli, K.R. Puram, Bengaluru, Karnataka 560016Tel: +91 80 6727 5000Fax: +91 80 2222 9914

Chandigarh1st Floor, SCO: 166-167Sector 9-C, Madhya MargChandigarh - 160 009 Tel: +91 172 331 7800Fax: +91 172 331 7888

ChennaiTidel Park, 6th & 7th Floor A Block (Module 601,701-702)No.4, Rajiv Gandhi Salai Taramani, Chennai - 600 113Tel: + 91 44 6654 8100 Fax: + 91 44 2254 0120

Delhi NCRGolf View Corporate Tower BSector 42, Sector RoadGurgaon - 122 002Tel: + 91 124 464 4000Fax: + 91 124 464 4050

3rd & 6th Floor, Worldmark-1IGI Airport Hospitality DistrictAerocity, New Delhi - 110 037Tel: + 91 11 6671 8000 Fax + 91 11 6671 9999

4th & 5th Floor, Plot No 2B Tower 2, Sector 126 NOIDA - 201 304 Gautam Budh Nagar, U.P.Tel: + 91 120 671 7000 Fax: + 91 120 671 7171

HyderabadOval Office, 18, iLabs CentreHitech City, MadhapurHyderabad - 500 081Tel: + 91 40 6736 2000Fax: + 91 40 6736 2200

Jamshedpur1st Floor, Shantiniketan Building Holding No. 1, SB Shop Area Bistupur, Jamshedpur – 831 001Tel: +91 657 663 1000BSNL: +91 657 223 0441

Kochi9th Floor, ABAD NucleusNH-49, Maradu POKochi - 682 304Tel: + 91 484 304 4000 Fax: + 91 484 270 5393

Kolkata22 Camac Street3rd Floor, Block ‘C’Kolkata - 700 016Tel: + 91 33 6615 3400Fax: + 91 33 2281 7750

Mumbai14th Floor, The Ruby29 Senapati Bapat MargDadar (W), Mumbai - 400 028Tel: + 91 22 6192 0000Fax: + 91 22 6192 1000

5th Floor, Block B-2Nirlon Knowledge ParkOff. Western Express HighwayGoregaon (E)Mumbai - 400 063Tel: + 91 22 6192 0000Fax: + 91 22 6192 3000

PuneC-401, 4th floor Panchshil Tech ParkYerwada (Near Don Bosco School)Pune - 411 006Tel: + 91 20 6603 6000Fax: + 91 20 6601 5900

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