I still remember the time in the early part of the century when everything in the economy was cash based…When the office peon who was going to the bank was the most important person because everyone had some or other transaction to do at the bank whether it be withdrawal of cash or deposit or whatever.
I also remember when I started Systematic Investment Plan in mutual funds I had to open a new account in my friend’s new generation bank to get more cheque leaves as the SIP involved handing over 12 cheques to the mutual fund in advance… Or to the time just a few years ago where you would search around for your bank ATM and you would find ATM of every other bank except yours as you could only withdraw cash from the ATM of your own bank.. I also remember the time when we used to collect cheques from our distributors and sales associates and it would take days and even weeks to get confirmation on the clearing of the payment depending on the location of the bank and the clout the client had with the bank.
Today we jump into an Uber or an Ola and at the end of the drive the money gets automatically deducted from your digital wallet like Paytm or Ola money… Electronic clearance systems clears cheques on the same day…and you hardly need to go to the bank and you can withdraw money from all ATMs irrespective of which bank you have your account in…
So for me… Fintech or Financial technologies are technologies used in the financial services sector that are disrupting the way traditional financial transactions like money payments, money withdrawals, money transfer, loans, funds raising and asset management are carried out.
Since these are financial needs all of us have on a day-to-day basis, Fintech has a far wide – reaching effect than we can imagine.
With exposure to service levels in the other sectors as customers we have begun to expect to certain level of service and the ease of doing things which the financial or banking sector has not still been able to cater to and what the fin tech companies are trying to achieve is bridge this gap between expectation and actual experience.
Before we get into detail let’s look at some numbers with reference to the Indian subcontinent
- There has been a 400 times jump in the number of Fintech companies launched since 2010
- There has been 1500 times jump in venture investments in fintech companies since 2014.31 deals in only the second quarter of 2018 totalling investment of about $370 million
- The transaction value of Digital payments stands at $ 50 Billion. Expected to go up to $ 500 billion by 2020
- 1500 fintech start-ups …Almost half of which have been started in the last 2 years
- Almost 2400 times increase in value of mobile payments in the last 2 years… Expected to touch $ 460 billion by 2022
Come to think these are only numbers for India which is why Fintech is a sector of the immediate future…
Let’s understand things in a bit of detail..
- PPI [Prepaid instruments]…These include smart cards, magnetic stripe cards, internet accounts, online wallets, mobile accounts, mobile wallets, paper vouchers and any such instruments used to access the prepaid amount.
- IMPS [Immediate Payment Service] -This is faster than NEFT [National Electronic Fund Transfer] and lets you transfer money immediately and unlike NEFT, it works 24×7.IMPS is an instant payment inter-bank electronic funds transfer system in India. IMPS offers an inter-bank electronic fund transfer service through mobile phones. Unlike NEFT and RTGS [Real Time Gross Settlement], the service is available 24/7 throughout the year including bank holidays
- UPI [Unified Payments Interface] is an instant real-time payment system developed by National Payments Corporation of India facilitating inter-bank transactions. The interface is regulated by the Reserve Bank of India and works by instantly transferring funds between two bank accounts on a mobile platform.
The Unified Payment Interface (UPI) can be thought of like an email ID for your money. It will be an unique identifier that your bank uses to transfer money and make payments using the IMPS (Immediate Payments Service).
The beauty of UPI is that it makes your bank account portable and any third party wallet can use it to transfer money…
So consider transferring money the way we share pictures and videos today…This is exactly what UPI does to Digital payments. .So anyone with a bank account can link his bank account with UPI through his mobile phone by creating a virtual payment address with a PIN.. He does not need to disclose any bank account number or IFS code.. UPI will aide in both peer to peer transactions as well as peer to merchant transactions
How UPI is changing the fintech sector is due to the adoption of this technology by bank and third party wallets. The biggest advantage of this technology is also that it can be used by other players other than banks. The UPI system which was introduced only two years back has seen payments using the technology rise from Rs 6900 crores in 2016-17 to Rs 2,67,000 crores in only the first half of 18-19..which is already a jump of 100 times in two years ..
UPI brought in interoperability between PPI as per the new guidelines passed by RBI which will enable transaction between all the PPI players. Some of the key wallets which have adopted this technology are Paytm, Phone Pe, Amazon Pay, Google Tez, Reliance Jio Money, Whatsapp…which goes to show the potential of this new technology.
Non-banking wallets as we can call them fall under three broad categories
1.Those that cater to domestic money transfers and remittances
It is this segment, which is today capturing almost 75% of the Rs 16000 crores market approximately. The key players in this segment are Itz Cash, Oxigen, Eko and M Pesa
2.Those that cater to online retailers and consumers
This segment, which accounts for about Rs 2000 crores is the one with which we are most familiar with and includes players like Paytm, Mobikwik and Ola money
3. Those that provide prepaid cards, meal coupons and gift vouchers to business which in turn and then handed over to their respective employees and customers.
This segment is also worth about Rs 2000 cr today and probably the most popular today would be Sodexo.
Similar to the wallets and other infrastructure that’s equally important for the growth of the sector is the merchant acceptance network or the acceptance infrastructure since without this you will not be able to use your PPI at a merchant location…So the POS (Point of sale) system becomes crucial. The infrastructure that is needed at the retail level could be in the form of a QR on a mobile phone app or a physical POS terminal and in both these cases will require a stable internet connection
In the case of an e-commerce player they will need to have a payment gateway which is then connected to a financial switch which sends transactions to card or banks or other service providers to authenticate the transaction
This is a segment which hasn’t seen much innovations or hasn’t really kept pace with the customer segment of the fintech revolution…
There is an opportunity here for a player who can not only provide
- Acceptance of all channels of payments
- Easy reconciliation between the different service providers
- Provide customer insights to the merchant for customer profiling
While every wallet has been trying to attract more and more customers by offering discounts and cash backs on almost all transactions … while this will enable more and more customers to try out their services the ultimate winner will be the one who offers solutions for the most complex solutions and offers ease of operations to customers for all his payment requirements.
Every wallet collects so much information about a customer and his spending habits, what each user is buying and the quality of each user which makes it very easy to upgrade to the other financial services other than payments like insurance, investments, loans, wealth management etc.
Some companies have already started doing that…An example that comes to mind is of the tie up between Mobikwik and Bajaj Finance where a wallet has tied up with a NBFC to expand the range of services.
Also consider these big names internationally …
- Facebook has about 50 regulatory licenses in the US, which would allow facebook users to transfer money using their messenger app.
- Amazon is experimenting with providing customer and student loans to their customers for purchases based on the profiling done by them on their usage on Amazon.
- Alibaba financial arm has become the third biggest money market fund in the world and have 150 million individual investors with average investment of close to 1000 dollars for many of whom this is their first such investment.
- WeChat has become one of the most common apps to transfer money. In the last Chinese new year they have made 8 billion such transactions…The same WeChat app also helps you to buy a financial product or get a loan while being on the same app.
To conclude, what could this do to the banking industry as we know it today…
The new players who are entering this field through the fintech revolution have daily touch points with their customers like the examples I quoted above and have also won their trust through these continuous interactions and transactions that they have had by helping you buy products or using the services to chat with your friends and connect with them
These fintech companies also have the option to enter into only selected sectors unlike a bank and disrupt that sector totally…of course the sectors that everyone would enter would be the most profitable and the most potential ones… So you will hardly find any fintech start up entering the area of deposit mobilisation.
This is already leading to more financial inclusion…And this is not restricted to only the developing countries…20% of people in Miami or Detroit are totally unbanked..
Artifical Intelligence enabled Chatbots will replace the call centres and this will take care of the long wait times that we are all used with our existing banks
The traditional banks as we know them today could be a think of the past or at least we wouldn’t need to interact with them or interact with them very less since the new players like the wallets or payment banks would be the customer interface…The traditional banks would become bank end operators ..But then most of the banks have also started their own wallets and they could also develop their own frontends and stay ahead in the race.
The bankers of the future will require a very different set of skills, this could also lead to skill sets needs in the banking sector changing dramatically, and this could lead to financial centres moving out from centres like Hong Kong to technology centres who are taking care of these services.
However, unlike other sectors, the financial sector is one which is controlled and regulated and the job of any regulator is to ensure status quo in the best possible way
… where the role of the disruptor fintech startups is to disrupt the status quo…so this will be an interesting space to keep a watch on…
