How fintech has become a game changer in finance sector

January 9th, 2023

In November 2019, Mark Isakowitz, vice president of government affairs and public policy, USA and Canada at Google, wrote an interesting letter to the Federal Reserve in support of the Fed’s idea to deploy ‘FedNow’, a new interbank Real Time Gross Settlement (RTGS) facility. Interestingly, the letter cited the example of India’s Unified Payments Interface (UPI), a digital money transfer platform aggregating multiple bank accounts and a peer-to-peer mobile phone-based platform that facilitates real time money transfer electronically, 24×7 and 365 days a year. The letter highlights the adoption numbers from UPI’s modest start in 2016 to its emergence as the world’s largest payment platform. 

The UPI storm in India

The UPI platform has transformed the lives of millions of Indians and helped the country take a quantum leap bypassing the entire payments journey from cash to cheques to credit cards to wallets to P2P! In October 2022, UPI clocked more than 7.3 billion transactions with a value of over Rs 12 trillion 1. FY22 saw  UPI processing more than 46 billion transactions totalling to over Rs 84.17 trillion, amounting to nearly 40 per cent of the global digital payments2. India currently leads the world in real-time digital payments, ahead of even China and the U.K. 

Most interestingly, India is perhaps the only country in the world where policy makers have created the biggest innovation and instead of trying to be a monopoly, UPI has provided an opportunity for several businesses to create APIs on top of this digital ecosystem to build out successful and scaled payments systems (PhonePe and Google Pay are two notable examples). By making itself a public utility, UPI has driven penetration at a globally unprecedented scale and speed. UPI is just one example of how fintech has brought about financial inclusion and increased the access to credit for millions of Indians. While UPI was one of the greatest success stories for the fintech revolution in recent times, the building blocks were put in place several years earlier.

The India Stack

The India Stack project, started in 2009, has been a gamechanger for the Indian economy. India Stack essentially refers to four technology layers – consent layer, paper-less layer, presence-less layer and cashless layer which are at the heart of the digital and fintech revolution in India. The stack is a group of APIs (application programming interface) that enables digital payments, instant KYC and digital storage of data in a secure manner. It further creates a digital highway to enable all entities to drive their networks for facilitating payments and other financial transactions. 

The maturing of India Stack has accelerated India’s financialisation. It has become an inspiration of how Governments can drive disruptive innovation through technology. Today, there are more than 2,100 fintech companies in India in the digital payments, wealth tech and lending space3

The fintech revolution in India has forced even established banks and NBFCs to re-architecture their businesses and be “digital first” in their approach. 

The global context and the pitfalls

Mark Twain once said History never repeats itself, but it does often rhyme.”  The events in the financial system and the fintech ecosystem over the last year or so are great reminders that in every exuberant bull market there are excesses, and those excesses inevitably get exposed as the environment turns.

While fintech has been viewed as a great theme both internationally and in India, what is now becoming apparent is that in many instances it was easy liquidity conditions and abundant money supply that had inflated fintech assets beyond any reasonable estimate of the underlying value of the business. Two notable areas where the subsequent purging has been painful for investors have been cryptocurrencies and their ecosystems and ‘Buy Now Pay Later’ (BNPL) businesses. The rout in the valuations of Klarna and Affirm and the contagion led blow ups in the crypto space are a reminder that not every theme makes for a great investment and not every business that aligns to a hot theme makes for a sound investment that will deliver returns to investors over an extended period of time. 

The fintech opportunity in India is real and significant

The re-adjustment in asset prices and the “cleansing of the system” as it were, though painful, provides a strong foundation for the future. In the Indian context, the opportunity is significant, but investors need to be discerning. It is imperative that fintech businesses are focussed on thinking about what is it that truly differentiates them and how durable this differentiation is. Currently, many segments within the fintech ecosystem have multiple businesses with little or no differentiation. This is likely to be corrected over time with mortality to be expected in some cases.

That said, there are also businesses which have been built up on first principles and with the idea of solving a uniquely Indian problem and these will be the ones which will continue to dominate the ecosystem and create extraordinary value over the next decade and more.

A notable highlight in the Indian context is also the fact that the Reserve Bank of India (RBI) has been an extremely watchful and nimble regulator. It has always stepped in to ensure consumer protection and safeguarding of consumer interests in a timely manner and will continue to do so.

In our view, India presents one of the most fertile landscapes for fintech. India’s innovation and technological disruption continues through Account Aggregators (AA) and Open Credit Enhancement Network (OCEN) platforms. OCEN will herald a new age of financial inclusion in India. The AA framework will sync in with OCEN to create a super data and financial highway that will facilitate democratising credit to provide better access to India’s credit-starved population. 

The evolution of India’s financial sector has just about begun. For the discerning investor, the opportunities are real and with the recent turmoil, the risk return payoffs in many pockets are hugely asymmetrical.

Excerpts from the interview have been covered here on the Times of India website :-


Posted by Siddharth Mehta, Founder & CIO