Beyond the basic building blocks, for a hub to work effectively, its ‘ecosystem’ needs to function as an integrated system with feedback loops and complementarities.
India is undergoing a proverbial revolution in access to finance and in the range of financial products and services available, much of which has been fueled by two sets of major changes in the last few years: Government of India (GoI) policy reforms, and new technology.
On the policy front, the game-changers are three-fold.
First, the introduction of Aadhaar has overcomes issue of identification, especially at the last mile and with previously unbanked individuals. Verification that previously took multiple documents and many days to process, can now be done instantly through Aadhaar.
Second, the introduction of new forms of banks such as Small Finance Banks and Payment Banks <1> have opened up banking to innovating firms formerly operating as microfinance or non-bank financial services entities and made it easier to obtain licenses.
Third, the major focus on financial inclusion by the GoI, and in particular the opening of bank accounts through the Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJDY) scheme, which includes no-frills accounts and an increased use of business correspondent models to reach underserved populations, especially in rural India. <2> While the government’s PMJDY scheme has led to the opening of more than 300 million Jan Dhan accounts, repeat use of accounts remain a challenge, as many accounts lie dormant. <3> This financial inclusion drive emphasises the use of digital technology, including direct benefit transfers directly into accounts opened and linked through Aadhaar identification.
On the technology front, two developments are worth noting. First, the introduction of cheaper feature and smart phones, with competitive data plans including Jio, have resulted in a rapid increase in phone ownership (to 1183 million mobile subscriptions in March 2018 <4>), and internet access through mobile phones (456 million users by December, 2017 <5>).
Second, the introduction of interoperable platform technologies such as the Unified Payment Interface, and the India Stack platform have opened up for fintech innovation in digital lending, risk assessment (using new forms of data and assessment tools), and payment technologies (e-wallets). The technology has allowed the financial services sector to move away from banks that traditionally dominated payments and loans.
Fintechs in particular are reaping the benefits of these the significant shifts, nimble enough to be able to adjust to challenges and uncertainties, while also able to swiftly move on new opportunities at the intersection of technology, new regulations and opening up of previously inaccessible markets.
Globally, we see that innovating firms tend to cluster in certain cities, and these cities emerge as fintech hubs. Chief among these are London, Beijing, New York and San Francisco, all cities with a history of innovation and technology-focussed startups. In India, Mumbai has entered at number 20 in ranking of the new Global Fintech Hub Index 2018,<6> managed by Sinai Lab from Academy of Internet Finance (AIF), Zhejiang University, in partnership with the Zhejiang Association of Internet Finance, while Mumbai is placed at number 29 of the 2018 Global Fintech Ranking by the Switzerland based Institute for Financial Services Zug (IFZ) of the Lucerne University of Applied Sciences. <7> Other clusters of fintech activity exists in Bengaluru, spurred on by the city’s tech boom, while Fintech Valley <8> in Vizag is an attempt to create an enabling ecosystem away from India’s financial and tech capitals.
A hub, or an ‘ecosystem’, just like any other cluster of activity, needs a set of basic building blocks, and the better these blocks work together, the more efficient the ‘system’ functions, and the easier it is for startups and established firms within the hub to start up, grow and innovate.
Apart from demand for fintech products and services, the building blocks <9> include:
Leading global fintech hubs — London, San Francisco and Beijing — have these attributes, offering strong startup and innovation ecosystems, where there are not only a lot of ventures, but also access to finance, and infrastructure, including both the basics such as electricity and good quality internet, but also good innovation infrastructure such as labs and incubators, access to good quality talent and education, platform where industry stakeholders connect, and enabling policy.
Turning to India, what does it take to create enabling ecosystems in the form of hubs for fintech in India that will be on par with global hubs?
Mumbai, Delhi and Bengaluru in particular have a large number and range of firms working on fintech — whether startups (Paynearby, Zest Money), relatively new but well entrenched fintech ventures such as Capital Float and PhonePe, or startups turned banks (PayTM Payments Bank). Banks are increasingly partnering with fintech startups, or running in-house innovation labs (ex. ICICI Bank) and accelerators (ex. Yes Bank) to spur innovation.
Currently, fintech products and services need to operate in an environment that relies on relatively shaky basic infrastructure (electricity and internet), especially outside the main metros. Likewise, high-speed and secure internet remains an issue in urban areas. Additionally, startups benefit from spaces to test and pilot new fintech tools, services, market demands, business models, and regulatory aspects. These include innovation labs (Mastercard has a lab in Pune), accelerators and incubators (ex. Zone Startup at BSE, Mumbai), as well as industry and regulatory sandboxes <10> (such as that envisioned by Government of Maharashtra).
As a high-tech services sector that needs to work both with cutting edge financial instruments and tools, as well as customers at the bottom of the pyramid, the fintech sector requires technically skilled talent, especially in understanding user requirements and converting those into functioning technologies and interfaces. Finding talent is a challenge, and education institutions have not yet adapted courses to fit with industry requirements.
Fintech startups require financing to test, build solutions, access the market and scale. Currently India’s venture financing landscape is quite robust — from angels (individual early stage investors), to impact investors <11> (Village Capital), and venture capital (ex. Sequoia Capital).
Beyond the basic building blocks, for a hub to work effectively, its ‘ecosystem’ needs to function as an integrated system with feedback loops and complementarities. This means that education institutions need to produce the kind of talent that is required by the firms, that firms produce the kind of products and services that consumers demand, that policymakers and regulators are agile enough to move with a swiftly changing sector, that government provides the basic infrastructure requirements that form the basics of any digitally based hub, and that financiers offer the kind of support required by startups.
For this to happen, stakeholders within the ecosystem, or the hub, needs to engage with each other. This is where the role of platforms (online and offline), forum and industry bodies become vital to share knowledge, facilitate exchanges, connections and collaborations between different stakeholders, and engage with government as a collective and representative voice.
Lastly, State and local governments can build on the enabling fintech environment created by the Government of India by strengthening industry platforms and innovation spaces by supporting regulatory and industry sandboxes where experimental approaches can be piloted. It can ensure educational institutions produce talent with prerequisite skills and fund practice-oriented research (R&D) on fintech, reduce tax liabilities for startups and for those investing in startups, especially in the early ‘seed’ stage, make regulations and compliance easy to understand. It can also incentivise investments in startups by providing matched funding in ventures.
Two ambitious policy efforts on the ground in India are the recent policy by the Government of Maharashtra to set up a global fintech hub in Mumbai, as well the Government of Andhra Pradesh’s strategy to build an innovation ecosystem for fintech at Fintech Valley Vizag. <12> Both emphasise the need to take an ecosystem approach to creating an environment for innovation and sustainable business.
<1> Small Finance Banks (ex. Ujjivan, AU Finance) offer savings accounts and can provide loans with a specific focus on priority sector lending. Payment Banks (ex. Aditya Birla Idea Payment Bank) offer only current and savings accounts and accept deposits of up to INR 100000.
<2> RISIL. CRISIL INCLUSIX - Financial inclusion surges, driven by Jan-Dhan Yojana, February 2018, Vol. 2018. CRISIL (2018).
<3> CRISIL. CRISIL INCLUSIX - Financial inclusion surges, driven by Jan-Dhan Yojana, February 2018, Vol. 2018. CRISIL (2018).
<4> Source: Telecoms Regulatory Authority of India (2018), Highlights of Telecom Subscription Data as on 31st March, 2018. https://trai.gov.in/sites/default/files/PR_No.56_Eng.pdf
<5> Source: Internet and Mobile Association of India (2018) Mobile Internet in India 2017.
<6> https://www.crowdfundinsider.com/2018/07/135851-new-global-fintech-hub-report-puts-china-at-top-silicon-valley-in-2nd-place/
<7> https://innovation.thomsonreuters.com/en/labs/portfolio/global-fintech-rankings.html#/
<8> http://www.fintechvalleyvizag.com/
<9> Draws on Brett, L. (2018) What Makes a Successful Fintech Hub in the Global Fintech Race, Inside Magazine, Deloitte; Lee, I. and Shin, Y.J. (2018) Fintech: Ecosystem, Business Models, Investment Decisions, and Challenges. Business Horizons (2018) 61, 35—46; Sonne, L. (2014) Regional Social Enterprise Ecosystems in India: Conceptual Framework. Villgro & UNU-MERIT Working Paper.
<10> An Industry Sandbox is an industry-owned platform for testing fintech solutions prior to market. Regulatory Sandbox is an environment in which to experiment with regulatory aspects of fintech. Source: Innovate Finance (2017) Industry Sandbox Consultation Report, p. 7.
<11> Impact investors invest with a dual focus on financial returns and social impact. Within remit of fintech, that would focus on financial inclusion for the underserved low-income segment.
<12> Government of Maharashtra Fintech Policy: https://maitri.mahaonline.gov.in/PDF/Fintech.pdf
Government of Telangana’s Fintech Valley Vizag: http://www.fintechvalleyvizag.com/
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