Expert Speak Digital Frontiers
Published on Jun 15, 2020
India’s digital financial services opportunity in a Post-COVID world

COVID-19 could be the “demonetization moment” for digital services delivery in India. In 2016, the adoption of digital payments was accelerated by a lack of cash during the unanticipated demonetization policy with a pre-established national tech infrastructure. Now, during an equally-unexpected macroeconomic shock of a different variety, entrepreneurs across India’s formidable start-up ecosystem have been pivoting business models in unexpected ways leveraging technology to solve meaningful challenges for their consumer and small business customers arising from the significant health and resultant economic crisis in India.

Since 2017, the financial services industry in India has seen accelerated growth and widespread adoption of new mechanisms for digitization. Complemented by proactive regulatory and policy efforts for financial inclusion and an increasing availability of affordable internet and smartphones, fintech has now become a critical component in urban, semi-urban, and last mile distribution of economic development through financial services.

The ripples of near-standstill of economic activity during the COVID lockdown have been felt across India: the burgeoning fintech industry has been no exception. For example, disbursement of fresh loans and collection of outstanding accounts have paused, in part due to the extended Reserve Bank of India (RBI) loan payback moratorium. This situation presents a challenge for micro and small businesses as well as consumers who require financing in addition to traditional and digital new-age lenders with inflexible business models and targets. As economic turmoil persists and consumers cut back on discretionary consumption, especially credit start-ups--including leaders of the e-commerce and start-up ecosystem--continue to face stress in the medium term. Credit start-ups have shifted their focus to improving collections in an appropriate manner, incentivising borrowers to repay loans while propelling the lenders’ efforts to raise fresh lines of capital to serve more borrowers. The RBI has taken steps to ensure optimal liquidity in the system through its targeted long term repo operations and by inducing banks to lend to more agile non-bank lenders. How banks utilize this fresh liquidity to ensure financial stability of their ecosystem partners will be a critical component of financial sector recovery.

The best businesses and ideas emerge during the most volatile and uncertain times, and Indian start-ups have been quick to adapt to the rapidly changing environment. In addition, to​ core financial services offerings, digital fintech platforms have leveraged their delivery mechanisms to meet consumer needs during this challenging time. For instance, as demand for groceries and essential items has increased, companies like PhonePe (majority owned by Walmart) have enabled virtual stores on their mobile app to enable local businesses to sell products online. Bangalore-based start-up Niki is leveraging voice chat in local vernacular languages including Tamil and Gujarati for its users in underserved Tier 2-3 cities enabling Indians to conduct otherwise-offline household transactions digitally during the lockdown, as well as sharing health information from local state authorities.

The lockdown period has also seen a surge in online payments for certain categories of products. What’s coming is a defining shift in Indian consumer behavior as users develop new habits from paying cash at a local kirana shop to using a low-data app on their Jio phone to order from the same store, who now can manage its operations on a mobile phone.

Concurrently, the Government of India has ramped up its digital finance efforts as part of the COVID economic response. It is actively promoting use of the real-time Unified Payments Interface (UPI) for transactions. The Jan Dhan bank accounts - a key component of Prime Minister Modi’s financial inclusion initiative over the past few years--have been particularly beneficial during these times for direct cash transfer by the government to the most vulnerable sections of society.

As COVID-19 cases scaled globally, countries explored how to rapidly leverage technology to ease economic governance challenges. India was uniquely primed to manage these aspects with a robust, low-cost payments and fintech infrastructure in place with wide adoption. Start-ups have been successful in employing this infrastructure to innovate and scale.

Fintech has now become closely integrated with even the most remote areas of India and has emerged as an efficient and reliable component of economic relief. As a result, banks have also begun to scale their digital offerings to cater to more customers, often in partnership with smaller technology companies.

Many payment and e-commerce companies have also partnered with insurance firms to provide COVID-19 health insurance to their customers in “sachet size” micro-policies: These uncharted waters present new challenges for India’s insurers. The situation has accelerated healthcare and insurtech start-ups witnessing significant growth as individual customers, small businesses, and employers across India have been introduced to the importance of insurance to keep themselves and their employees financially safe. Insurance penetration in India remains exceptionally low. These digital interventions are a welcome push forward for the industry and consumers.

The post COVID-19 period will see a shift in the Indian consumers -  growing preference for digital and contactless payments, renewed emphasis on savings and investment to create a household capital cushion for uncertain times, and increased interest in health and life insurance to manage future unforeseen financial shocks. In a post-COVID world India’s early stage tech start-ups will focus on managing their cash flows more conservatively than recent years, experimenting with remote work practices, and building products that solve livelihood challenges for Indians across the socio-economic spectrum. While this crisis has introduced ample challenges​ for India’s thousands of digital fintech businesses, many will emerge more resilient and primed for a global stage with Indian innovation leading the way.

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Melissa Frakman

Melissa Frakman

Melissa Frakman is Managing Partner &amp: Founder of EMVC a cross-border venture capital firm with investments in financial technology in India and other high-growth markets. ...

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