FinTech beyond Payments

Are you tech savvy? Do you follow the latest trends in the tech world? If YES, then you must have noticed the hype surrounding FinTech. Financial Technology or FinTech utilizes technology and innovation in the delivery of financial services. But why is FinTech booming at such a fast pace? Read on to understand the various trends in the FinTech space.

As per Gartner, the overall sales of smartphones in 2016 was 1.5 billion units which is an increase of 5% from 2015. Around the globe, we have been seeing a massive Internet revolution with the number of Internet users growing at a CAGR of 11.54% between 2005 and 2016. As per Internet Live Stats, the world Internet penetration is 3.4 billion covering 46.1% of the world population in 2016. These factors have created a huge traction in moving towards

technology-enabled financial sector.

When we hear about FinTech, the first thing that flashes in our minds is innovation in payments, mobile wallets and online payments. But today, the innovation in FinTech has gone beyond payments to create wide-scale disruptions in the traditional financial sector and has broadened the scale and the scope of this space.

Today FinTech has created a huge disruption in wealth management services. A new trend is emerging where traditional financial advisors and high-cost fund managers are being replaced by programmed virtual fund managers called robo-advisors to manage wealth at low cost. As per Bloomberg, robo-advisors managed $16 billion assets in 2014, $50 billion in 2015 and this is estimated to reach $2.2 trillion by 2020 which will be a game changer in this space.

Credit scoring platforms are the latest in FinTech space which help to calculate creditworthiness of consumers. There have been many startups in this space which focus on improving credit scoring system which is fairer and accurate. These firms calculate the credit score based on living style, demographics, professional track records, intention to pay and various other parameters.

A blockchain is a virtual public ledger which records and validates transactions. The data recorded using blockchain is safe and secure. The blockchain is the underlying technology in Bitcoin transactions. The settlements and the delivery of financial assets between participating parties typically involve huge turnaround time, but with Blockchain technology, it may happen in seconds. So brokerage firms, financial institutions, stock exchanges and clearing houses around the world are looking at Blockchain as a potential technology which can make the entire process fast, smooth and cost efficient. As per PwC’s “Global FinTech Report 2017”, 77% of Financial Institutions are expected to adopt Blockchain in their platforms. According to KPMG’s report “The Pulse of FinTech Q4 2016”, Blockchain attracted $543.6 million of investments in 2016 from $441 million in 2015 and this upward trend is likely to continue.

Banking and lending is a new entrant in FinTech space which has a large representation in terms of funding in 2016. As per ‘Let’s Talk Payments’, the lending firms represented 29% of the total number of FinTech firms which received funding in 2016 and this figure is 22% for payment based firms. This highlights the growing importance of lending platforms. Lending platforms have taken various shapes. Some operate as aggregators of financial institutions (FIs) and sell loan products to consumers through these platforms. These firms use advanced algorithms with inbuilt platforms which check the credit worthiness of customer and map customer’s profile with a suitable financial institution that satisfies his financial needs. End to end integration of these platforms from customer to financial institution results in less turnaround time, less processing cost and less documentation. This also brings down the cost of processing and hence benefits FIs.

Another game changer in the lending space is P2P lending platforms. These platforms connect lenders and borrowers on a common platform without involving banks and middleman. This reduces the cost of processing and benefits both the borrower and the lender. All these benefits come at a risk. In many parts of the world, P2P lending is not regulated. There are regulatory uncertainties around this and there are no clear guidelines in case borrower defaults. So unless we see an efficient regulatory framework which can handle these risk factors, we cannot expect any major shift in this space. In India, P2P lending is still in the nascent stage with no clear regulations from regulators. Any move from The Reserve Bank of India to regulate this space will be a welcome fillip as this will enable P2P lending firms to attract funding and grow profusely.

As per Tracxn, India attracted $512 million funding in FinTech space in 2016. Of this, $199 million (39%) was towards lending space which highlights the growing importance of lending platforms in India. India’s move towards a cashless economy, the central government’s demonetization move, Digital India initiative and financial inclusion will benefit FinTech sector positively. As of now, P2P lending platforms have not attracted funding due to regulatory

uncertainties, but this will change once we have clear guidelines from RBI.

The success of an economy depends on how well the credit expansion happens in that economy. For a growing economy like India, there is a huge gap between credit seekers and traditional banking system. This gap can be fulfilled by FinTech firms.

Today there is hue and cry about growing Non-Performing Assets (NPAs) in India. Many a time an honest loan seeker doesn’t get loans, but on the other hand, we see growing defaults from large corporations and individuals who seem to be creditworthy. When you get into the root cause of growing NPAs, we can understand that it is the absence of technology which made our FIs hard to predict and monitor impending risks. The only way to bridge these voids in our financial system is by integrating technology with our financial system. So going forward budding FinTech firms will play a large role in reshaping our financial system and they have potential to redraw Indian growth trajectory altogether to a higher level.

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