The Holy Grail of FinTech - IndiaStack and Beyond

In the 1980s, Indian banks started experimenting with online banking and even made it popular in the 1990s. ICICI was the first bank to step into the internet banking space with limited access to services like access to account details and money transfers within the bank. Other banks rapidly followed suit and started adopting online banking. However, they faced challenges in the form of technical mishaps, fraud, complex-border transactions, payment methods, and more. This was FinTech 1.0.

The FinTech 2.0 revolution came to India when HSBC became the first bank to launch an ATM for withdrawing cash in 1987. While the first credit card was launched in India in 1980, it took some time to become a widely accepted means of exchange.

The release of Google Wallet in 2011, Apple Pay in 2014, and more were the cornerstones of FinTech 3.0 in India. But the real FinTech revolution was never based on just digital. It was a combination of physical + digital or what we can call Phi-Gital. There were physical spaces where financial transactions took place. People queued in line at the stockbroker, who then traded securities at the terminal. The same went on with financial institutions and banks.

In the past 5 to 10 years, the rise of FinTech startups has transformed how India thought about FinTech. Banks had to rethink their strategies and welcome more financial inclusion to serve digital customers. Financial services and technology enablement of the industry, along with the regulators, was one of the biggest drivers of bringing this change. The need to make formal financial services accessible has been a key area of development in the Indian financial sector. This paper focuses on how FinTech made that possible, solving the accessibility issue, and the major drivers that brought the change.

Regulatory frameworks are significant players in the success and adoption of digital finance. They appear to be bad, but as innovation progresses and changes happen, regulatory frameworks focus on protecting the people - in this case, the 1.3 billion people of India. Therefore, this paper also explores what the core of regulation involves when it comes to FinTech. And then democratization of finance is something that has taken the reins in modern times for digital finance. While centralization does create risks for finance, it also provides a proper framework for accessibility and economic development. Thus, the paper will also focus on the democratization aspect of finance and what is considered to be the “Holy Grail of FinTech for India.”

1. Initial Stages of FinTech in India

Finance is a basic need for every human being. Exchange of money, buying & selling, payments, etc., are critical and necessary for people. Basic banking and financial services are a part of everyone's life.

The initial path of FinTech worked on making access/inclusion to the formal financial services. The technology usage was focused more on access to the bank branch, account opening, ATM withdrawals, cash management, and similar things. The first 7-8 years of FinTech in India were, therefore, more about access than anything else.

The second wave, when access was good enough, was with physical touch. There were many game-changers in this space - depositories, core banking, migration of banks, mobile banking, and more. This stage focused on how to convert to digital. Physical plus Digital, or Phi-Gital as we call it, became the central aspect of this change.

"NPCI was started by then, and there were several initiatives in the Indian FinTech landscape. There was check truncation, interoperable exchange, and created the largest ATM network in the world. We also started with IMPS as a real-time payment system. That was the time of Phi-Gital. While some of the early adopters were on digital, predominantly, the banking and financial services sector was on a Phi-Gital channel,"" says Mr. Dilip Asbe, the current MD & CEO of NPCI.

Examples of Phi-Gital include people who stood in queues at the stock broker's office for trading where the broker traded on the terminal or people going to ATM machines, banks for money exchange, and more.

2. The Third Phase of FinTech in India

In the third stage, in the last 3 or 4 years, FinTech is more and more digital. Every year passing by is re-emphasizing and accelerating that movement to only digital. There are three turning points for this rise.

2.1 The First Turning Point

In India, the JAM trinity - Jan Dhan, Aadhar Ecosystem, and Mobile was the first big game-changer. Slowly, it started getting clear how the JAM trinity fueled the growth of digital finance in the country.

2.2 The Second Turning Point

The second aspect came recently in the form of demonetization. Everybody started looking at a viable alternative for cash as large denominations of currency were striked out. Demonetization excited every Indian that, Yes, there is an alternative to paper currency.

2.3 The Third Turning Point

Covid was the third factor in recent times that drove the adoption of digital finance in India. The biggest advantage, thanks to the RBI and the government, was that India had the platforms ready to scale up big time. The strengthening of NPCI, other payment platforms, and the innovation focus of the government and RBI. India had the vibrant ecosystem, the FinTech banks collaboration in place, and the NPCI as the public goods payment platform. It fueled the growth with time in the last 2 years. The consumer was ready, the platform was ready, the ecosystem was ready, and the situation forced the consumer to move to digital in all aspects. It took some time for banks to pick up, but most of the banks in India are now truly digital.

3. Approaching FinTech Development in India

There has to be some real problem to solve in a significant way, which is the starting point for any FinTech scenario. The incremental effort, efficiency, and pricing cuts will always have a limited shelf life from the time perspective. When there's a real problem to solve, the FinTech approach becomes simplified.

Technology has scaled up the development of FinTech dramatically. The cost of building cloud solutions has come down tremendously in the last few years. With low-code and no-code, use of AI, and software 3.0, FinTech has to be deeply involved with technology in the country. It offers a long-term advantage of creating futuristic tech, which will be able to deal with most problems in the most cost-effective way.

The third approach is considering the ecosystem of FinTech. How regulators look at innovation, change, regulation for the financial services area, how institutions are leveraged, how banks are utilizing technology, etc., are important while approaching FinTech in India.

Therefore, a real problem to solve, deep tech, and a diverse and vibrant ecosystem are three things that are significant factors to consider before jumping into FinTech development in India.

4. FinTech Disruption and Regulations

Regulators and disruptors are often considered to be on the opposite ends of the spectrum of innovation. The path of change creates its own problems, but there is no choice apart from that. Regulators not understanding the path of innovation is legitimate because disruptors are only looking at technology and its positives. But technology brings in the negatives as well.

Whether it's NPCI or RBI, there is a consideration about the issues of technology because their primary job is to save and protect the 1.3 billion people, which is the core job of the regulator. They need to keep on mitigating the unintended consequences of technology and innovation. Regulators have one of the most difficult roles in the public sector

For FinTechnocrats who are looking at innovation in FinTech, there are a couple of aspects that come into the picture. Shri. T. Rabi Shankar, the deputy governor of RBI, uses the term “Responsible Innovation.” What does it mean, and what can it be called? While platforms are necessary for the public, whenever people use them, it becomes a public platform. What are the areas a FinTech person should look at in such a scenario? Whether the solution has an in-built security and data protection system, whether it has a grievance redressal mechanism or not, regulators need to take care of several aspects that might not be fulfilled by today's FinTech industry.

Regulators worldwide are becoming more and more open to interaction in the FinTech ecosystem. FinTechnocrats can approach these regulators, meet them, and communicate the strategy and plan, whatever they intend to execute. While the regulators can openly agree, innovators can derive inputs from regulators on how to approach the development of FinTech.

Disruptors need to assess why regulators do not agree to their conditions or why regulation does not exist. Once they understand the reason, they can structure the methodology/approach in alignment with the regulators of the particular FinTech aspect.

5. Decentralizing and Democratizing Finance

The rate of pace of change for FinTech is extremely high. People are still framing their minds on how to deal with this technology. There are lots of debates around centralization, decentralization, and democratization. Many conversations on these protocol-level areas are happening in India.

Centralization is not inherently harmful. On the contrary, it gives a huge advantage to the country as a whole if looked at with a public good lens. Till the time it's a public good, centralization is useful. While it creates operational risk, there are a variety of ways to structure the technology stack to ensure that the operation risk is handled adequately.

When centralization is looked at with public-good, that is democratization. This is what has been seen for several public-good platforms in India, be it Aadhar, Cowin, UPI, or NPCIs other platforms. It's a centralization of public good resulting in the democratization of finance. People have access to services that require almost zero cost and zero trouble.

Web 3.0, the democratization of Finance, is a great aspect on its own. However, companies working on this technology are more driven toward cryptocurrency. But the technology goes way beyond crypto and the whole currency aspect of it. At NPCI, people are bullish on this technology as India will take the lead on the protocol level strategies and the decentralization platforms.

6. Future of FinTech and IndiaStack

India can be a great example to many countries when they look at how you ensure that you live with minimal geopolitical risk in that sense. India is fairly self-sufficient in the payments system and the digitization of finance. Credit goes back to the RBI and the government. It goes right from the creation of an entity like NPCI and promoting innovation to the variety of payment platforms that are nowhere in the world. It is going right in every aspect of FinTech for India.

The country has its own needs that many global institutions won't be able to fulfill. This is a debate between standardization and localization. While the former continues to be an approach, localization becomes the need of the hour to move towards that standardization. Today, India has done a lot to build the public-good infrastructure. Now, India is in the process of inspiring other countries to build up a self-reliant and vibrant financial services ecosystem. Whether it's an Open ID project or NPCI's platform, India is open to central banks worldwide for a central bank-to-central bank arrangement or a government-to-government arrangement. India is now open-sourcing its platforms to other countries.

For the future of FinTech in India, multiple solutions will be required. One single solution will not be able to fulfill the FinTech needs of the country of 1.3 billion population. The emergence of CBDC is one of the motivators as it offers a more secure way to make payments. Web 3.0 platforms will co-exist to a large extent and ensure the advantages of Web 3.0 are preserved in a responsible way. It also ensures that the risks of Web 2.0 platforms are also mitigated in a proper manner. Most of the new platforms that India builds, which will take the protocol-driven approach, will ensure a clear structure for FinTech. The tokenization of assets, the power of smart contracts, and more show an exciting future for India in the FinTech industry.

Conclusion

There are three important parameters for any FinTech to be successful - what's the why, how the technology is used, and how to engage with the ecosystem. The growth of FinTech will be interesting, which is going to be a long-term one. Valuations are getting doubled, tripled in a year. If the whole valuation story is left aside, if founders are really committed to solving the problem, if they are able to add value in a significant way, those who are ready to collaborate with banks and regulatory systems in the country, the future will be great for FinTech in India. The country has seen a lot of different stages of FinTech. Now, it is time for multiple solutions to emerge and become a part of the ecosystem that drives sustainable change for the Indian FinTech industry.

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