Fintech Revolutions in the Indian Context

By: Abhinav Mohanty | XLRI Jamshedpur

Fintech is the beautiful amalgamation of technological advancements with the world of finance, with the sole purpose of making finance more transparent, inclusive, and secure. The foresight of Indian financial regulators, a vast pool of IT talent, and enthusiastic private players have helped India scale great heights in the fintech world. In this article, we will be looking into the various fintech revolutions the country has witnessed.

India’s exposure to fintech started in the backdrop of 1991’s LPG reforms (Liberalization, Privatization, Globalization) when India first started adopting technological innovations as a cure to its financial woes. This sparked the first fintech revolution in India, which began in the mid-1990s and lasted till the early 2000s. 

It started with the digitization of banks and later proceeded to modernize the securities market with the setting up of National Securities Deposited Limited (NSDL). Interoperability was established between the NSE and the BSE, enabling market participants to jump between the NSE and BSE for trading freely. While all these reforms brought forth transparency in the financial system, the system has yet to become inclusive. These technological reforms touched the lives of only a few Indians who traded in share markets or those who had a functional bank account.

To ensure an inclusive financial system, the government and other financial regulators joined hands. They came up with the NPCI (National Payment Corporation of India) in 2008. This sparked the onset of the second fintech revolution- the quest to maximize financial inclusivity in the country. This second wave of the fintech revolution is itself anchored by three pillars- Aadhar, UPI, and the Account Aggregator. While the first two are already functional and helping the economy prosper, the Account Aggregator is still in the final stages of its implementation. Let’s briefly see how these innovations are revolutionizing the way of doing business.

Aadhar started as a basis for identity. It was conceptualized to help facilitate de-duplication of passports, pan cards, driving licenses, etc. But later, the scope of Aadhar was expanded to include the banking system in its foray. Aadhar was used to seed and create bank accounts. Backed by 2014’s Jandhan Yojana, Aadhar has helped roughly 40 crores Indian in rural and semi-urban India open their bank accounts. This is a significant achievement because millions of Indians were able to avail banking and other financial services like insurance and mutual funds for the first time in their lives. Direct benefit transfer (DBT) was made possible by Aadhar-enabled bank accounts. The DBT program eliminated the scope of corruption and helped the government send subsidies and other cash benefits directly to the bank accounts of millions of beneficiaries. To help people in remote places withdraw cash or deposit cash in their bank accounts, the government also came up with the Aadhar Enabled Payment System (AePS). AePS ensures last-mile financial inclusivity.

After Aadhar, UPI (Unified Payment Interface) became the second pillar that facilitated financial inclusion. NPCI was conceptualized by NPCI to make payments cashless and paperless. The UPI framework helped link multiple bank accounts into a single mobile application and made real-time cash transfers hassle-free at an individual level. UPI significantly decreased people’s dependence on banks, enabling people to avail banking services on their mobile phones. The UPI framework also opened up the fintech market for many private players. Players like PhonePe, BharatPe, Paytm, etc., started leveraging the benefits of UPI to attract customers and started selling them other financial products. For example, BharatPe not only allows small merchants to use its platform for transactions, but it also allows merchants to obtain credit based on the volume of transactions. UPI has also boosted retail and e-commerce in our country. UPI has facilitated the democratization of the entire financial infrastructure, accounting for more than 50% of retail payments in just five years.

The last and yet to be properly implemented pillar for financial inclusivity is the Account Aggregator (AA) system. Our banking system follows a traditional asset-based lending model, where banks give credit based on one’s asset size and thus ability to pay. Now there is a big issue with this model. Most of our economy is buoyed by the unorganized sector, where people don’t have any verifiable physical evidence to back up their ability to pay. This is the sole reason why small businessmen face problems with availing of loans in our country. To solve this situation, AA comes into the picture. AA collects your financial information from regulated financial information providers (like banks, GST offices, IT departments, etc.) and bundles all this data in an encrypted manner, and gives it to you. Based on this bundled data, you can now give this to lenders who will draw out meaningful information by using their AI and based on your data, they will determine your creditworthiness.

AA helps us to monetize our data. It helps us transition from an asset-based lending model to a cash flow-based lending model. The AA system will facilitate a data-based credit giving system, which will ease the credit-availing experience for small businessmen.

After successfully dealing with the transparency and inclusivity aspects, the final aspect that remains to be addressed is security. The government is already conceptualizing a third fintech revolution, where blockchain and cryptography will solve our security needs. 

Backed by its immutability, blockchain promises to provide a tamper-proof financial system. Similarly, quantum cryptography holds the potential to provide a much-needed layer of security to our financial systems. Currently, our financial systems are heavily dependent on traditional cryptography. But with the advent of quantum computers (like Google’s Sycamore), traditional cryptographical problems are expected to become redundant, thus exposing our financial systems to a huge array of security risks. Quantum cryptography can solve this issue because it can provide problems that will be difficult for quantum computers to solve. 

To achieve the final frontier of security, significant investment in both blockchain and quantum cryptography can be expected soon, and this will inadvertently ignite the spark for the third and final fintech revolution in India.