Role of FinTech in Accelerating Financial Inclusion in India

Abstract

The term ‘FinTech’ is a combination of the words ‘financial’ and ‘technology’. It can be broadly defined as technology-enabled financial innovation that could result in new business models, applications, processes or products with an associated material effect on financial markets, institutions and the provision of financial services. FinTech, therefore, has the potential to reshape the financial services and financial inclusion landscape in India in fundamental ways. Through their innovations, new business models and applications, FinTech firms can help increase competition and play an important role in accelerating Financial Inclusion in India by helping reduce costs and improving access to financial services to the under-served, persons in low income groups, rural and other under-served sectors of the Indian economy. An estimate suggests that almost 90% of micro units in India are still outside the formal credit system. This segment, along with the small enterprises, can benefit immensely from a collaboration between banks and FinTech players, whereby their other payment records can form a basis for assessing their credit worthiness. It is noteworthy that a number of FinTech players have witnessed strong growth over the past few years and from being virtually unheard of, at the beginning of this decade, today we have as many as 1218 entities operating in India. This paper, therefore, takes stock of the technological revolution that is shaping the future of finance in India and the important role FinTech can play in accelerating Financial Inclusion in India. It also discusses the regulatory initiatives taken to spur the FinTech movement in India, the framework for Regulatory Sandbox in India and the steps required to help achieve the potential that the sector offers towards growth and inclusion. The paper draws insights from the work of leading FinTech firms focused on enhancing financial inclusion in our country and discussions with industry experts and officials leading the FinTech agenda in our country. It proposes accelerating the agenda of financial inclusion through innovation and offers solutions on how FinTech can help in this regard. The paper also discusses the importance of an ecosystem which promotes collaboration and advocates the need for banks and FinTech firms to work together for their mutual benefit. It discusses how to harness the benefits of FinTech while ensuring that concerns relating to data confidentiality and customer protection are also addressed. As regards the potential risks and their mitigation, the important role of RegTech and SupTech i.e. technologies which help improve efficiency through the use of automation, introducing new capabilities and streamlining workflows, is also discussed. The key to success in FinTech is to harness the benefits while managing the risks. Therefore, this paper concludes with the need to have an appropriate regulatory and supervisory framework to facilitate the growth of this sector to ensure that FinTech continues to help accelerate Financial Inclusion in India.