FinTech: The Force of Creative Disruption ARTICLE

FinTech: The Force of Creative of operations of FinTechs has also broadened, moving
from crypto assets to payments, insurance, stocks,
Disruption* bonds, peer to peer lending, robo-advisors, regtech
and suptech.
FinTech has the potential to fundamentally transform
In India, FinTechs and digital players could
the financial landscape, provide consumers with a greater
function as the fourth segment of the Indian financial
variety of financial products at competitive prices, and
system, alongside large banks, mid-sized banks
help financial institutions become more efficient. The
including niche banks, small finance banks, regional
rapid and transformational changes brought on by
FinTech need to be monitored and evaluated so that rural banks and cooperative banks (Das, 2020).
regulators and society can keep up with the underlying This segment has the potential to fundamentally
technological and entrepreneurial flux. This article transform the financial landscape where consumers
provides a succinct review of the sector, encompassing its will be able to choose from broader set of alternatives
evolution, characteristics and driving factors, both for the at competitive prices, and financial institutions could
world and India. For a sustainable business ecosystem, improve efficiency through lower costs. India has
FinTechs need to bridge the digital divide and promote emerged as the fastest growing FinTech market and
equitable and broad-based customer participation. the third largest FinTech ecosystem in the world
Introduction (Mankotia, 2020). Today, we carry out complex
financial actions like sending or receiving money,
The landscape of banking and financial sector
paying bills, buying goods and services, purchasing
has undergone a phenomenal transformation since
insurance, trading on stock markets, opening bank
2008 Global Financial Crisis (GFC), owing to financial
accounts and applying for personal loans online using
technology firms, popularly known as ‘FinTechs’. Both
as creative disruptors and facilitators, FinTechs have smartphones, without ever physically interfacing
contributed to the modern banking and financial with a bank employee. India has the opportunity of
sector through various channels including cost a digital payments market of $ 1 trillion (PIB, 2018).
optimisation, better customer service and financial It recorded 3,435 crore digital payments in the year
inclusion. FinTechs have played an important role in 2019-20 (Annex 1).
unbundling banking into core functions of settling The exciting, rapid and transformational changes
payments, performing maturity transformation,
in financial services brought on by FinTechs need to
sharing risk and allocating capital (Carney, 2019). The
be continuously monitored and evaluated so that
information and telecommunications (IT) revolution
regulators and society can keep up with the underlying
is regarded as the fifth ‘Technological Revolution’
technological and entrepreneurial flux. Regulators
driving growth1, and FinTech is at the helm of this
creative disruption (Hendrikse et al., 2018). The scope need to be creative, nimble and tech savvy with their
approach. They will have to further expand their focus
*
This article is prepared by Rajas Saroy, Ramesh Kumar Gupta and Sarat from entities to activities, while also becoming experts
Dhal, Department of Economic and Policy Research, Reserve Bank of India. in assessing the soundness and security of algorithms,
The authors are thankful to Smt. Rekha Misra and Dr. Mohua Roy for their
valuable comments and guidance. The views expressed are those of the which is easier said than done (Lagarde, 2017).
authors and do not necessarily reflect the views of the Reserve Bank of Thus, for facilitating discussion and understanding
India.
1
The five Technological Revolutions defined by Perez (2002) are the
that could be useful for policy and regulation
Industrial Revolution, The Age of Steam and Railways, The Age of Steel, purposes, this article attempts to provide a succinct
Electricity and Heavy Engineering, The Age of Oil, Automobiles and Mass
Production and, The Age of Information and Communications. review of FinTechs, encompassing their evolution,

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ARTICLE FinTech: The Force of Creative Disruption

characteristics and driving factors. Our evaluation In today’s app-centric world, consumers are less
throws up sobering concerns regarding the future of concerned about receiving all their services from
FinTechs, such as the status of digital hygiene, data a single provider, and instead expect a seamless
use and privacy. The article proceeds in five sections: experience. FinTechs are realising this new value
the FinTech revolution in the global context, delving expectation and have started to ‘unbundle’ many of
into its history, evolution, and adoption in Section II, the traditional financial offerings (Basole and Patel,
the FinTech ecosystem in India, its enablers, diversity, 2018). At the same time, the financial services provided
funding and collaboration with banks in Section III, by FinTechs are being re-bundled with a range of non-
challenges for future development in Section IV, and financial services, thereby allowing services to be
the way forward in Section V. provided seamlessly via application software (Bank
of Japan, 2018). Illustratively, taxi aggregators bundle
II. FinTech Revolution: The Global Context
ride sharing with instantaneous fare payment upon
Definition of FinTech arrival at destination.
With no universally agreed upon definition, FinTech History and Evolution
FinTech is generally described as an industry that Technology-induced financial innovation has a
uses technology to make financial systems and the long history. In the 1950s, credit cards appeared for
delivery of financial services more efficient. It is the first time, followed by Automated Teller Machines
“technologically enabled financial innovation that (ATMs) in the 1960s, electronic stock trading and
could result in new business models, applications, banks’ new data recording systems in 1970s and
processes or products with an associated material 1980s, and e-commerce and online brokering in
effect on financial markets and institutions and 1990s (Basole and Patel, 2018). The online revolution
the provision of financial services” (FSB, 2019). in the last decade of the 20th century connected the
FinTechs are “start-ups and other companies that use world through the Internet, and enabled e-commerce,
technologies (Table 1) to conduct the fundamental Internet banking and pioneering online payment
functions provided by financial services, impacting platforms like PayPal. The next decade witnessed
how consumers store, save, borrow, invest, move, pay, the emergence of smart technology. The smartphone
and protect money” (McKinsey, 2016). materialised as a powerful computer in human

Table 1 : Key Enabling Technologies used by FinTechs

Technology Description

API (Application Programming Interface) APIs comprise a set of rules and specifications that software programmes use to communicate with each
other. They allow new applications to be built on top of others.
Cloud Computing The use of an online network (‘cloud’) of hosting processors to increase the scale and flexibility of computing
capacity, generating cost savings.
Biometrics The study of distinctive and measurable human characteristics that can be used to categorize and identify
individuals.
DLT (Distributed Ledger Technology) A digital system for recording the transaction of assets in which details are recorded in multiple places at
the same time.
Big Data Voluminous amounts of structured or unstructured data that can be generated, analysed and utilized by
digital tools and information systems.
AI (Artificial Intelligence) & ML IT systems that can perform functions that would otherwise require human capabilities. ML entails
(Machine Learning) computers learning from data without human intervention.

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FinTech: The Force of Creative Disruption ARTICLE

palms, and the movement to app-based operating At present, FinTechs are diversifying into
systems spurred innovation, unbundling and sharing different sectors (Chart 1). Among the top 100
of services. Bitcoin came as another important FinTechs, payment and lending companies are being
development in 2009. The present decade is dedicated replaced by wealth and brokerage, insurance and
to the ‘rise of the robots’, where the emergence of multi-sector companies2 (KPMG, 2019).
big and unconventional datasets has enabled AI to
Demand-side Push to FinTech Adoption
provide accurate predictions and personalise banking
(King, 2019). Against the backdrop of globalisation and
digitisation, users’ appetite for financial services has
The ‘new’ FinTech sector gained momentum
become increasingly diversified and sophisticated in
in its modern incarnation after the GFC as FinTech
entrepreneurs realised that banking services should line with their changing lifestyles. The rate of FinTech
be transparent, facilitative and economical (Hendrikse adoption is greater in jurisdictions where there is
et al., 2018). After the GFC, public perception of banks unmet demand for financial services, less competition
had deteriorated, as savings were diverted to subprime from traditional finance, macroeconomic conditions
borrowing without adequate consumer protection. are conducive, regulation is accommodative and
Many finance professionals confronted job losses or demographics are favourable (Frost, 2020). According
pay cuts, which inspired enterprising innovation as to the ‘Global FinTech Adoption Index 2019’, the
FinTechs (Buckley et al., 2016). Also, tighter regulation adoption of FinTech services globally has progressed
of traditional banking after GFC supported the growth from 16 per cent in 2015 to 33 per cent in 2017 and
of the FinTech sector (Cortina et al., 2018). 64 per cent in 2019. Despite concerns about data

Chart 1: Top 100 FinTechs by Business Models

Source: FinTech 100, KPMG and H2 Ventures (2019)

2
Neo-banks have digital as the only or predominant channel for engaging with customers and challenge either the products, user experience or business
models of traditional banks and other financial services organisations; Multi-companies are FinTechs providing a diversified range of financial services
products to customers

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ARTICLE FinTech: The Force of Creative Disruption

security, the respondents preferred FinTechs over of 8 companies on the FinTech100, India is emerging
the traditional sector due to low fees and ease of as a prominent FinTech force3.
opening of accounts (EY, 2019).
Benefits of FinTechs
Supply-side Support to FinTech
Efficiency enhancement
Reflecting on growing adoption over the past
FinTechs have played a key role in making the
decade, many start-ups have come up with diverse
financial sector more efficient (Philippon, 2020). In
and innovative FinTech products. They have been
the USA, FinTech lenders enhanced ease of borrowing
supported enthusiastically by investors, with
by processing mortgages 15-30 per cent quicker than
investments in the sector increasing from $5 billion
other lenders with no evidence of higher (conditional)
in 2010 to $78 billion in 2019 (Chart 2).
default rates (Fuster et al., 2018).
Geographical Distribution of FinTechs
Financial inclusion
A unique feature of FinTech has been its shifting
geography; both in terms of the locus of activities By overcoming market failures such as
and the area of influence. According to KPMG’s information asymmetry or high transaction costs,
FinTech100, the new productive ground for FinTech FinTechs help enhance financial inclusion. In a survey
companies is shifting from North America and Europe of retail borrowers on a large Chinese platform, more
to the Asia-Pacific; 42 companies from the Asia-Pacific than half reported that they had no prior borrowing
region (highest among all regions) were featured in history from a financial institution (Deer et al., 2015).
2019 as compared to 31 companies in 2017. Within Big data and machine learning techniques may even
the Asia-Pacific, China is facing stiff competition from help reduce human biases against discriminated
countries like India, Vietnam and Korea. With a total groups (Bartlett et al., 2018).

Chart 2: Global FinTech Investment

Source: Tracxn Database, upto June 2020.

3
Paytm ranked fifth and OlaMoney ranked eighth.

78 RBI Bulletin November 2020

FinTech: The Force of Creative Disruption ARTICLE

Reduced credit risks

Chart 3: FinTech Tree Highlighting the
By providing more choice of credit sources, Role of Regulation
proliferation of FinTechs could lower the risks an
economy faces if credit provisioning is dominated
by a few banks. FinTechs focused on credit could be
beneficial for commercial banks as some of them rely
on FinTech platforms’ credit assessment processes
(Claessens et al., 2018).
FinTech Regulation
Fintechs can be viewed as double edged swords.
Despite various benefits, these innovations can
sometimes magnify existing threats to consumers
such as likelihood of privacy breaches and
cybersecurity risks, leaving behind digitally illiterate
and unconnected consumers. Thus, while the role
of regulation is undisputed for the financial system
as such, it assumes greater importance for newer
innovations such as FinTechs.
Source: Financial Stability Institute, BIS (2020).
A central bank’s interest in FinTech is not confined
to its impact on the financial sector per se, but rather
many FinTechs leveraging on cloud computing, it
its implications for financial stability and monetary
policy. The regulatory environment, like the roots that is becoming systemically important to the financial
provide life to a tree, provides a solid foundation for system. It is possible that going forward some future
FinTech activities (Chart 3). software could end up being exclusively available on
cloud platforms. In such cases, central banks may have
A survey-based study under the aegis of the Bank
to opt for in-house cloud development or collaborate
for International Settlements (BIS) summarises the
with various service providers. For instance, the US
responses of regulators across the world to rapidly
Federal Reserve has visited Amazon’s cloud facilities
emerging FinTech (Ehrehtraud et al., 2020). While
for on-site inspections, while the European Banking
most surveyed jurisdictions did not have a dedicated
Authority has published guidelines for cloud
regulatory regime for FinTech lending, many had
outsourcing (King, 2019). However, for artificial
it in place for digital payments and crowdfunding.
intelligence, machine learning and DLT, regulatory
For insurance, existing regulations were broadly
action has been limited to risk assessments and
considered sufficient. Warnings and clarifications
issuance of general guidance.
were the most common regulatory responses to
crypto-assets, but a few respondent jurisdictions also Financial regulators are facing unprecedented
reported emergence of crypto-specific licenses. With challenges with the emergence of FinTechs. These
regards to enabling technologies, most regulators firms come in new shapes and forms, so fitting them
tweaked existing guidelines to include tech-specific into buckets for prudential or risk-based supervision
elements. Regulators have been particularly active is not easy. As the scope of activities widens from
on application programming interfaces (APIs), national to global, regulation too has to reach out
cloud computing and biometric identification. With across borders. Furthermore, if the importance of

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ARTICLE FinTech: The Force of Creative Disruption

traditional banks in the financial system declines, Regulatory Environment

central banks might have to increase the number of
India is one of the few jurisdictions with a
counterparties to their operations in money markets specific Payments and Settlements law to “provide
for effective monetary transmission (Lagarde, 2017). for regulation and supervision of payments and
III. Evolution of the FinTech Ecosystem in India settlement systems in India and to designate the
Reserve Bank as the authority for the purpose and the
The roots of Indian FinTechs lie in the
matters connected therewith or incidental hitherto”.
groundwork done over the previous decade in
The Reserve Bank regulates some FinTechs directly
developing key enablers. The Indian FinTech industry
by granting them NBFC licenses (such as NBFC-P2P),
as it stands today is the result of a unique concoction
or indirectly by regulating the banks and NBFCs
of technological enablers, regulatory interventions
associated with them. National Payments Corporation
and business opportunities as well as certain other
of India (NPCI) is the umbrella organisation for
characteristics unique to India.
operating retail payments and settlement systems
As the regulator of payment systems, the Reserve in India, as an initiative of the Reserve Bank and the
Bank has undertaken numerous measures to ensure Indian Banks’ Association (IBA) under the provisions
increased efficiency and uninterrupted availability of of the Payment and Settlement Systems Act, 2007.
secure, accessible and affordable payment systems The interventions in Payment and Settlement System
and to serve segments of the population which are proposed by the Reserve Bank in its various Monetary
hitherto untouched by the payment systems. To Policy Statements over the past year are presented
achieve this, Reserve Bank’s Vision 2021 envisages four in Annex 2. A regulatory timeline depicting India’s
goal posts (4 Cs), i.e., Competition, Cost, Convenience favorable policy moves to promote FinTech has been
and Confidence. illustrated in Chart 4.

Chart 4: Regulatory Timeline of Indian FinTech

Note: Vide its order dated March 04, 2020, Hon’ble Supreme Court of India set aside the RBI Circular on Prohibition on Dealing in Virtual Currencies on the ground of
proportionality.

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FinTech: The Force of Creative Disruption ARTICLE

Major Enablers of Indian FinTech

Chart 5 : Wireless Data Usage and Tariff
Penetration of internet and smart phones
Propelled by massive strides in internet and
smartphone penetration, FinTechs have expanded
their reach rapidly in India (Table 2).
Favourable Demography
The Indian market is blessed with a higher
proportion of young population, who are more likely
to trust and adopt FinTech. There were 1157.75 million
wireless subscribers in the country as on March 31,
2020, comprising 638 million urban and 519 million
rural subscribers (TRAI, 2020). India and China lead

Table 2 : Telecommunications Indicators

Source: Department of Telecommunications, Government of India (2020).
Parameter Period Cumulative
amount
the Global FinTech Adoption Index 2019 with an
Telephone Subscribers 31-Mar-14 to 30-Apr-20 116.8 Crore
Teledensity 31-Mar-14 to 30-Apr-20 86.6 % adoption rate of 87 per cent. While per capita internet
Internet Subscribers 31-Mar-14 to 31-Mar-20 74.3 Crore
usage has increased, tariffs have declined (Chart 5).
Broadband Subscribers 31-Mar-14 to 31-Mar-20 68.7 Crore
Wireless Data Usage Q3 2019-20 21,402 India Stack
Petabytes
Telecom Usage (Monthly Wireless 31-Mar-14 to 31-Dec-19 ` 78.7
Average Revenue per User)
India’s evolution as a progressive FinTech nation
Telecom Towers 01-Sep-17 to 27-Jul-20 6,05,788 happened on the back of the ‘India Stack’ – an
Gram Panchayats connected 31-Aug-14 to 30-Jun-20 1,41,098
under BharatNet indigenous set of technologies and policies that act as
Telecom Licenses 31-Mar-14 to 30-Jun-20 156
enablers to innovation (Chart 6)
Source: Department of Telecommunications, Government of India (2020)

Chart 6: Development of India Stack

Source: D’Silva et al. 2019.

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ARTICLE FinTech: The Force of Creative Disruption

The ‘India Stack’ encompasses two core principles Data sharing framework
- building digital platforms as public goods and
Wider access to data generated by online activity
incorporating data privacy and security in the design of
could be beneficial since they are often obtained at zero
digital public goods (D’Silva et al., 2019). An example
of the India Stack for payment systems is shown in marginal cost and are non-rival4. Open access to data
Chart 7. The cornerstone of the India Stack is the could also lower switching costs for customers and
Aadhaar enabler, used to access a unique, verifiable generally foster competition and financial inclusion. In
identity at low marginal cost by FinTechs. Over 1.25 2016, the Reserve Bank established a legal framework
billion residents of India have been issued Aadhaar, for a class of regulated data fiduciary entities, called
and 30 million authentication requests are processed Account Aggregators (NBFC-AA), enabling customer
daily (UIDAI, 2019). Various publicly provided
data to be shared within the regulated financial system
platforms for verification (e-KYC), digital signature
with the customer’s knowledge and consent. Access
(e-sign), cloud storage (DigiLocker) and payments
to data will be granted to regulated entities (under
have been developed over Aadhaar, which can be used
by innovators to create and exchange value, obviating the RBI, SEBI, IRDA and PFRDA) for a limited time
the need to build their own digital infrastructure. for a specific purpose. Innovation facilitators are also
important FInTech enablers. The Reserve Bank has
Unified Payments Interface (UPI) is a pivotal
set up a ‘Regulatory Sandbox’ for issuing facilitative
enabler, which virtualises accounts and facilitates
customers to undertake merchant payments and fund regulation to help the fast-developing FinTech sector,
transfers. allowing live testing of new products in a controlled

Chart 7: India Stack for Payments

Source: D’Silva et al. 2019.

4
A good is non-rival in nature when its consumption by one individual does not diminish the amount available for others.

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FinTech: The Force of Creative Disruption ARTICLE

regulatory environment to generate evidence on the classified as FinTechs, which can be grouped broadly
benefits and risks of financial innovations (RBI, 2019). into fifteen business models (Annex 3).
The first cohort of applications considered for the
Equity Funding
Regulatory Sandbox was under the operational theme
‘retail payments’ (RBI 2019a). Startups tend to raise money through equity,
since they usually have no history of demonstrated
Indian FinTechs: Strength in Diversity
earnings or collateral to offer to banks, which are
The hallmark of India’s FinTech ecosystem is generally conservative in lending. Lending to a
diversity of markets and applications. It is seen that startup requires assessment of novel parameters like
emerging industries often concentrate regionally to the future earnings potential of the unconventional
benefit from agglomeration effects, but FinTech does business model, motivation and suitability of the
not follow this trend (Basole and Patel, 2018). Though founders, business climate, domain knowledge, etc.
concentrated in major metropolitan cities such as Also, specialised equity investors like Venture Capital
Mumbai, Bangalore, Delhi-NCR, and Hyderabad, firms can be more ‘hands-on’ and guide startups to
FinTech is also expanding to smaller cities (Chart 8). make them more successful in the long run. Equity
Mumbai and Bangalore lead the FinTech momentum funding also allows startups to take a long view of
and account for 42 per cent of the startup headquarters. their business, since they are freed from immediate
Other cities like Jaipur, Pune, and Ahmedabad are also loan repayment obligations.
emerging as centers of FinTechs (Medici & Pisabazaar:
According to Tracxn database, 211 Indian FinTechs
India FinTech Report 2019). According to the Tracxn
raised $ 3.18 billion (in equity rounds and from angel
database, there are a total of 4,680 companies in India
investors) over 2019-20 (Chart 9). 25 FinTechs over
and above these 211 also raised funding but did not
Chart 8: FinTechs in India - Geographical
provide details. Fundraising activity took a hit in
Distribution
April 2020 due to the spread of COVID-19 and the
enforcement of a nationwide lockdown.
The distribution of the funding of $3.18 billion
raised during 2019-20 was highly skewed with the
top 10 companies (by equity funding) accounting
Latitude

for approximately two-thirds of the total funding

(Annex 4). Of this, $ 1 billion was raised by Paytm
alone in November 2019. Most of the top FinTech
fundraisers operate in the payments arena. Seed and
Series A, Series B and Series C funding5 constituted

5
Start-ups tend to raise equity in successive pitches or rounds (Seed,
Series A, B, C and so on), which broadly follow the growth/scale of the
business, and serve the needs of the business in that stage. Early rounds
Longitude may be used to establish a foothold in the market, while later rounds can
be used for expansion.

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ARTICLE FinTech: The Force of Creative Disruption

Chart 9: Equity Funding of Indian FinTechs

Source: Tracxn.

14, 24 and 20 per cent of the equity pie respectively are acting as enablers in banking and finance. Banks
(Chart 10). Almost a third of the entire year’s FinTech are relying on a number of strategies to embrace
funding was obtained in the late Series G round by technological innovation; ranging from investing in
Paytm. FinTech companies and launching FinTech subsidiaries,
FinTechs and Banks: Collaboration to collaborating with FinTechs for various operational
functions. Banks and non-banks are partnering to
FinTech firms are no longer viewed by banks as
offer the combination of trust and innovation to the
disruptive forces. There is evidence that FinTechs
Indian consumer (Das, 2020). For enhancing revenues
Chart 10 : Funding by Round: 2019-20 and profits, they are diversifying into newer areas
such as insurance, asset management, brokerage and
other services supported by financial technologies.
There are synergies to be explored between
FinTechs and banks. FinTechs, while possessing
vast technological knowhow and new ideas, lack a
large client base and the expertise to navigate the
regulations and licensing discipline of the finance
industry. Traditional banks possess a major strength
- reputation for trustworthiness built over several
decades. Banks have capital and can weather intense
competition. They also have the benefit of experience
and tried-and-tested infrastructure alongside specific
knowledge of risk management, local regulations and
Source: Tracxn.
compliance. In fact, banks’ on-the-ground market and

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FinTech: The Force of Creative Disruption ARTICLE

customer knowledge and pre-existing client base can Second, the increasing popularity of FinTechs
be of immense value to FinTech projects. In a nutshell, could exacerbate data use, protection and privacy
banks and FinTech firms have different comparative concerns if the statutory rights and obligations of
advantages and a strategic collaborative partnership service providers are not clearly delineated. Machine
between the two would liberate them to focus on learning algorithms could reproduce and perpetuate
their respective core competencies (Mundra, 2017). existing patterns of discrimination and exclude
vulnerable sections. As the Indian population
IV. Challenges for Future Development
becomes data-rich with increasing Internet and
FinTechs will confront several opportunities and mobile coverage, the next challenge is empowering
challenges in the future. Broadly, they need to address consumers with the data generated by them through
six concerns to become more efficient, reliable, adequate legal and regulatory interventions. Citizens
equitable and resilient. should be able to exercise control of their data like any
First, despite immense scope for innovation, other personal asset. There is an emerging demand
cross-border payments are still unchartered territory for data localisation from various jurisdictions. In
for FinTechs. Availing remittance services burdens this context, a solution could be a model where data
migrant workers due to steep costs associated with is stored locally, and only binary (Yes or No) queries
such remittances (D’Silva et al,. 2019). A high share of are allowed on it from abroad, from a specified and
cross-border payments flows through correspondent globally agreed upon set of permitted queries.
banks, whose dwindling numbers could result in Third, there is a need to ascertain the impact of
even higher costs and retrogression to informal, FinTech on financial stability, due to higher potential
unregulated payment networks (Carstens, 2020). In for system-wide risk with its expansion. Lending
India, cross-border transactions are slow compared standards could weaken due to wider credit access
to domestic payments and few alternatives are and higher competition. Since FinTech lenders give
available, despite heavy inward personal remittances advances from debt and equity rather than from
(RBI, 2019). To make payment systems in different deposits, such credit could be more procyclical and
jurisdictions interoperable, payment instructions volatile due to lack of standard credit guidelines.
need to be translated to a common language. For this, Further, credit activity outside the prudential
standards and practices across jurisdictions must be regulation space could render credit-related
coordinated, and mutual confidence in each domestic countercyclical policies less effective. Reputational,
network’s Know Your Customer (KYC) and Anti-Money cyber and third-party risks may arise for banks
Laundering (AML) frameworks must be established. interacting with FinTechs.
Recently, UPI was connected with Singapore’s Network Fourth, there is inequality of access to FinTech
for Electronic Transfers (NETS) on a pilot basis at the services. Despite having the world’s second largest
Singapore FinTech Festival 2019 (ET, 2019), suggesting Internet user base, the access to Internet is still
that significant advances could be made within the highly biased towards the urban, male and affluent
existing setup. The UPI system settles in fiat money population segments. Trust in the online marketplace
within the regulated financial system perimeter and is low and a typical user takes 3-4 months to make
therefore, poses less risk than systems such as stable- their first online transaction. Most users use
coins which are usually managed by BigTechs. online platforms for product research, but prefer

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ARTICLE FinTech: The Force of Creative Disruption

subsequent offline purchase (Bain & Company, 2018). ecosystem. However, to follow the principle of
Though ‘micro-merchants’ in India account for an neutrality, “authorities may have to contend with
overwhelming proportion of sales, they have been stricter treatment for certain types of activity, such
left out of the cashless revolution especially in smaller as where a claim on the platform’s balance sheet is
cities. Despite high penetration of mobile-data and generated or where retail investors and consumers are
smartphones, use for financial transactions is low due involved” (Claessens et al., 2018).
to behavioral reasons like lack of trust, misconceptions V. The Way Forward
about taxation, lack of applied knowledge in using
As a facilitative regulator, the Reserve Bank
digital payment modes and perceived security threats
has broadened the scope of priority sector lending
(IFMR, 2017).
to include start-ups. In order to overcome internet
Fifth is the issue of consumer protection and connectivity problems as major hurdle for digital
digital education. Regulators need to stress on pre- payments in rural areas and encourage innovations
emptive fraud detection, while also integrating digital that enable offline digital transactions, the Reserve
literacy into financial literacy to dispel misconceptions. Bank has announced a pilot scheme under which,
Safety provisions and grievance redressal mechanisms authorised Payment System Operators (PSOs)
need to be simplified and publicised to encourage including banks and non-banks, will be able to
participation by low-income groups. However, provide offline payment solutions using cards, wallets
financial literacy and digital hygiene alone may be or mobile devices for remote or proximity payments
insufficient. Cross-country evidences suggest that (RBI 2020b). Over the years, the Reserve Bank has
paying with cash is a habit, generally slow to change. prioritised security measures for digital payments
In China, street vendors, buskers, and even beggars such as the requirement of Additional Factor of
accept electronic payments (Jenkins, 2018). However, Authentication and online alerts for every transaction.
in Tokyo, six of ten restaurants require cash payment These measures have significantly increased customer
(Lewis, 2019). Cash use increases as concerns about confidence and safety leading to increased adoption
privacy rise, while it declines as confidence in banks of digital payments. Going ahead, FinTechs need to
rises (Png and Tan, 2020). Thus, policies to promote prioritise regulatory compliance and the management
electronic payments need to address fundamental of cyber risks. They should design and implement
concerns about privacy and confidence in financial cyber-risk prevention frameworks and regularly
institutions. conduct penetration tests.
Finally, regulators need to conduct themselves Indian FinTechs are now witnessing one of their
neutrally. The Report of the Working Group on biggest challenges till now - the COVID-19 pandemic.
FinTech and Digital Banking (RBI, 2018a) cautions that A survey of 250 Indian startups confirms that largely,
regulators should neither overprotect incumbents, the pandemic had a negative impact on business,
nor unduly favour newcomers by applying differential though the FinTech startups among these reported
regulatory treatment. With increasing dominance the lowest operational disruptions (FICCI-IAN, 2020).
of big firms in digital payments, there will emerge Experts foresee that new firms are bound to lose out
a tradeoff between data-fueled oligopoly for cheap and established, well-funded startups and BigTechs
services and the need for re-aligning incentives to in favorable sectors such as payments, e-commerce
foster smaller, more innovative firms for a competitive and online learning will tide through the business

86 RBI Bulletin November 2020

FinTech: The Force of Creative Disruption ARTICLE

disruptions. Ensuring a high degree of interoperability Claessens, S., Frost, J., Turner, G., Zhu, F., (2018),
among startups is key to ensure a coordinated “FinTech Credit Markets across the World: Size, Drivers
response to market demand and changing attitudes. and Policy Issues”, BIS Quarterly Review, September
The pandemic also challenges the belief that FinTechs Cortina, J. and Schmukler, S., (2018), “The FinTech
promote financial inclusion; a topic of future research Revolution: A Threat to Global Banking?”, World Bank
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FinTech: The Force of Creative Disruption ARTICLE

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ARTICLE FinTech: The Force of Creative Disruption

Annex 1 : Digital Transactions

Volume (Lakhs) Value (` Crores)
 
  2017-18 2018-19 2019-20 2017-18 2018-19 2019-20
1. Large Value Credit Transfers 1,244 1,366 1,507 11,67,12,478 13,56,88,187 13,11,56,475
(RTGS – Customer and
Interbank)
2. Retail Credit Transfers (AePS, 58,793 1,18,750 2,06,661 1,88,14,287 2,60,97,655 2,85,72,100
APBS, ECS, IMPS, NACH, NEFT,
UPI)
3. Debit Transfers and Direct 3,788 6,382 8,957 3,99,300 6,56,232 8,26,036
Debits (BHIM Aadhaar Pay,
ECS, NACH, NETC)
4. Card Payments (Credit and 47,486 61,769 73,012 9,19,035 11,96,888 15,35,765
Debit cards at PoS terminals
and Online transactions)
5. Prepaid Payment Instruments 34,591 46,072 53,318 1,41,634 2,13,323 2,15,558
(PPIs)
Total Digital Payments 1,45,902 2,34,339 3,43,455 13,69,86,734 16,38,52,285 16,23,05,934

Source: RBI Annual Report, 2019-20.

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Annex 2: Statement on Developmental and Regulatory Policies: Decisions regarding

Payment and Settlement System
Date Decision Taken
Feb 07, 2019 Regulation of Payment Gateways and Payment Aggregators
Apr 04, 2019 A report to benchmark India’s payment systems would be prepared.
Apr 04, 2019 A Framework for Harmonising Turn Around Time for the Resolution of Customer Complaints and
Compensation to be put in place for all authorised payment systems.
Jun 06, 2019 Removing charges levied by the RBI for RTGS and NEFT transactions
Jun 06, 2019 Committee to Review the ATM Interchange Fee Structure
Aug 07, 2019 24x7 availability of NEFT
Aug 07, 2019 Expansion of Biller Categories for Bharat Bill Payment System (BBPS)
Aug 07, 2019 ‘On-tap’ Authorisation for Bharat Bill Payment Operating Unit (BBPOU), Trade Receivables Discounting
System (TReDS), and White Label ATMs (WLAs).
Aug 07, 2019 Creation of Central Payments Fraud Information Registry
Oct 04, 2019 Internal Ombudsman by large non-bank Prepaid Payment Instrument (PPI) Issuers (more than 1 crore
outstanding PPIs)
Oct 04, 2019 Dissemination of granular payments data
Oct 04, 2019 Payments Infrastructure Development Fund (PIDF) to increase digitisation through cards in Tier III-VI
centres
Oct 04, 2019 100 per cent digitally enabled districts
Dec 05, 2019 Introduction of a new PPI only for purchases up to `10,000, with loading only from a bank account and
usage only for digital payments. Only minimum customer details required.
Dec 05, 2019 Previously, NBFC-P2P aggregate limits for both borrowers and lenders were `10 lakh, whereas exposure
of a single lender to a single borrower was capped at `50,000. It was proposed to increase the aggregate
exposure limit of a P2P lender to all borrowers to `50 lakh.
Dec 05, 2019 Baseline cyber security controls shall be mandated by regulated entities in contractual agreements with
ATM Switch application service providers
Feb 06, 2020 Publication of a “Digital Payments Index” (DPI)
Feb 06, 2020 A framework for establishing a Self-Regulatory Organisation (SRO) for the digital payment system to be
prepared to foster best practices on security, customer protection and pricing etc.
Feb 06, 2020 A pan India Cheque Truncation System to be operationalized.
Aug 06, 2020 Broadening the scope of Priority Sector Lending to include start-ups
Aug 06, 2020 Scheme of Offline Retail Payments Using Cards and Mobile Devices
Aug 06, 2020 Online Dispute Resolution (ODR) for Digital Payments
Aug 06, 2020 Positive Pay Mechanism for Cheques
Aug 06, 2020 Creation of Reserve Bank Innovation Hub
Oct 09, 2020 Round-the-Clock availability of Real Time Gross Settlement System (RTGS)
Oct 09, 2020 Perpetual Validity for Certificate of Authorisation (CoA) issued to Payment System Operators (PSOs)

Note: Updates on the above may be found in the RBI Annual Report 2019-20

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ARTICLE FinTech: The Force of Creative Disruption

Annex 3 : Indian FinTechs by Business Model

Business Model No. of Description
Firms*
Investment Tech 990 Platforms for retail and institutional investors to research and invest in multiple
financial assets.
Payments 978 Companies which participate in traditional web based and offline payment cycle;
provide alternative mode of payment, and support the payment companies in terms
of security, analytics, platform, etc.
Finance and 906 Automate functions of finance and accounting departments of organisations.
Accounting Tech
Alternative Lending 702 Online lending platforms (including balance sheet lenders, marketplaces, P2P lenders
as well as lead generators) and enablers.
Banking Tech 369 Tech solutions for banking industry including software, hardware, and Tech-enabled
services.
Cryptocurrencies 342 Bitcoin and other digital currency products and services.
Crowdfunding 185 Online platforms where people, organisations raise money from the masses.
Internet First 161 Tech platforms to consumers for purchasing and managing their insurance
Insurance Platforms
Insurance IT 98 Software products and data solutions primarily for the insurance industry
RegTech 95 Tech products primarily for financial institutions and regulators for efficient
implementation and monitoring of regulations
Robo advisory 68 Automated, low-cost investment services to retail investors and technological
solutions for automated investments.
Remittance 46 Cross-border money transfer solutions & services
Forex Tech 32 Tech solutions, including internet-first platforms and software for forex market .
Islamic FinTech 7 Internet-first platforms and software for sharia-compliant finance
Employer Insurance 6 Solutions for managing employee insurance benefits.

* Source: Tracxn database. The total is more than 4,680 as some companies have multiple business models.

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Annex 4: Top Indian FinTechs by Funding Raised in 2019-20

Rank Company Founded Funding Total Description
Rounds Amount
Raised
($ Million)
1 Paytm 2010 Series G 1000 App-based wallet for consumer payments
2 BharatPe 2017 Series A, B, C 154.3 QR code based payment app
3 Policybazaar 2008 Series F 150 Online insurance comparison platform
4 CRED 2018 Series A, B 145.6 Rewards-based platform for credit card bill payments
5 KhataBook 2016 Angel, Seed, 140.6 Digital ledger account book
Series A,
Series B
6 Acko 2017 Series C 101.6 Tech-enabled automotive insurance
7 ZestMoney 2015 Series B 30.47 Online platform for point-of-sale financing
8 Lendingkart 2014 Series C, D 87.87 Online platform providing working capital for SMEs
9 InCred 2016 Series A 85.9 Alternative lending platform focusing on SME,
consumer & personal, home and education loans.
10 Pine Labs 1998 Series C 85 PoS software solutions for offline retailers
11 Billdesk 2000 Series C 84.8 Payment Gateway
12 Digit Insurance 2016 Series C 84.35 Insurance platform for individuals

Source: Tracxn database.

RBI Bulletin November 2020 93