Role of FinTech in Accelerating Financial Inclusion in India

Brij Raj1 & Varun Upadhyay2

Paper presented at the 3rd International Conference on Economics and Finance

organised by the Nepal Rastra Bank at Kathmandu, Nepal during February 28-29, 2020

1
General Manager & Banking Ombudsman, Reserve Bank of India, Patna. Views expressed are personal and not those of the Bank.
2
Manager, Reserve Bank of India, Patna. Views expressed are personal and not those of the Bank.
Postal Address: Brij Raj, Office of Banking Ombudsman, Reserve Bank of India, South Gandhi Maidan, Patna, Bihar, India - 800 001. Contact Number:
00-91-7070993597.
The authors would like to declare that the results and findings in the paper have been formed on the basis of data available in public domain.
E-mail addresses of authors: [email protected] and [email protected] respectively
Author responsible for correspondence: Brij Raj, General Manager & Banking Ombudsman, Reserve Bank of India, Patna.

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 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 underserved, persons in low income groups, rural and other

underserved 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

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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.

JEL Classification: D14, D83, G02

Keywords: FinTech, Financial Inclusion

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 I. INTRODUCTION

1. 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. FinTechs

leverage on technology for the design and delivery of financial products and services in

an innovative manner. They have the potential to reshape the financial services and

financial inclusion landscape in India and play a critical role in achieving inclusive growth

and broad-based prosperity. Through their innovations, new business models and

applications, FinTech firms can play an important role in accelerating Financial Inclusion

in India by helping reduce costs and improving access to financial services to the

underserved, persons in low income groups, rural and other underserved sectors of the

Indian economy.

2. An IFC-Intellecap report estimates that about 16% of the MSMEs in India are

being financed by the formal banking sector. A vast majority of micro units in India are

still outside the formal credit system. According to the India FinTech Report 2019, the

MSME financing gap stands at US $240 bn and the consumer lending gap stands at US

$300 bn. These numbers indicate a huge demand-supply gap and, therefore, the MSME

and consumer lending segments can immensely benefit from a collaboration between

financial institutions and FinTech players, whereby their other payment records and

alternative data can form a basis for assessing their credit worthiness.

3. The credit scoring models used by FinTech lenders differ from those used by

traditional lenders in two ways. The first is that technology allows financial

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intermediaries to collect and use a larger quantity of information. FinTech credit platform

may use alternative data sources, including insights gained from social media activity

(U.S. Department of the Treasury (2016); Jagtiani and Lemieux (2018a) and the digital

footprints of users (Berg et al (2018)). The second difference is the adoption of machine

learning techniques which can mine the non-linear information from variables.

4. Today, given the technological developments, there is also a strong business case

in catering to the underserved sections of the society in India. According to the

Consultative Group to Assist the Poor (CGAP), FinTechs are innovating at every step of

the financial services value chain, offering new value propositions, including flexible

products and better ways to address the financial challenges faced by low-income

customers. As a result, India’s FinTech adoption has risen exponentially over the last two

years led by a government and regulatory push towards a digitalised economy and

financial inclusion. According to the Ernst & Young’s Global FinTech Adoption Index

2019, India along with China leads emerging markets with a high 87% FinTech adoption

rate in 2019 (see Table I below) whereas the 2019 global average adoption rate was 64%.

In 2017, the first time when the above Index was created, India’s FinTech adoption rate

was 52%, still higher than the global average of 33%. FinTech adoption locally is driven

by greater use of money transfer and payments at 96% (see Table II below). All other

categories also have a higher adoption compared to the global average. The prime reasons

for the higher FinTech adoption rates in 2019 are more attractive rates or fees, easier to

set up an account, access to different and more innovative products and services and better

experience, product features and quality of service.

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 Table I: Top Countries in FinTech Adoption

Sr. Percentage of adoption Country

1. 87% India, China
2. 82% Russia, South Africa
3. 76% Colombia
4. 75% Peru
5. 73% The Netherlands
Average adoption: 64%
Source: EY Global FinTech Adoption Index 2019

Table II: Consumer Awareness of FinTech Services in India

Sr. Percentage of Awareness Purpose

in India
1. 96% Money transfer and payments
2. 86% Insurance
3. 78% Savings and Investments
4. 76% Borrowing
5. 71% Budgeting and Financial Planning
Source: EY Global FinTech Adoption Index 2019

5. Technological innovation is changing the provision of financial services and,

therefore, it is important to understand the implications these developments have for

economic efficiency and growth, financial stability and financial inclusion. As a country,

India is embracing the opportunities of FinTech to boost economic growth and inclusion,

while balancing risks to stability and integrity. As regards the potential risks and their

mitigation, RegTech and SupTech are emerging as technologies which help improve

efficiency through the use of automation, introducing new capabilities and streamlining

workflows.

II. ROLE OF FINTECH IN ACCELERATING FINANCIAL INCLUSION IN

INDIA

6. In the Indian context, FinTech is having a positive impact in addressing the long

standing barriers for financial inclusion, financial sector deepening and development.

Digital Financial Services are becoming a promising channel for overcoming the

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geographical barriers to financial inclusion. According to an IMF Paper titled “Fintech:

The Experience so Far” (Policy Paper No. 19/024 published on June 27, 2019), Financial

Inclusion is one of the areas where FinTech solutions have been identified as potentially

transformative because they help address several financial frictions. These include: (a)

cost barriers for delivering financial services - especially severe in remote rural locations

and among marginalized groups such as women, the urban poor and migrants; (b)

information asymmetries between service providers and consumers, especially among the

unbanked who lack information needed to adequately assess risk; (c) lack of a verifiable

ID and difficulty in meeting customer due diligence requirements; and (d) lack of suitable

financial products for lower income segments.

7. The most significant impact of India’s FinTech revolution, however, has been on

the MSME lending landscape. With the emergence of innovative alternative lending

platforms, smaller enterprises with no financial records or credit history are now finally

getting some much-deserved access to credit. Further, the Goods and Services Tax

Network (GSTN), which currently has a registered base of more than 9.2 million MSMEs

regularly filing monthly returns every month. The GSTN data is verified through the

matching concept and provides a deeper and more expansive overview of the nature of

the business, thus complementing the conventional financial data.

With more accurate verification and validation of transactional information enabling

stronger underwriting processes, this will improve the efficacy and coverage of newer

FinTech lending models such as flow-based lending, vertical-based lending, and

ecosystem-based lending. (Mittal, 2020)

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8. FinTechs can help introduce more efficient and inclusive business models and

expand the pool of suppliers of financial services. The enormous potential of FinTech to

create a more inclusive financial system and to stimulate economic growth is also being

widely recognised. A study by the McKinsey Global Institute (Manyika, et al. 2016)

estimates that emerging economies could boost their GDP by $3.7 tn by 2025 by fully

embracing digital finance. Research has also shown that countries with deeper levels of

financial inclusion have stronger GDP growth rates and lower income inequality (Ravi,

Shamika 2019).

II.1 National Strategy for Financial Inclusion (NSFI)

9. The Reserve Bank of India defines Financial Inclusion as the “process of ensuring

access to appropriate financial products and services needed by all sections of the society

in general and vulnerable groups such as weaker sections and low income groups in

particular, at an affordable cost in a fair and transparent manner by regulated,

mainstream institutional players”. (Jain, M. K. 2019). Access to formal finance can boost

job creation, reduce vulnerability to economic shocks and increase investments in human

capital. At a macro level, greater financial inclusion can support sustainable and inclusive

socio-economic growth for all. To achieve the above objectives in a co-ordinated and

time-bound manner, a National Strategy for Financial Inclusion for India 2019-24 has

also been prepared by the Reserve Bank of India. The Strategy envisages to make formal

financial services available, accessible and affordable to all the citizens in a safe and

transparent manner to support inclusive and resilient multi-stakeholder led growth.

(NSFI: 2019-2024).

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II.2 The next wave of financial inclusion

10. Data analytics and machine learning combined with alternative data sources are

enabling individuals to build digital and financial identities which are allowing them to

demonstrate credit worthiness and eligibility for a range of financial services hitherto

inaccessible to them, thereby, leading the next wave of inclusion. E-KYC and biometrics

are aiding the next wave of inclusion and making a headway among the unbanked

population. (Dunaev, 2018). The mass adoption of Aadhaar, India’s biometric linked

identity has significantly streamlined the KYC processes which have helped in opening

bank accounts and electronic wallets. Through the Aadhaar-enabled Payment System

(AePS), people in rural areas are making deposits, withdrawals and transfers. This system

allows business correspondents (BCs) to visit rural areas with a micro ATM that can

verify customers’ identities digitally and operate their accounts. (Carstens, Agustín 2019).

II.3 Enabling access to credit and other financial services

11. With appropriate access to credit, consumers and small businesses can help drive

stronger and inclusive growth. Given the huge gap in MSME financing and consumer

lending, banks and financial institutions are partnering with FinTechs and leveraging on

their credit decision-making frameworks to lend to these segments. Customers with a

limited credit history and lack of documentation but having a good digital footprint and

record of regular payment of bills, etc. are being afforded credit, thereby helping

accelerate financial inclusion in India. In recent years, FinTechs have also expanded

beyond payments to credit and other financial services like insurance, investments, etc.

12. FinTech firms are using latest technologies and a mix of traditional and non-

traditional methods to assess the credit worthiness of individuals and SMEs. This

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provides an inherent advantage to them vis-à-vis traditional lenders in gauging the

creditworthiness of the potential borrowers / businesses (Mundra, S.S. 2017). According

to a recent working paper published by the Bank for International Settlements (BIS

Working Papers No. 834, December 2019), FinTech firms that use machine learning and

“non-traditional” data sources may be able to generate a more accurate picture of the

credit risks posed by their customers. This advantage when combined with the physical

distribution and reach of the banks could be a win-win combination.

13. On the back of strong growth in internet penetration and mobile density, e-

commerce and smartphone-based services have created huge amounts of data on

individuals and small businesses in India. As more and more data is getting digitized, the

cost, time and effort involved in assessing the creditworthiness of individuals and

MSMEs is also coming down. This is also evident in the pre-approved loans that are being

offered by banks. Therefore, given the huge business potential the number of FinTech

companies in the digital lending space have also been growing rapidly. (Mundra, S.S.

2017).

III. KEY REGULATORY INITIATIVES TO SPUR FINTECH AND

FINANCIAL INCLUSION IN INDIA

III.1 High-Level Committee on Deepening of Digital Payments

14. The Reserve Bank of India is committed to promote and deepen the cause of

financial inclusion in India. (Das, S. 2019)3. With a view to encouraging digitization of

payments and enhancing financial inclusion through digitization, the Reserve Bank of

India had constituted a High-Level Committee on Deepening of Digital Payments under

3
17th C.D. Deshmukh Memorial Lecture (Opening remarks by Shri Shaktikanta Das, Governor, Reserve
Bank of India - April 25, 2019 - Mumbai)

10

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the Chairmanship of Shri. Nandan Nilekani, former Chairman, Unique Identification

Authority of India (UIDAI), in January 2019 to review the existing status of digitisation

of payments and level of digital payments in financial inclusion, identify best practices

that can be adopted, recommend measures to strengthen safety and security of digital

payments, lay down a road map to increase customer confidence in digital financial

services and suggest a Medium-Term strategy for deepening of digital payments. (Setting

up of High-Level Committee on Deepening of Digital Payments, Press Release by RBI

dated January 08, 2019). As digital payments are an important means of economic

development and achieving financial inclusion, in its Report the Committee has laid down

a strategy for achieving a digitally included society over the medium term through a focus

on the user, accelerating acceptance, getting the system ready for scale, accelerating

financial inclusion and encouraging high frequency use cases4.

III.2 Regulatory Sandbox

15. The Reserve Bank of India is also continuously aligning its regulatory and

supervisory framework so that the evolution of FinTech can be leveraged to widen and

ease the financial access by the excluded population. (Das, S. 2019)5. In this context, it

has also come up with an “Enabling Framework for Regulatory Sandbox” on August 13,

2019. A regulatory sandbox (RS) usually refers to live testing of new products or services

in a controlled / test regulatory environment for which regulators may (or may not) permit

certain regulatory relaxations for the limited purpose of the testing6.

4
Report of the High Level Committee on Deepening of Digital Payments, May 2019 (Chairman: Shri.
Nandan Nilekani)
5
17th C.D. Deshmukh Memorial Lecture (Opening remarks by Shri Shaktikanta Das, Governor, Reserve
Bank of India - April 25, 2019 - Mumbai)
6
Press Release by RBI dated August 13, 2019 on ‘Enabling Framework for Regulatory Sandbox’.

11

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16. On November 04, 2019 the Reserve Bank of India also announced the opening of

the first cohort under the Regulatory Sandbox (RS) with ‘Retail Payments’, as its theme.

The adoption of ‘Retail Payments’ as the theme is expected to spur innovation in digital

payments space and help in offering payment services to the unserved and underserved

segment of the population7.

III.3 Other initiatives

17. The advancements in digital technology for use in financial services be it

payments or credit or other financial services, are based on the digital infrastructure built

by the government and RBI. Several measures have also been taken on the supply-side to

make low-cost financial services available for all. A bank account, an Aadhaar ID linked

to biometric data and mobile connectivity is in place for millions of Indians. The advances

in an open, interoperable payment system in the form of Unified Payments Interface (UPI)

which can be availed by anybody having a smartphone and a bank account have

revolutionized our payments system. There is a significant thrust on digital delivery of

government services, especially through Direct Benefit Transfer (DBT) under

government schemes to Aadhaar-linked bank accounts of beneficiaries and as a result,

the DBT has also been a big driver of digital transactions. (Misra and Tankha, 2019)

18. The Reserve Bank of India has initiated several measures to expand the reach of

banking services for the unbanked population and also launched technology-based

initiatives for the benefit of the MSME ecosystem. It has also encouraged greater use of

electronic payments to achieve a “less-cash” society. In India, banks have been the

traditional gateway to payment services, however, with the fast pace of technological

7
Press Release by RBI dated November 4, 2019 on ‘Opening of first cohort under the Regulatory Sandbox’.

12

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changes, this domain is no longer the monopoly of banks. Non-bank entities are co-

operating as well as competing with banks, either as technology service providers (TSPs)

to banks or by directly providing retail electronic payment services. A focussed effort has

been made to develop a state of the art national payments infrastructure and technology

platforms, be it Immediate Payments Service (IMPS), Unified Payments Interface (UPI),

Bharat Interface for Money (BHIM), Bharat Bill Pay System (BBPS), or Aadhaar-

enabled Payment System (AePS). All these initiatives have catalysed the retail payments

scenario in India and the total volume of retail electronic payments has witnessed a nine-

fold increase over the last five years8.

19. The Reserve Bank of India has also licensed a few entities to operate peer-to-peer

(P2P) lending platforms which have the potential to improve access to finance for

individuals, micro and small enterprises. It has also set up the Trade Receivables

Discounting System (TReDs), an innovative financing arrangement where technology is

leveraged for discounting bills and invoices. The TReDS assists MSMEs which have

working capital and cash flow problems due to delayed payments. Three entities are

currently operating TReDS exchanges in India and the volumes are slowly gaining

traction9.

20. Following the issuance of differentiated banking licenses, ten Small Finance

Banks are currently operating in India. They have the advantage of embracing state-of-

the-art technology from the beginning and are primarily undertaking basic banking

activities of acceptance of deposits and lending to unserved and underserved sections

8
Opportunities and Challenges of FinTech (Shri. Shaktikanta Das, Governor, Reserve Bank of India,
Keynote Address delivered at the NITI Aayog’s FinTech Conclave on March 25, 2019.
9
Same reference as Footnote number 8.

13

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including small business units, small and marginal farmers, micro and small industries

and unorganised sector entities. The Reserve Bank has also granted licenses to seven

purely digital loan companies to operate through mobile applications10.

IV. OPPORTUNITIES, RISKS AND WAY FORWARD

OPPORTUNITIES

IV.1 Digital onboarding and financial inclusion

21. Digital onboarding is vital in achieving the objective of financial inclusion. The

central KYC registry is a significant step in this regard as about 100 million KYC records

have already been uploaded onto this platform11. The focus now is on ‘digital financial

inclusion’, which broadly refers to the use of digital financial services to advance

financial inclusion. These include payments, transfers, savings, credit, insurance,

securities, etc. delivered through digital channels.

IV.2 Designing Suitable Financial Products

22. In the Indian context, improving the accessibility of financial platforms using

FinTech is key. Therefore, designing suitable financial products that cater to specific

needs of the financially excluded population12 is vital in achieving the objective of

financial inclusion.

10
Same reference as Footnote number 8
11
Same reference as Footnote number 8
12
Same reference as Footnote number 8

14

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IV.3 Eliminating the Gender Gap

23. Financial inclusion and empowerment of women can have a far reaching socio-

economic impact. The World Bank Global Findex 2017 Report on the use of financial

services also finds that men remain more likely than women to have an account. Further,

gender gaps in data can also perpetuate disadvantages for women. Therefore, as

recommended by the High-Level Committee on Deepening of Digital Payments, gender

data can be collected so that this gap can be measured and eventually eliminated. In this

regard, FinTechs can help empower women by designing financial products and services

specifically for women and delivering them through mobile phones, personal computers,

internet, etc. and by increasing their access to such products and services. FinTechs could

also use appropriate research methods to collect the required data for this purpose. Over

time, such efforts would also help in closing the gender gap in financial inclusion.

IV.4 Bringing merchants in the digital fold

24. A vast majority of the merchants in India are still not in the digital fold. Of the

seven crore merchants and traders, only a small proportion has begun accepting digital

payments, therefore, there is a huge scope for accelerating merchant acceptance through

mobile payments, Smart Point of Sale (PoS) Terminals and Quick Response (QR) Codes.

This would be possible if services such as lending, reconciliation, working capital, etc.

are also provided to merchants in addition to payments. Improving the payments

acceptance infrastructure and connectivity in areas with low digital transactions would

also give a big fillip to financial inclusion in India.

15

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RISKS

IV.5 RegTech and SupTech

25. Emerging technologies such as big data analytics, machine learning, artificial

intelligence, cloud, blockchain, robotics, Internet of Things, etc. are transforming the

financial services landscape and driving substantial efficiency gains in the financial sector

in India. However, they could also pose risks to the stability and integrity of the financial

system where they operate outside the purview of financial regulation and supervision.

While opening a new world of opportunities, the developments in FinTech have their own

share of risks and challenges for the regulators and supervisors. Data confidentiality and

consumer protection are major areas that are getting addressed. Financial innovations can

give rise to new risks and challenges, which may undermine market integrity or even

increase systemic financial risk. Early recognition of these risks and initiating action to

mitigate the related regulatory and supervisory challenges is key to harnessing the full

potential of these developments13. It is, therefore, important that the financial sector

regulators closely monitor the developments in the field of finance and technology.

26. As regards potential risks that may arise out of FinTech adoption and their

mitigation, new domains such as RegTech and SupTech can help improve efficiency

through the use of automation, introducing new capabilities and streamlining workflows.

RegTech is an application or platform which makes regulatory compliance more efficient

through automated processes and lowers the costs of compliance. RegTech focuses on

technologies that facilitate the delivery of regulatory requirements more efficiently and

effectively. SupTech is technology to be used by the regulators and supervisors to support

13
Same reference as Footnote number 8

16

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supervision. The objectives of SupTech are seamless and straight-through data collection

/ reporting, data analysis and decision making, streamlined licencing, market monitoring

and surveillance, KYC / AML / CFT, cybersecurity data or evidence based policy

making14.

27. In the Reserve Bank of India, SupTech is being used for data collection and

analysis. The examples are Import Data Processing and Monitoring System (IDPMS),

Export Data Processing and Monitoring System (EDPMS) and Central Repository of

Information on Large Credits (CRILC), to name a few. Also, the risk-based supervision

of banks is extensively data-driven and is an example of SupTech. The future of RegTech

and SupTech technologies, however, lie in big data analytics, artificial intelligence,

machine learning, cloud computing, geographic information system (GIS) mapping, data

transfer protocols, biometrics, etc.15

WAY FORWARD

IV.6 Need for greater collaboration between banks and FinTechs

28. The ability of banks and financial institutions to collaborate both at strategic and

business levels with FinTechs could become a major competitive advantage in the coming

years. Keeping this in view, the Reserve Bank of India has encouraged banks to establish

alliances with FinTech firms as these could be pivotal in accelerating the agenda of

financial inclusion16. The PwC 2019 Global Fintech Survey also emphasises that given

the speed of developments in technology, financial institutions cannot afford to ignore

FinTechs firms and by partnering with them, they can strengthen their competitive

14
Same reference as Footnote number 8
15
Same reference as Footnote number 8
16
Same reference as Footnote number 8

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position and bring newer products and services into the market more quickly. FinTechs

can help banks and financial institutions reduce costs, improve the efficiency of their

operations, improve customer retention and bring additional revenues. Appropriate

regulatory and supervisory frameworks can ensure orderly development of FinTechs and

protect the consumers and safeguard the interests of all stakeholders.

29. The introduction of the Goods and Services Tax (GST) in India, one of the largest

and most significant tax reforms, is also helping formalise the informal economy in a

significant way. As a result of a much-improved digital footprint, proprietary businesses,

micro and small enterprises, etc. are becoming attractive clients for banks and financial

institutions, thereby reducing their dependence on informal sources of funds. The cost of

credit for the micro and small enterprises is also likely to decrease significantly as lending

shifts from collateral-based to cash flow-based17.

IV.7 Personal Data Protection

30. FinTech companies collect a lot of data on their customers which is used for

marketing and analyzing their credit worthiness. Therefore, keeping in view the concerns

relating to the protection of personal data and digital privacy in India, on December 11,

2019 the Personal Data Protection Bill 2019 was introduced in the Indian Parliament and

it has been referred to a Joint Committee of the Parliament for fine turning through

consultation with various stakeholders. The successful enactment of this law would result

in a new dawn for privacy in India, give a fillip to the working of FinTech companies and

boost financial inclusion in India.

17
Microfinance as the next wave of Financial Inclusion, Address by Shri. M. K. Jain, Deputy Governor,
Reserve Bank of India at the SIDBI National Microfinance Congress 2019 at Mumbai on November 26,
2019.

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IV.8 ‘On tap’ Licensing of Small Finance Banks

31. Following a review of performance of the existing small finance banks and to

encourage competition, on December 05, 2019 the Reserve Bank of India announced

Guidelines for ‘On tap’ Licensing of Small Finance Banks in the Private Sector18. As the

Small Finance Banks would have the advantage of embracing state-of-the-art technology

from the beginning and would be primarily undertaking basic banking activities and

lending to the unserved and underserved sections, therefore, the setting up of more such

banks would give a boost to the FinTech ecosystem and financial inclusion in the country.

IV.9 Need for greater focus on rural and semi-urban India

32. According to the India FinTech Report 2019, FinTechs must also work on

improving the quality of life for the underbanked communities and people who are mostly

in rural and semi-urban India. While FinTechs have had an impact on urban India and to

some extent on semi-urban India, they need to cater to rural and semi-urban India in a big

way. FinTechs can also help rural households in India who are still dependent on informal

credit to become a part of the formal financial system. Transaction data and mobile usage

could also be used to extend micro-credit to small businesses with their digital footprints

used for credit scoring and fast disbursal of credit. Further, a majority of the FinTechs are

located in a metro cities in India and to make a bigger impact they would need also expand

their presence to the Tier II-IV cities in the country.

18
RBI releases ‘Guidelines for ‘on tap’ Licensing of Small Finance Banks in the Private Sector’, RBI Press
Release dated December 5, 2019.

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IV.10 Tailored financial products for the unbanked and underserved customers

33. A collaborative approach with FinTechs can help banks and financial institutions

offer tailored financial products to the unbanked and underserved customers. Financial

services could be personalized by putting customers at the centre of product design. For

MSMEs, the banks could leverage its data analytic capabilities and price loans

dynamically and for payments, customers could set limits, etc. (Bansal, 2019).

IV.11 FinTech Policies

34. The Government of Maharashtra has become the first State in India to frame a

FinTech Policy to promote the FinTech sector in the State. Likewise, the Government of

Karnataka has also come up with a Start-up Policy to create a start-up ecosystem in the

State through strategic investments and policy interventions. The Government of

Telangana has set up T-Hub, India’s largest facility for innovation and entrepreneurship.

Therefore, keeping in view the role of FinTech in accelerating financial inclusion in the

country, it is imperative that other States in India too come up with similar policies.

IV.12 Digital financial literacy is essential for financial inclusion

35. India’s efforts to expand access to organised financial systems through digital

payments have started to gain ground and these can get a boost through an increase in the

financial and digital knowledge among the masses. With the digital culture spreading fast

through digital payments, online purchases, etc. this is the right time to accelerate digital

literacy campaigns19. It is also important to develop a consistent definition of digital

financial literacy, to design and implement tools to assess it, and develop strategies and

19
‘Digital literacy is integral for financial inclusion’, Shri. K. Srinivasa Rao, The Hindu Business Line,
December 30, 2019.

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programs to promote digital financial education as well as special programs for vulnerable

groups, including the elderly, the less educated, owners of small and medium-sized

enterprises (SMEs) and start-up firms, women, etc. (Morgan et al; 2019)

V. CONCLUDING OBSERVATIONS

36. As a country, India is on the cusp of a tremendous opportunity to accelerate

financial inclusion through FinTech which is becoming a key driver of the country’s

growth. Of its population of 1.3 billion, only under 300 million people have availed a loan

at some time and, therefore, the next 300 million is clearly the opportunity. India is

becoming a data-rich country and we have a billion people who have data on payments

and telecom in some form. As of now, we have only scratched the surface in terms of data

that is machine readable and usable for credit assessment. Therefore, if we are able to

bring together data, technology and consumer insights against the next 300 million

people, the opportunities are enormous20. India has shown to the world that connecting

the unbanked need not be a dream for years to come and much can be learnt from its

financial inclusion initiatives based on the pillars of digitization and infrastructure

creation (Dunaev, 2018).

37. Digital Payments in India have seen an accelerated uptake following the

government and regulatory push for a less-cash economy. For FinTechs, payments can

be a pathway to other areas such as lending, insurance, wealth management, etc. as digital

payments can give them a history which can be leveraged in the other areas21.

20
FinTech for Inclusion: Challenges and Opportunities, Roundtable discussion organized by Business
Today in collaboration with PwC, BT Print Edition: December 16, 2018. Available online at
https://www.businesstoday.in/magazine/the-hub/fintech-for-inclusion-challenges-and-
opportunities/story/294454.html
21
What’s Driving India’s Fintech Boom?, Feb. 11, 2018. Available online at
https://knowledge.wharton.upenn.edu/article/whats-driving-indias-fintech-boom/

21

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38. The key to success in FinTech is to harness the benefits while managing the risks.

Therefore, we need to have an appropriate regulatory and supervisory framework to

facilitate the growth of this sector and to ensure that FinTech continues to help accelerate

Financial Inclusion in India. FinTech can reduce costs and improve access and quality of

financial services. However, we have to strike a subtle balance between effectively

utilising FinTech while minimising its systemic impacts. By enabling technologies and

managing risks, we can help create a new financial system which is more inclusive, cost-

effective and resilient22.

39. The goal of universal Financial Inclusion in India can be achieved only through

synergistic efforts between the mainstream financial entities and other players like non-

banking finance companies, FinTechs, etc. as they play a complementary role in

championing this cause. Therefore, banks and financial institutions need to collaborate

among themselves, and with FinTech firms as it would be pivotal in accelerating the

agenda of financial inclusion through innovation. They will also need to raise the digital

literacy of their customers that is not highly informed and aware and, therefore, can be

susceptible to frauds23.

40. According to a report by Deloitte titled ‘FinTech in India - Ready for Breakout’

(July 2017), FinTech firms can reshape the financial services landscape in India as they

can help develop unique and innovative models of assessing risks. By leveraging big data,

machine learning and alternative data to underwrite credit and develop credit scores for

customers with limited credit history, they can improve the penetration of financial

services and accelerate financial inclusion in our country. Having access to financial

22
Same reference as Footnote number 8
23
Same reference as Footnote number 17

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services is a critical step towards reducing both poverty and inequality and new data on

mobile phone ownership and internet access shows unprecedented opportunities to use

technology to achieve universal financial inclusion. As a country that is determined to

achieve universal financial inclusion at affordable costs, this is a defining moment for us,

and we should seize the opportunity24.

24
Same reference as Footnote number 8

23

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***

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