The future of India's fintech sector, which is estimated by the government to hit a $150 billion-valuation by 2025, will be shaped by growing data access, deeper penetration of UPIs and rising embedded finance among other top factors, says a report released by the Boston Consulting Group (BCG).
The BCG report for July 2022, which focuses on the theme of "future of fintechs in India", claims that the growth in this sector would continue to be propelled due to a "large addressable demand".
The consultancy group, citing the data sourced from Statista, said India's middle class would comprise 46 percent of total households by 2025 as against 37 percent in 2018. The population residing in urban areas has climbed to 36 percent in 2022 from 33 percent in 2017. The expanding middle class and rising urbanisation is expected to aid the growth of fintech industry, the report suggested.
"Unprecedented growth in data access with growing smartphone penetration (1130 million smartphones by 2025 vs 600 million in 2020), rising internet penetration (900 million internet users in 2025) and declining cost of data" is also listed as a factor that will continue to propel the fintech growth story.
The "maturing digital infrastructure", which has been powered by the linking of Jhan Dhan accounts, Aadhaar cards and mobile numbers, and the "pandemic-aided explosion" in UPIs, has been pivotal to the sector's growth, the report added.
UPI transaction volumes grew 2.6 times between April 2020 and April 2021, from around 1 billion transactions to around 2.6 billion transactions, BCG said.
UPI held over 60 percent volume share of total non-cash transactions in FY22, it said. "Increase in proportion of digital payments driven by UPI has created more digital data that enables robust underwriting for lending," the report added.In the coming years, the rise of embedded finance is expected to drive
digital payments and credit penetration, BCG claimed. E-commerce marketplaces (Amazon, Flipkart), e-commerce enablers (Shopify, WooCommerce), traditional lenders (Bajaj Markets), and merchant discovery platforms (Zest, Simpl) now capture multiple stages in the journey from product discovery consideration, purchase, fulfilment and financing via BNPL (buy now pay later)", the report said.
"India’s BNPL disbursements are expected to grow from around Rs 100,000 crore in FY21 to over Rs 700,000 crore by FY26," it noted, adding that the increasing e-commerce penetration and the maturity of Open Network for Digital Commerce (ONDC) will act as key catalysts to this topline growth.
"The open architecture of Account Aggregator, OCEN, ONDC is expected to lead to a dramatic explosion in machine-readable data, transform data into a utility and democratize payments, credit, commerce, and savings," the report further said.
Regulatory stance 'nationalistic'
According to BCG, the regulatory stance in India is "increasingly nationalistic, pro-innovation and pro-consumer". The RBI continues to limit the ringfence of deposit-taking institutions in its "selectivity of handing out banking / NBFC licenses", the report said.
However, the central bank seeks to complement this ringfence by opening it up to service providers via an open architecture, it added.
RBI’s Payment Vision 2025 will also be a factor in influencing the sector's future, as per the research group. "From a Fintech perspective, this vision signals a clear regulatory lean towards innovation and growth, while potentially followed by increasing scrutiny and audit. This will consequently push Fintechs to build and strengthen capabilities like risk management, compliance, etc. which were hitherto the responsibility of licensed entities," it said.
Under the vision 2025, the RBI has announced regulation of bigtech and fintechs, BNPL systems and introduction of a central bank digital currency (CBDC), among others.
The BCG report concludes that the fintech sector will continue to find underlying demand growth in India which "is expected to stay strong". They will have to operate in a vigilant regulatory environment, and the new players will have to compete against licensed incumbents who are "strengthening their digital capabilities".The fintechs also have to cater to an increasingly affluent and digitally-savvy customer base, which is "hungry for their financial needs to be met digitally, and most importantly, a large base of mass customers waiting to be digitally educated and serviced", the report noted.