Financial technology (“fintech”) makes the market more accessible to many people and provides access to many financial services that they may have previously lacked. Technology can overcome physical boundaries; one need not live near a bank, for example, to open a bank account. Fintech enables financial services firms to reach the broader population with tools that are more scalable and thus potentially profitable, even in the face of small account balances and transaction amounts. It’s a win-win for the industry and the populace.
In a country where cash still accounts for an estimated 80 percent of financial transactions, the potential for growth in investments, banking, alternative lending, and electronic payments is enormous. While the addressable market is huge, the monetary values of such transactions are typically quite low.
So fintech systems are really the only hope for scaling profitably for financial services firms. These consumer finance innovations accommodate the small and often unpredictable cash flows of the population. They enable even very small transactions to be handled cost-effectively.
And since India holds the world’s largest unbanked or underbanked population, the potential to make a real impact via financial inclusion is significant. For example, there are about 40 to 50 million merchants in India, and it is estimated that less than 10 percent of them have access to digital payment solutions.
Financial literacy is often coupled with financial inclusion; the two go hand-in-hand. Financial literacy, too, remains a challenge in India, and fintech can provide tools that can help people who lack access to human advice. This market is simply too large and the skill shortages within the finance industry too big to be addressed in face-to-face interactions with everyone. It’s one thing to enable people to better manage their finances, it’s quite another to ensure that they have the proper knowledge to do so. A basic level of financial literacy is therefore critical.
India has an emerging middle class, and this presents a real opportunity for wealth management and investment management firms. While the high net-worth end of the market has been relatively saturated and well covered by financial services firms, the investing needs of the emerging middle class need to be met. While still a relatively small part of the overall population, demographic trends and a strong economy point to a rise in the middle class.
Market observers estimate that the overall wealth management industry could grow by 10 to 15 percent annually over the next five years with the high-net-worth segment growing by 20 percent, according to Capgemini. Incumbent firms and fintech upstarts have this opportunity clearly in their sights—a demographic dividend that every other major market envies.
Also, let’s not lose sight of the invaluable role that human investment skills, both at an institutional and individual level, will play in this development. I believe that as the market expands and investment opportunities increase, judgment, experience and soft skills – listening, empathy, and understanding – will rank more highly than ever. Financial technology will make our industry more scalable, more transparent and more consistent, but delivering empathetic advice attuned to people’s goals and aspirations requires much more than a calculation. The financial services firm of the future in India will need to invest more time and effort to train their advisors in these vital skills. Blending the power of a machine with human judgment and expertise is the future.
Overall, I am bullish on the investment management industry in India. The challenges are not insurmountable. The solutions are at hand, and the opportunities are enormous.Paul Smith is President and CEO at the CFA Institute.