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Is fintech innovation in India sustainable?

Fintechs that focus on innovation tend to provide their services free of cost in order to achieve scale. The funding to sustain this innovation largely came from VCs, but global economic headwinds could turn the tides of funding, leaving India’s burgeoning fintech sector in a precarious state.

December 09, 2022 / 12:11 PM IST

There can be no better testament to India’s world-class fintech innovation than the fact that it leads the world with an 87% fintech adoption rate.

The story behind the number is that India’s fintech sector has greatly added value to people’s lives, from the local street vendor using QR codes for payments to businesses adopting new-age payroll management systems.

The government, along with the RBI, has played a key role in providing the regulatory framework and digital infrastructure to enable this pace of innovation.

Initiatives like UPI, video KYC and the Account Aggregator (AA) framework have laid the foundations for the development of a wide range of innovative products and services.

Innovation with impact - how far we’ve come

No one is a stranger to the UPI success story. India saw 19.65 billion UPI transactions during the July-September quarter this year, amounting to ₹32.5 lakh crore in value, according to Worldline India's Digital Payments Report. This will only grow further as UPI Lite, credit cards and cross-border transactions are enabled on the network.

Video KYC has propelled financial inclusion, allowing people in remote locations to open bank accounts online, providing much-needed access to banking services. It has also made investing and other financial services far more convenient, broadening India’s capital markets.

By democratising access to financial data, the AA framework has opened up endless possibilities for more fintech innovation. For instance, Fi Money built its ‘Connected Accounts’ feature using the AA framework, which enables users to link multiple bank accounts together on one app. From loans and payments to insurance and investments, the framework has paved the way for the hyper-personalisation of financial services.

Budgeting for sustainable innovation

Innovation necessarily involves dedicating resources to research and development. And while India’s burgeoning fintech industry grapples with profitability on account of providing most of their services for free, a lot of the innovation is underpinned by VC funding.

While the market potential of this sector has attracted record investments amounting to $10 billion in FY21, global headwinds in the form of a looming recession and tighter monetary conditions could spell tough times ahead. Fintech funding plunged by 60% sequentially in the quarter-ended September this year, according to a PwC report.

With lofty objectives of bridging the gap in financial inclusion and helping Indians build wealth, the fintech sectors’ progress should not be cut short by unfavourable economic conditions. The government could look at formulating policies to introduce refunds of GST input tax credits for unprofitable start-ups during their initial years of operation in the upcoming 2023 Union Budget.

This would free up substantial working capital, enabling early-stage fintech startups to focus on innovation in critical areas, such as improving the security and reliability of digital payments and providing greater access to banking, credit and investment services, instead of preserving capital.

If implemented, such a move would unlock the fintech sector’s potential to further national objectives in a sustainable manner while delivering long term and resilient customer-centric solutions.

Moneycontrol Journalists were not involved in the creation of the article.

first published: Dec 9, 2022 11:00 am