The Front Lines of the Digital Revolution: Caution and Hope as India Experiences a Fintech Boom

The financial industry’s efforts to serve lower-incomecustomers has have gone through four distinct phases: from social banking tomicrofinance to financial inclusion and now to technology-driven financialservices or “fintech.” Fintech has fundamentally changed people’s lives, andtransformed the business landscape forever. In many markets, cash is fastbecoming obsolete, and transactions are mostly via digital tools. Banking isalso moving into a presence-less, paperless and real-time era: While there willalways be bank branches, banks will become more “invisible” in how they delivertheir services – many of which will be accessed primarily online.

This transformation is fully underway in emerging markets aswell as developed ones. India is now the world’s second biggest fintech hub,trailing only the U.S. Today the global digital economy accounts for around 15%of the world’s GDP. In India, it is currently about 8% of the GDP – but it isgrowing 1.5 times faster than the global average, and at this rate it’spredicted to reach 30% of the country’s GDP by 2025. A Boston Consulting Group(BCG) survey estimated the size of India’s digital lending market at around $75billion in 2018, up from $46 billion in 2016, projecting exponential growth inthe sector in the coming years. Likewise, India’s digital payments market isset to grow to US $500 billion by 2020, and its overall digital economy couldgrow to US $1 trillion by 2025.


This revolution in fintech is led by a host of players,including commercial banks, telecommunication firms, payment banks, smallfinance banks and financial technology companies. It is harnessing technologyto reinvent traditional business models, creating opportunities to connectIndia’s hitherto unbanked communities to affordable and reliable financialtools at an unprecedented speed and scale. It offers a preview of what theglobal banking model may look like a generation from now, delivering benefitsthat include:

•         Financialflows that can be accurately tracked, resulting in safer and speediertransactions, and less corruption and theft;

•         Usefulinsights from client transaction patterns and financial histories, which canhelp providers to design products that are better suited to customers’ needs,cash flows and risk profiles;

•         The abilityto instantly relay client account information, automatic reminders and helpfuldefault options via mobile phone menus, making it easier for consumers to trackand monitor their accounts, and to sign up for services quickly on their own;

•         Directdeposits (including wages and social assistance), which allow money to “bypass”the client’s pocket, helping users to save rather than spend – and often givingwomen more financial authority within the family.

Fintech has freed bank staff from counters, and relievedcustomers of the inconvenience of transacting solely during banking hours. Mostof their financial work can now be done via smartphone, improving paymentsystems, eliminating paper receipts, and reducing a number of frictions – notonly saving customers time and money but improving their quality of life.Meanwhile, the phenomenal data footprint provided by smartphones anddata-connected mobile phones is providing an unprecedented opportunity to bringpeople with limited credit-history into the formal mainstream through alternatecredit profiles. In conjunction with this digital data, artificial intelligenceand machine learning algorithms can assess the creditworthiness of the user,making it possible to provide loans to them even in the absence of atraditional credit history.

As a result of this digital transformation, traditionalfinancial institutions in India are losing their market share totechnology-enabled entrants in many markets.To stave off this challenge andremain relevant, banks will have to reinvigorate their talent ecosystems andredefine their roles. But as the sector evolves in response to the digital age,it’s important to keep in mind that fintech is not free of risks or downsides.


When it comes to lending, number-crunching with computerscan help with decision-making, but it cannot replace it. Anecdotal evidencecannot be dispensed with, particularly in the case of families without anyformal financial data. Proponents of algorithm-based lending argue that iteliminates the subjectivity factor in decision-making, replacing it withdata-based decisions. But digitizing and automating the lending process mayresult in excessive standardization when assessing a customer’s repaymentcapacity. This can lead either to over-lending and customer over-indebtedness,or to the rejection of a loan based on opaque reasoning premised on arbitraryfactors such as location.

For example, in microfinance, individual traits can best becaptured by personal contact. And the best clients are often those who get aloan not on the strength of their credit scores, but on the basis of thetransparent and unvarnished honesty about their financial dealings that comesthrough in these encounters. For these clients, computer modelling fails toconvey these essential qualities.

Digital finance also offers major technological andinfrastructure challenges. Sparse populations, inconsistent network coverage,insufficient capital for building new business models, and customers’ lack oftrust and comfort with technology can stand in the way of success, particularlyin remote or underserved communities. And the risks of implementing digitalfinancial services are not just operational and technical: There are alsoconcerns about the security, affordability and safety of these new financialchannels.To take just one example, loss of customer privacy is all butinevitable, despite efforts to create safeguards. For India’s financialinclusion industry to capitalize fully on the benefits of digital finance,these accompanying risks must be understood and adequately addressed.


The most important need is to strengthen the entireecosystem within which last-mile agents, clients and financial serviceproviders interact with technology. To facilitate a seamless transition indigital financial services, India will have to consider the following:

•         The need tobalance the regulatory framework to support innovation and competition, whileensuring the safety and soundness of the financial system;

•         The need tomaintain openness to new players and models, such as non-bank players likefintechs, telecom-supported financial services providers, crowdfunding and bigdata analytics;

•         The role ofregulatory sandboxes to test new digital ideas and initiatives;

•         Theimportance of sufficient digital infrastructure;

•         The role ofnational identification systems, biometrics, and tiered know-your-customerdigital solutions that reach beyond the current banking system.

In addressing these areas, India will have to contend with amajor geographical and cultural divide in terms of the uptake of fintechproducts. The aversion of underserved Indian customers to digital finance hasmuch to do with their overall aversion to technology, which stems from theirlack of trust in it. It is also partly due to the low technical literacy ofconsumers. Women in particular often face additional barriers, including lessaccess to mobile phones, lower literacy and numeracy levels, less confidence inusing technology, and restrictions on their travel or social interactions.Furthermore, villagers tend to value personal relationships – particularly whenit comes to money. They will not trust technology that they do not understandfor anything except very basic payments.


These issues are further complicated by the fact that Indiaculturally believes in cash. There are marked demographic and class issuesbuilt into India’s struggles to execute a cashless transition, and a paradigmshift in thinking will require time, resources and a migration to new socialand cultural patterns and habits. But though it will be impossible for India tobecome a cashless economy in the immediate future, this is definitely somethingthe country can look forward to. However, there are several challenges peculiarto India that may constrain a full-scale digital transition for the foreseeablefuture:

•         To startwith, India has 438 languages, with each having multiple dialects and differentscripts. This greatly increases the difficulty in designing digital financialproducts that will be usable across India.

•         Migratingfrom a cash economy to a digital economy will demand a recast of the entireconsumer mindset, and the smooth functioning of last-mile touch points. Makinggadgets available will not help unless India can bring about a change in theskills and digital literacy of users.

•         The country’sfinancial services providers too often focus on short-term incentives at theexpense of long-term customer trust and loyalty. Consumers will have to make anextra effort if they want to reap the harvest of these new financial tools. Soproviders will have to make these new technologies worthwhile by showingcustomers clear benefits, giving them confidence in the services, and makingthem convenient and affordable.


As Nobel prize-winning economist Daniel Kahneman advises,when overcoming resistance to technology, it’s essential “not to persuade, butto assess the source of resistance and address that.” This will requirethinking very hard about the motivators that will pull consumers into this newspace. The issue is lot more nuanced than what we are seeing today, and thesenuances change from culture to culture and consumer segment to consumersegment. But there are some motivators that almost everyone shares: Forinstance, in a digital world, safety and security are customers’ top prioritieswhen considering financial services. Payment providers can develop the mostfool-proof systems in the world, but the human element of payments – includingthe risk of digital theft and agent fraud – cannot be emphasized enough.

That’s why the government’s role will be critical, whetherit involves reducing risk, improving uptake and usage, enhancing consumerprotection or avoiding over-indebtedness. The tech revolution will have abetter chance of success if it is driven less by the demands of an industrythat believes it should be allowed unhindered freedom to innovate and introducedigital services, and more by empathetic governance.

India’s central bank has been espousing a cautious approachin addressing concerns around consumer protection and law enforcement. The keyobjectives of the regulator have been to create an environment for responsiblefintech innovations, to expand the reach of financial services for the unbankedpopulation, to regulate an efficient electronic payment system, and to providesuitable options to consumers.

There have been two highly significant developments in thisspace. The first is the Personal Data Protection Bill, expected to beintroduced in Parliament this month, which specifies that a private entity mustseek user consent before collecting personal data. A user can also choose toremove consent at any point while utilizing a service. The second is theOmbudsman Scheme for Digital Transactions, for the redress of complaintsregarding digital transactions made through non-banking channels like mobilewallets.

As India’s government and fintech industry work to navigatethe many challenges ahead, these efforts to maintain a balance between safetyand innovation must continue. During this transition, it’s in everyone’sinterest to pay heed to the words of UN Secretary General Kofi Annan in 2004,when the world was in the midst of an earlier phase of digital upheaval: “Inmanaging, promoting and protecting the Internet’s presence in our lives, we needto be no less creative than those who invented it. Clearly, there is a need forgovernance, but that does not necessarily mean that it has to be done in thetraditional way, for something that is so very different.”

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Andrew Smith

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