Fintech platforms facilitating payments services to promote digital channels for financial services
Fintech platforms facilitating payments services to promote digital channels for financial services
Business Model Description
Fintech platforms for facilitating Person to Person (P2P), Person to Business (P2B), Business to Business (B2B) payment transactions through technology backed platforms that allow for interoperability between banking entities using infrastructure such as Unified Payments Interface, Quick Response (QR) code allowing platforms to charge a commission for enabling utility payments and other transactions. Using payments as a gateway to garner client acquisition, these Fintech platforms also have an opportunity to offer value added services such as booking keeping services for small businesses, lending to small businesses that offer additional source of revenue to these platforms.
Expected Impact
Improve access to and adoption of digital financial services by households/businesses from low resource settings by creating easy to use, affordable payment platforms for financial transactions.
How is this information gathered?
Investment opportunities with potential to contribute to sustainable development are based on country-level SDG Investor Maps.
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Country & Regions
- India: Countrywide
Sector Classification
Financials
Development need
Financial inclusion is positioned prominently as an enabler of developmental goals in the 2030 Sustainable Development Goals, where it is featured as a target in eight of the seventeen goals (5.1). Financial inclusion is a key focus area of The Aspirational Districts Programme of the Government Of India (GoI), where it is one of the dimensions used to rank the comparative performance of India's districts and is observed to have a direct bearing on the quality of life and economic productivity of citizens. (5.2) By 2017, 80% of Indians had at least a Basic Savings Basic Deposits Accounts (BSBDA) due to GoI push for universal access to formal banking services under the Pradhan Mantri Jan Dhan Yojna (PMJDY) that was launched in 2014. Of the total number of bank accounts opened, usage of banking services is limited with only 43% of the PMJDY accounts being actively used between 2017-2018. (5.5) Adoption of formal financial services remains low due to the largely cash-based economy where over 65 million Indians still use over-the-counter services to send or receive domestic remittances (5.6) and cash continues to be a dominant mode of transaction despite the demonetization drive in 2016.
Policy priority
The roll-out of Pradhan Mantri Jan Dhan Yojna (PMJDY), a GoI scheme to provide universal access to bank accounts in India, has played a pivotal role in creating a gateway to accessing formal financial services. By 2017, 80% of Indians had at least a Basic Savings Basic Deposits Accounts (BSBDA). Since the roll-out of the scheme, parallel efforts such as launch of a universal, biometric-based unique identification system- Aadhar, bolstering of payments infrastructure to enable digital transactions through Unified Payments Interface (UPI), roll out of insurance cover through Pradhan Mantri Suraksha Bima Yojana (PMSBY) and coverage of pension through Atal Pension Yojana (APY) have been made to offer a holistic package of services to improve socio-economic resilience of citizens.
Gender inequalities and marginalization issues
Despite the focus by GoI to further financial inclusion in the country, a recent study by a global rating agency- Standard & Poor, titled- "Financial Literacy Around The World", reports that only 24% of the adult population in India is financially literate based on the study respondents' understanding of risk diversification, numeracy (ability to calculate interest rates), Compound Interest and Inflation (5.3). The 2016 Financial Inclusion Insights survey found only 30% of the Indian population was digitally financially included, meaning individuals were able to access their accounts via any number of electronic platforms including debit and credit cards, electronic money transfers, or mobile phones (5.4)
Investment opportunities introduction
Microfinance industry received equity infusion of ~USD 543 million in FY2018 (~Rs. 6,570 crore in FY2017), and 87% of the capital was infused in the top 10 lenders in terms of portfolio size. In ICRA’s opinion (a credit rating agency), the sector would need external capital of ~USD 1 billion for the next three years to meet its growth plans (16.13)
Key bottlenecks introduction
Technology is evolving very quickly and consumer stickiness is a concern for many players. It takes a significant amount of time to establish such a relationship and it is only organizations like PayTM (250 million wallet customers) and FINO (pre COVID monthly transactions at USD 60 million a month) who have been able to establish such over a 5-10 year horizon (17.25)
Corporate and Retail Banking
Development need
The 2016 Financial Inclusion Insights survey found only 30 percent of Indian population was digitally financially included, and were able to access their accounts through electronic means such as debit and credit cards, electronic money transfers, or mobile phones. (5.10).
Policy priority
Strong policy push for payment services through Fintech platforms. National Strategy for Financial Inclusion recognizes Fintech solutions to a critical agent in altering the financial inclusion landscape in India and in mitigating access related challenges to serve the last mile population (17.14)
Gender inequalities and marginalization issues
There is an opportunity for more innovation to create payment solutions and products that are suited to the BoP segment, many of whom are first time users. This includes domestic migrants that are heavily dependent upon transparent and affordable channels for remittances. A number of business models in the fintech/payments space appear to have struggled because their services do not meet the differentiated needs of Indian populations particularly with the vernacular market remaining largely underserved.
Investment opportunities introduction
Riding on the growth trajectory of digital payments and emerging form factors, India is swiftly moving to a cashless country. India is forecasted to see the fastest growth in digital payments transaction value between 2019 and 2023 with a CAGR of 20.2%, ahead of China and The United States. (17.9)
The CODI19 crisis has also turned into an opportunity for fintech apps with a surge in consumers using digital payment apps for transactions since the lockdown began in India. Unified Payment Interface (UPI), an instant real-time payment system operated by the National Payments Corp of India (NPCI), processed 1.23 billion transactions worth ~USD 33 billion in June 2020 alone, the highest value recorded by the channel in a month. (5.24)
Key bottlenecks introduction
Expert consultations have led to the conclusion that scale is possible only with a diversified product offering that needs to necessarily include lending in order to make it attractive to consumers and also for the business to run profitably.
Consumer Finance
Pipeline Opportunity
Fintech platforms facilitating payments services to promote digital channels for financial services
Fintech platforms for facilitating Person to Person (P2P), Person to Business (P2B), Business to Business (B2B) payment transactions through technology backed platforms that allow for interoperability between banking entities using infrastructure such as Unified Payments Interface, Quick Response (QR) code allowing platforms to charge a commission for enabling utility payments and other transactions. Using payments as a gateway to garner client acquisition, these Fintech platforms also have an opportunity to offer value added services such as booking keeping services for small businesses, lending to small businesses that offer additional source of revenue to these platforms.
Business Case
Market Size and Environment
> USD 1 billion
Potential to serve 0.8 billion people in peri-urban and rural areas.
Investment in financial technology (fintech) ventures in India nearly doubled to $3.7 billion in 2019 making the country the world's third largest fintech market, as per an analysis by Accenture (17.8)
India recorded an accelerated growth rate of over 50% in the volume of retail electronic payment transactions between 2015 to 2019. The growth in 2018-19 was largely due to the steep growth in Unified Payments Interface (UPI)- a system that powers multiple bank accounts into a single mobile application (17.12) .
With an annual growth rate of 150% since 2016, the Aadhar-Enabled Payments Channel (AEPS), which falls under the broader category of micro-ATMs, has emerged as one of the fastest-growing payments systems in the country, second only to the Unified Payment Interface (UPI) system in terms of annual volume growth. (18.7)
Indicative Return
> 25%
BFSI (Banking, Financial Services and Insurance) segment continued strong growth with investments of $8.4 billion in 2019, and above average returns, with highest multiples (17.6)
In March 2017, Reliance Capital (ADA Group) exited its original 0.83% in One97 Communications at 27x return on its investment. (It invested ~USD 1.4 million in 2011 and sold its stake for ~USD 37.5 million). (17.7)
Returns for this Investment Opportunity Area are expected to be upwards of 25x of the original investment values, far higher than the 20-30 percent IRRs that PE firms typically chase in emerging markets like India.
Investment Timeframe
Medium Term (5–10 years)
The fintech payments space is extremely competitive with companies having to constantly innovate with value added services in order to stay relevant. Their success depends on the problem they are able to solve. Thus, for many companies, shift from Peer to Peer (P2P) to Business to Business (B2B) has led to more stability and sustainability.
ADA Group group realised a handsome return on its investment in PayTM in about 6 years (17.7) PhonePe, a payments platform founded in December 2015, aims to be profitable by 2022 (17.13)
Ticket Size
In 2019, fintech emerged as the largest cross-sector x-tech segment in India, both in terms of deal value at USD 2.4 billion and deal volume at 83. (17.6)
Market Risks & Scale Obstacles
Business - Business Model Unproven
Market - High Level of Competition
Fragmented market ecosystem
Low demand side awareness
Impact Case
Sustainable Development Need
The 2016 Financial Inclusion Insights survey found only 30 percent of Indian population was digitally financially included, and were able to access their accounts through electronic means such as debit and credit cards, electronic money transfers, or mobile phones.
GoI's PMJDY (Pradhan Mantri Jan Dhan Yojna; Universal bank account opening scheme) facilitated bank accounts also share a close link with GoI’s DBT (Direct Benefit Transfer) mission that hopes to reduce leakages in BoP segments’ access to subsidies as well as provide a primary use case for bank account usage through Government to Person (G2P) payments.
There is an opportunity for more innovation to create payment solutions and products that are suited to the BoP segment, many of whom are first time users. This includes domestic migrants that are heavily dependent upon transparent and affordable channels for remittances.
A market gap persists because a number of business models in the fintech/payments space appear to have struggled because their services do not meet the differentiated needs of Indian populations particularly with the vernacular market remaining largely underserved.
Expected Development Outcome
Ubiquitous access to transparent, affordable and technology backed payment services in underserved regions of the country with enhanced user experience and increased awareness of digital modes of payment related transactions for small businesses and low income households. This has the potential to make digital payment services more efficient and lower market entry barriers due to the use of technology. (17.1)
Increased use of payment platforms will also help create a digital footprint for small businesses allowing them to access formal sources of financial services, adequate for their working capital needs.
Improved risk management capacities for financial service providers using technology backed payment platforms that allow for recording transactions allowing providers to offer value-added financial services such as book-keeping, credit, insurance, among others.
Potential for India Inc. to leverage the growing access to low-cost data services (405 million users in 2020 of which 259 million are in rural areas, a third of the users are women),(17.2) and penetration of smartphones (468 million in 2017 and expected to grow to 859 million by 2022) (17.3) to provide low cost digital financial services.
Gender & Marginalisation
Primary SDGs addressed
1.4.1 Proportion of population living in households with access to basic services
8.10.2 Proportion of adults (15 years and older) with an account at a bank or other financial institution or with a mobile-money-service provider
Secondary SDGs addressed
Directly impacted stakeholders
People
Corporates
Indirectly impacted stakeholders
Corporates
Outcome Risks
Payment space is an emerging sector. While regulations and investments are encouraging, business models still need to reach out to last mile consumers with products that are tailored for them
Impact Risks
Fintech solutions are still a very urban/peri-urban phenomena and due to supply side information asymmetries, potential to impact at last mile may still not be locked in as part of the business model
Impact Classification
What
Business models that are concertedly building solutions particularly for low income and low resource settings to use payment solutions are likely to benefit
Risk
Payment space is an emerging sector. While regulations and investments are encouraging, business models still need to reach out to last mile consumers with products that are tailored for them
Impact Thesis
Improve access to and adoption of digital financial services by households/businesses from low resource settings by creating easy to use, affordable payment platforms for financial transactions.
Enabling Environment
Policy Environment
Strong policy push for payment services through Fintech platforms. National Strategy for Financial Inclusion recognizes Fintech solutions to a critical agent in altering the financial inclusion landscape in India and in mitigating access related challenges to serve the last mile population (17.14)
The Supreme Court, in its recent ruling, held that Aadhar (biometric system) can no longer be used for purposes of electronic authentication by fintech companies for KYC purposes. The Committee first recommends exploring alternative KYC models, such as e-Sign, non-face-to-face boarding, use of documents in the Digi Locker and video-based KYC. (17.15)
Financial Environment
Financial incentives: At a consumer level, GoI has subsidized the merchant discount rates on all low value payments (below USD 13.5) to accelerate a shift from cash to digital transactions, especially for low income populations (17.23)
Fiscal incentives: There are no tax incentives specifically aimed at fintech companies. However, the fintech companies that qualify as start-ups may avail themselves of various benefits under the Startup India initiative launched by the Indian government in 2016. 3 year tax holiday in a block of 7 years: Under section 80IAC, any startup that has been incorporated after 1 April 2016 can get a 100% tax rebate on its profits for a total period of 3 years within a block of 10 years. However, if the company’s annual turnover exceeds Rs 100 crore, then the tax rebate is not valid. The company should be registered with DPIIT (Department for promotion of Industry and Internal Trade) (17.22) Tax exemptions on investments above the fair market value:If an eligible startup makes an investment, the government will exempt the tax on the investment above the fair market value. This includes a range of different investments such as funding secured by resident angel investors and funds that are not registered as venture capital ones.(17.22)
Regulatory Environment
Board for Regulation and Supervision of Payment and Settlement Systems Regulations, 2008 (BPSS Regulations) and the Payment and Settlement Systems Regulations, 2008 (‘PPS Regulations, 2008’) together provide the necessary statutory backing to the central bank for overseeing payments and settlement systems in the country (17.16)
In August 2019, RBI released an Enabling Framework for Regulatory Sandbox, primarily geared towards development and testing of fintech technologies with one of the primary motives as being the furthering of financial inclusion in India. The central bank hopes that with the regulatory sandbox, private sector players will be able to test the viability of innovative products without having to opt for a more expensive roll out.(17.17)
RBI released the guidelines for licensing of Payment Banks in the private sector in 2015 in a bid to revolutionize the cashless payment services in the country. (17.18) Of the 11 licenses issued, only 6 are currently operational of which only 3 are recording active transactions as of 2020. (17.19)
RBI operates the large-value payment system (RTGS) and retail payment systems (NEFT), other retail payment system products (CTS, AEPS, NACH, UPI, IMPS etc.) are operated by National Payments Council of India (NPCI). With the popularisation of these retail payment system products, digital transactions have increased manifold.(17.20)
Absence of, or erratic internet connectivity, especially in remote areas, is a major impediment for the adoption of digital payments. Availability of options to make offline payments, using cards, wallets or mobile devices could boost the adoption of digital payments. To encourage technological innovations that enable offline digital transactions, RBI has announced a pilot exercise for a limited period wherein authorised Payment System Operators (PSOs) – banks and non-banks – will be able to provide offline payment solutions using cards, wallets or mobile devices for remote or proximity payments. (17.21)
Marketplace Participants
Private Sector
Investors: Softbank, Ant Financial, AGH Holdings, SAIF Partners, Berkshire Hathaway, T Rowe Price, and Discovery Capital, Walmart, Sequoia Capital, Beenext Capital and Insight Partners.
Private Sector
Companies: PayTM, Google Pay, PhonePe, BharatPe, EKO Financial Services, Airtel Payments Bank, India Post Payments Bank, Jio Payments Bank. As of 2019, there are ~375 Fintech start-ups in India (17.24)
Government
National Payments Corporation of India, Payments Council of India
Target Locations
India: Countrywide
References
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