Fintech is the confluence wherein technology is leveraged to provide a convenient, faster, holistic and cheaper access to the financial product/service. Indian fintech initially targeted the cost-optimization objective, and subsequently moved to the revenue-maximization objective. Focus on costs meant innovations in processes and efficiencies. Focus on revenue meant innovations in access and channels. In terms of financial activities, fintech is making an impact, big or small, across payments, savings, credit and protection. The extent of their impact so far, and the latent market opportunity still available, indicates the possible areas where Israel can help to take Indian fintech to the next level.
In payments, India has seen several mobile/online payment platforms and robust payment interfaces like UPI, IMPS, etc. Looking at mobile payment apps itself, the combined user-base of the three largest apps (PayTM, Mobikwik and Freecharge) was approx. 13% of India’s population before the Nov 2016 demonetization. Recent numbers suggest this has moved north to approx. 22% – ~280 million in sheer numbers. Convenience of their interface helped migrate many cash-only customers. Security features gave the comfort to use for critical transactions. Empanelment with a wide network of offline merchants expanded the usage scope. The growing investor interest can be gauged by the fact that China’s Alibaba Group is now the largest investor in PayTM. However, discount marketing schemes threaten business profitability of payment apps, just like in e-commerce sites. Price-point of services is low; hence it is a continuous battle to expand the user-base. Industry consolidation is expected, as repeated capital calls to keep solvency is unsustainable. But only a niche value-add service/offering will offer a rationale for consolidation. Now, the first phase of expansion was driven by PE/VC investors and the first-generation start-ups. But the next phase of expansion has to be from strategic investors like domain-expert fintech companies, rather than secondary sales to further PE/VC funds, because only they can bring in tested business strategies to expand the market to the next stage in a profitable manner. Israel’s fintech payment players may have a role in a large Indian market which is still reasonably untapped.
In savings, India has seen few robo-advisory platforms. Financial savings in India have been historically low, given the traditional preference to save in real estate and gold. But new regulations made property transactions more transparent, dissuading it as a channel to park black money; while recent price trends of both properties and gold have not been attractive relatively to asset classes like equities. Thus, the ratio of financial savings to total household savings accelerated from ~31% in 2012 to ~41% in 2016 – from ~US$134bn in 2012 to ~US$165bn in 2016. This is during a time when total household savings to GDP dipped slightly from 24% to 19% (from ~US$431bn to ~US$399bn).
Automated robo-advisory platforms came up to meet this demand from the growing middle-class (nearly half of India’s 1.3bn population). While these platforms use profile-based and goal-based advice to sell mutual funds, the assessment of the individual’s situation is not customized in-depth, rather buckets him generally as aggressive/conservative/medium and suggests equity and debt funds in a proportion of 75-25/25-75/50-50 based on those three buckets. However, each individual is different, and the risk acceptance may vary even two are in the same bucket. Most of the automated platforms do not address why financial savings are low – like investor acceptance of equity funds, ability to suggest the correct product as per his situation and surplus, awareness that fixed-income investments in a reducing rate scenario leaves one net poor, difference between buying earnings vs. buying market in stock-selection, etc. In most cases, the financially illiterate client has to type the expected return himself. Indians, including millennial, still prefer a human intervention when it comes to investments, if only for a second opinion. Thus, most automated advisory platforms struggle to notch the base users to earn a ROI. Israel’s fintech investment players may sense an opportunity here to build a hybrid automated-human advisory model that evaluates profile information in a more in-depth and customized manner, yet in a way that can be scalable for a large user-base.
In credit, its lack of access to the middle/lower income segments is a huge challenge. Indian banks have been guilty of lending billions to high income business-people, often losing a large portion in bad loans, while resisting lending mere thousands to middle/lower income people, most of whom often repay in time. Result – Indian banks are reeling under a ~US$150bn bad loan problem from few big accounts. The Modi-government’s new MUDRA scheme disbursing micro-loans lent approx. US$24bn in FY2017, only ~62% of the targeted US$37bn, as banks’ portfolio turned sluggish. The share of micro/small loans in non-food credit of banks also dipped. This banking paralysis apart, a key challenge to lend to small borrowers like MSMEs (micro-small-medium enterprises), is the ability to conduct credit analysis of a large base in a cost-effective and time-bound manner. After all, the cost of acquiring a large client is always lower relative to returns. But MSMEs contribute approx. 35-40% of India’s ~US$2tn GDP, so cannot be ignored. Technologies from Israel’s fintech analytic firms can help conduct large-scale credit analytics of this segment in a cost-effective manner. Ariel Resnik of Paretix, an advanced data analytics firm in Tel Aviv, highlighted how machine-learning could transform credit analysis during the recent IMC Chamber conference in Mumbai. Apart from machine-learning, even transaction analysis and social media profiling are being used. India needs more of these to deepen credit penetration.
In protection, agents of India’s private insurance players have often been guilty of misselling for chunky commissions. This has reduced persistency ratios across players, and created resistance from buyers as they perceive being fleeced. While automated platforms have come up which help people in product analysis, comparison and purchase, the drop in persistency ratios is ominous. Just like investments, even insurance is hardly understood; hence the need for human advice exists. Automated platforms have to marry human intervention in key areas of the value-chain. That would give more comfort to users that they are getting the right product. A hybrid model can combine lower cost automated elements with higher cost human elements to create a win-win. Israel’s fintech insurance players could help build such hybrid models, and help deepen the insurance penetration in the long-run.
In conclusion, today’s age is about B2I (Business to Individual), not B2B or B2C. That means a level of customization far ahead than has ever been envisaged, yet which can be scalable in a cost-effective manner. Easier said than done? At the same IMC Chamber conference in Mumbai, Tal Sharon of Equitech Financial Consulting, an innovation advisory consulting firm in Tel Aviv, highlighted how Israel has evolved into a brand to be reckoned with in fintech innovations. The value-addition from Israel’s fintech players and the latent opportunity in a critically large market in India offers significant opportunities. But offerings have to meet the core needs, rather than just push sales blindly!