Sure, we are all watching China, but to win in dynamic markets you need to be both right and contrarian and it is accepted wisdom that China is the country to watch in Fintech. It is, but because fewer people see India as the country to watch, we decided to spend a week shining a light on Fintech in India. While many of our readers will be celebrating Christmas or Hannukha we reach out to those who did their celebrating at Diwali or Ramadan.
What is happening in India does not only impact the fastest growing large economy in the world – that is a big deal – it also impacts how Fintech develops around the world.
India finally has all 5 Aces
20 years ago, after spending a few years living and working in India I wrote this article. (It is no longer available where it was originally published, so I reproduced it on my personal blog).
My thesis at that time (in 1997) was that India had only one ace – low cost labor – and faced Western Competitors with 5 aces:
1. A large domestic market
2. Access to intellectual capital
3. Reliable, low cost telecommunications
4. A culture that rewards innovation and risk taking
5. A well-developed venture capital industry
In short, India in 1997 had a tough road ahead.
10 years later – in 2007 – I reviewed these 5 aces in an article on ReadWrite and concluded that India was doing a lot better. At that time, the biggest problem was risk aversion because a well-paid job in an outsourcing company looked like a better option than doing a startup.
Yet, as is usual, things take longer than we think (but the eventual change is also bigger than anybody forecasts). For the last 10 years, India as an innovation hub was far more promise than reality. Yet now, as we slide into 2017, it looks like India as an innovation hub is in great shape and that Fintech is where that innovation will happen first.
How the Fintech India story developed on Daily Fintech
When the Fintech City Tour first went to India two years ago January 2015, I found some innovation but missed the big story.
Only a few days later, the big story appeared in India’s first Fintech Unicorn – Paytm.
In May I dug into why Paytm was getting so much traction in mobile payments.
In September, I looked at the mobile payments battle in India as it relates to Uber.
Later in September came the really big news about the 11 new banking licenses.
A few months ago, I looked into the critical plank in the Fintech revolution in India – Aardhaar, digital ID at scale.
For more on the infrastructure behind this Fintech revolution we turn to one of its architects – Nandan Nilekani.
Three reasons you should pay attention to Nandan Nilekani
1 He was a cofounder of Infosys in 1981. Their current market cap is over $30 billion and they did not take a dime of VC money to get there.
2 He led the Aadhaar initiative. This is biometrics based digital ID at massive scale – over 1 billion issued in 5.5 years, making it the fastest digital service growth in history. (Android hit 1 billion in 5.8 years; WhatsApp took 7 years.) Think of the impact on financial inclusion; this is transformative for millions of people.
3 He led the Finacle business at Infosys. This is the least well known part of his story. Finacle is a core banking software product; it was unusual at that time for an outsourcing business to get in the product game. Finacle is significant as part of this story because this background makes Nandan Nilekani so well qualified to understand the Fintech revolution in India today. (I had the good fortune to meet him about 20 years ago during my Misys core banking days).
5 enablers for the Fintech revolution in India
– Aadhaar. Already described above. It is hard to overstate the importance of this. Without this, all the other enablers would only impact the urban middle class. Aardhaar really brings the power of digital to 1 billion people. It is an incredible achievement combining vision, tech smarts and drive.
– Mobile leapfrogging. There are 900 million mobile connections and Indians spend 45% of their incomes on mobile technologies and platforms (Americans only spend 11%), because mobile is the main point-of-entry to the Internet (PC penetration is 5% vs 75% for mobile).
– Immediate Payment Service (IMPS). This is a real-time inter-bank payment system through mobile phones that is a) net payment (unlike RTGS) and b) works 24/7. It was launched by the National Payments Corporation of India (non-profit, Government funded) in 2010.
– Payment Bank licenses. This enables entrepreneurs to deliver regulated payment services without becoming deposit taking banks.
– Unified Payments Interface. This enables Mobile wallet interoperability (read this post for why this is so critical).
This shows how positive change can come from the right mix of public policy, new technology and entrepreneurial drive.
Demonetization is the Fintech moment for India
All this was already driving rapid change, but then the turbocharger kicked in a few weeks ago when the Modi government declared the 500 and 1,000 Rupee notes to be no longer legal tender. This action was labeled “demonetization”
Sopnendu Mohanty of the Monetary Authority of Singapore (MAS) called Demonetization the “Fintech moment for India” in an interview in The Hindu Business Line.
“The Indian fintech story is different. The Indian government has a massive problem with an opaque, cash-based economy that has dominated the country for decades. With the majority of its citizens lacking access to formal banking services, India had nothing to lose by encouraging out-of-the-box innovation that would seem insane to the U.S. financial services establishment.”
Demonetisation applied a turbocharger to the already rapid acceleration of mobile money in India. According to Hindustan Times, Paytm transactions exceed combined usage of credit and debit cards in India. Paytm is seizing the day with a new ad targeting demonetization that has ignited controversy (read, free media).
Thanks to Unified Payments Interface (UPI) delivering mobile wallet interoperability, this is not a winner takes all market. Paytm is doing very well but they have plenty of competitors and UPI creates a level playing field. UPI is an example of Tech Smart Regulation. In this post on PSD2, we defined the 3 levels of regulatory maturity:
- # 1. Paper. Created in haste by politicians and lawyers after a crisis. Result = lawyers get rich. Examples: Sarbanes Oxley & Dodd Frank.
- # 2. Great Idea. Using a disruptive tech without implementation help. Result = uncertainty. Example: SEC Mandate for XBRL.
- # 3. Tech Smart Regulation. Using a disruptive tech with implementation help. Result: level playing field that drives innovation. Examples: PSD2 and UPI.
Demonetization certainly creates a lot of short term pain and damage to the economy and has drawn a lot of criticism. There is a lively debate on this thread on the Fintech Genome. Prathamesh Godbole from Mumbai expressed the negative view on demonetization very well:
“A big chunk of business is done in cash largely because its frictionless, and not necessarily to avoid taxes. This has been hit quite badly. Uber, Ola and other startups with deep pockets still process most of their customer payments in cash. On average, cab drivers, shops and small business owners I’ve spoken to said their business has dropped by 40-50% with no rebound even after a month.
The measure may be well intentioned, but it’s been pushed prematurely. Based on govt numbers, it is going to take anywhere from another 5-10 months to restore the currency supply. Personally, I’ve not seen much change in attitudes towards digital payments- small businesses have started accepting cards/mobile payments but will drop it the moment card companies charge a transaction fee. For now, most card processors and wallet companies have waived off fees.”
Disruptive change does not happen in a linear fashion. It happens in short explosive bursts after long periods when nothing seems to happen. Fintech in India is going through one of those short explosive bursts of change.
Durinh the rest of the week we stayed with India:
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