From AI to SME Digitization: How the Indian FinTech space Is gearing up for 2021

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AI is gearing up to gain a prominent position in the future of the credit ecosystem and there is a visible shift from traditional modes in the lending and payment framework.

As businesses and customers adapt to the Covid-19 crisis, the financial sector has seen an overwhelming transition to digital. Even in the face of economic uncertainty, the prospects of digital finance in the country seem bright with the Indian fintech space driving innovation across verticals.

AI is gearing up to gain a prominent position in the future of the credit ecosystem and there is a visible shift from traditional modes in the lending and payment framework. With regulators working to enhance the country’s digital infrastructure and new startups entering the online financial services space, there is an increase in investor attention. The year 2020 set in motion a transformation in India’s financial services.

2020 At A Glance

While 2020 was mostly about grappling with the pandemic, the fintech sector saw significant traction this year. The sector mopped up funding of USD 1 billion in venture capital investments in the first nine months. Despite an atmosphere of credit stress due to the moratorium, consumer lending saw a boost with high-quality digital lenders attracting more capital and debt investments.

Well-run digital and non-digital lenders performed well while the crisis forced those with poor credit discipline to shut down. While the SME sector was badly hit by the economic situation, the pandemic turned into a catalyst for the digitization and adoption of e-commerce by SMEs in India. On the other hand, Insurtech and savings platforms that were slowly gaining momentum have garnered significant interest from consumers.

The year 2020 has seen a paradigm shift from traditional modes of payment towards digital options. With customer-centric solutions driven by neobanks coming to the forefront, startups are offering innovative products to woo previously untapped categories like millennials and those residing in rural India.

This year has also seen the emergence of strong vertical-led lenders focusing on specific sectors like education and skilling. Perhaps the biggest harbinger of the times to come is the swift adoption of AI and ML in the fintech space. Services like payments, claims processing and savings marketplaces are being migrated to AI-driven processes to improve efficiency.

Big Ticket Items For 2021

With the ongoing ease in regulations and increasing investor interest, the fintech sector is gearing up for a dramatic transformation.

  1. SME digitization: The focus on SME digitization will continue in the next few years as fintechs are enabling SMEs to optimize their business operations, by digitizing ledgers and managing receivables as well as providing credit.
  2. Bite-sized Transactions: Small investments and insurance options will lead to a spur in fintechs offering such services, a practice that is likely to increase in popularity. These are preferred by the younger generation and rural India, where large ticket sizes can be a deterrent.
  3. Savings Penetration: The economic turmoil of this year brought with it the increased propensity to save money. The employed segment is shying away from traditional investments like physical gold and land and is paying attention towards creating a more diversified portfolio of financial assets. This trend will likely encourage digital first AMCs and wealth managers like Zerodha and Groww to offer more such products including digital gold, which is piquing consumer interest.
  4. Access To Credit: In the coming year, there will be a surge in intelligent lending platforms. Horizontal lenders with a more conservative approach, who rely on the traditional CIBIL-based scoring system, steered clear of the low credit and NTC segments in 2020. Therefore, 2021 will see strong vertical lenders leveraging technology and tapping into niche lending opportunities like financing school fees and ed-tech.
  5. Ecosystem Enablers: Regulatory bodies are also encouraging alternate modes of payment and boosting the democratization of the financial ecosystem through enablers like QR Code Interoperability and OCEN. The Reserve Bank Of India’s push for APIs like India Stack will optimize services in the future.

The year 2020 witnessed Fintechs responding to the pandemic through innovative offerings and, in turn, attempting to revolutionize the sector. By adopting intelligent platforms and pursuing robust strategies, Indian fintechs are gearing up to confront the challenges of the post-Covid world. With increasing VC attention on new-age financial services models that leverage AI/ML and provide a technology-first approach to lending, the Fintech sector is likely to gain traction in 2021 as well.

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