Over the years, the fintech revolution has been limited to bigger metro cities of India. But the Covid-19 pandemic and digital penetration have taken fintech innovation into India's smaller towns and cities. Fintech unicorn Razorpay was initially a platform to provide payment services to small online businesses, that were not catered to by banks.
Last year, in the middle of the pandemic, Razorpay's business tripled. It processed payments worth $35 billion for 5 million businesses, including food delivery startups like Zomato and Swiggy. As the lockdown forced businesses to shut down, vegetable vendors to cupcake sellers, all began selling online.
Digital penetration in India’s small towns
India's tier I and tier II cities would now become the next target audience for fintech companies. Not that India's small towns do not have entrepreneurial ambitions, but with low levels of digitisation in banking associations, a huge part of the population is unable to access loans. India's loan rejection rate still is a challenge. And this would be where fintech companies would want to focus on, providing modern banking services to tap potential customers from India's small towns and cities.
"Fintechs and e-wallets have significantly changed the way Indians access their banking needs. This is not just true for tier I and II, but can be extended to tier III and IV cities as well," said Amit Wagh, partner and leader, financial services business consulting, KPMG India.
McKinsey's Personal Financial Services Survey has found that about 4,000 consumers in tier 1 and tier 2 cities across India (consumers with at least one existing savings account), showed a willingness towards digital forms of banking. About 91% said they use digital banking at least once a month and 50% of consumers said that they used fintech or e-wallet services.
In the post-Covid scenario, the lending business has been dramatically disrupted. And fintech has been instrumental in bringing the disruption. "...improving inclusivity (e.g. affordable housing for the masses); better sourcing of customers through partnerships (e.g. neo-banks); and verified data sources enabling faster credit and risk assessment, thereby faster turnarounds. Improved reach and accessibility is changing the way Indians are banking," Wagh said.
The survey also found that the adoption of digital banking in emerging markets is at par with that in developed markets. Almost nine out of ten consumers across the emerging and developed markets of the Asia–Pacific region use digital banking actively. Most of these people are open to purchasing more banking services through digital channels, the survey found.
The majority of the consumers surveyed in India's tier-I and tier-II cities are digitally capable. Of them, 31% were digital-first category and 67% were multi-channel.
"The digital payment revolution has been powered by innovative partnerships between FinTech platforms and banks and we will continue to see this for products in Tier II and Tier III cities. Financial literacy and digital literacy will become critical for wide-scale adoption of digital payment products in more remote locations," Shilpa Mankar Ahluwalia, partner and head-fintech, Shardul Amarchand Mangaldas & Co, said.
According to the survey, digital behaviour from the digital-first section is relatively higher at 36% for the younger age group compared to 31% overall.
"More than 70% of consumers surveyed are willing to switch to a direct bank," the survey found.
Recognising the increased dependence on digital payments platforms, the Reserve Bank of India (RBI) in its April monetary policy announcements allowed interoperability of Prepaid Payment Instruments (PPIs). It also raised the account limit for digital wallets to Rs 2 lakh and also extended traditional bank facilities of NEFT and RTGS to non-bank payment players.
E-wallets initially had limited functionality. Low transaction caps prevented widespread usage and cash withdrawal was not permitted for e-wallets issued by non-banks.
"The RBI has increased the limit on e-wallet transactions and has also permitted cash withdrawal at ATMs. These relaxations recognise to a large extent the penetration of digital payments products and by enabling quasi-bank functionality for small value transactions, the RBI has ensured a greater level playing field for banks and non-banks," Mankar Ahluwalia said.