Fintech: Technology, Economy and Talents

A paper on the opportunities and threats in the Fintech space in India and Abroad
Index

Executive Summary

Technology
Emerging Technologies and Trends

Economics
Brief Overview

Market Size and Growth Rates

Leading Players Across Segments & Upcoming Startups

Talent
Key Skillsets and Specializations

Talent Tracker Format

Executive Summary

The Indian FinTech market has been on an upward growth trajectory over the last five years. This is
evidenced by an increase in both the number of FinTech companies founded and the investment they
have attracted. From January 2013 to October 2018, approximately 2,000 FinTech companies have been
founded, turning India into a hotbed of entrepreneurial activity.

This has also translated into increased consumer adoption of FinTech solutions. In 2018, India ranked
second globally in the FinTech adoption rate. The average percentage of FinTech users in the country is
57.9%, behind China’s 83.5%, and much higher than developed countries’ 34.2%.4 With a strong
technological ecosystem as its backbone and a huge market base with a low penetration of financial
services (FS), the Indian FinTech market holds immense potential.

The overall transaction value in the Indian FinTech market is estimated to jump from approximately USD
66.1 billion in 2019 to USD 137.8 billion in 2023, growing at a CAGR of 20.18%. The global FinTech market
is also poised to achieve high growth levels in the coming years. The overall transaction value in the
global FinTech market is predicted to grow from around USD 5.49 trillion in 2019 to USD 9.82 trillion in
2023, a CAGR of 15.64%.

This report focuses on the major advancements in Fintech technology over the years and the newest
trends like Quantum computing, Artificial Intelligence, Neural Networks and their applications in modern
finance and underwriting. The underwriting ranges from loans, to insurance premiums and more. The
use of technology is becoming more and more pervasive and big data analytics of user-generated data
is becoming more commonplace by the day.

Also this report will focus on some of the biggest names in the fintech industry as of now, their business
models, strategies and future prospects.
Technology

Emerging Technologies and Trends

According to an article by Atos, found here, the key to be successful in a digital banking landscape are
the following:

a. Becoming wholly customer-centric, ensuring 360° multi-channel engagement with clients, smart
devices and machines
b. Adopting open-platform approach to digitizing services
c. Optimize costs radically
d. Providing Security and Compliance

Becoming wholly Customer-centric

In advanced economies, 2/3rd of the banking customers execute half their financial transactions
online. Therefore, the strategy should be to become customer-driven rather than product-driven. It is key
to develop personalized solutions for every customer to derive maximum value out of digital interactions
between humans and banking platforms.

Adopting Open-Platform Approach

According to an EY report, found here, intermediary platforms are most effective in attracting and
retaining customers. Platforms include characteristics such as low cost, minimum friction, high degree of
personalization and ease-of-use on a mobile device.

Radical Cost-Optimization

Shifting to lower cost standardized processes and deploying intelligent automation are key to
minimizing costs to achieve a 10-25% reduction in total costs according to this report
Providing Security and Compliance

Fintech companies have to walk a fine line between gathering as much customer data as possible
for analysis and invading customer privacy. Also, Fintech companies will have to increase their Cyber-
Security expenditure to gain widespread customer trust.

Top Disruptive Technologies

From the same Atos report, following are

the most potentially disruptive
technologies. We assess their degree of
impact on business, especially on Digital
Lending and Digital Payments:

 API Platforms –
The most valuable companies in
the world right now are digital
platform-based companies like
Amazon and Alibaba.
According to a McKinsey report, a
platform play by an incumbent
company can lead to great
performance gains.

According to the same report, it was found Fig i: Source – Atos Report on Disruptive Technologies

that a single digital platform will dominate

the others 75% of the time.

Digital platforms are less common in markets with low digital maturity like pharma and healthcare,
while very common in retail banking.

Some advantages of having a platform approach are as follows:

i. Aggregation of consumer data using various services on the platform, to create a
shared, cloud-based utility
ii. According to estimates, platform players will witness an additional 10% growth in
EBIT compared to non-platform players

Coming to the fintech space, banks will fare better by either becoming a participant on others
’platforms or creating a platform of their own, according to this EY report.
The report further states that traditional banks with their legacy structures and processes will not be able
to compete with fintech companies with their lean business structures, highly competitive rates and no
requirement for physical infrastructure. To counter this, rather than developing new technology focused
products, banks would do better to collaborate with these fintech firms. Developers in these firms would
then use this bank-led platform to develop transformative products and ideas for the marketplace.

The customers would then have a bank-led app store that lets them choose their desired service from a
host of sources (fintech products). Since the platform services have been led, regulated and vetted by a
bank, customers will have fewer trust issues with the service providers on the platform.

Essentially, following a platform-based banking business model will enable a bank to deliver substantially
more services to its customers (via fintech developers), than it would be able to, on its own.

Interestingly, in 2017, RBL Bank opened its API to developers for providing digital banking services.

In the case of Jio, therefore, it would be beneficial for our digital lending entity to tie up with a bank-led
platform to provide services.

Fig ii. Source - EY report on Platform-Based Banking

Summarizing, the advantages of API Platform Based Banking are as follows:

i. Fintech companies benefit from access to a wider customer base without much marketing
ii. Bypass regulatory approvals (already vetted by the bank)
iii. Data aggregation from the customers for better service targeting
iv. Improved end-to-end digital journeys for customers
v. More innovative products for the bank customers, leading to customer satisfaction

 Blockchain –
It is a cryptographic distributed ledger stored on computers in a network. Each computer holds a
copy of the ledger so that there cannot be a single point of failure.

Recent developments – Santander worked with Ripple to create the world’s first blockchain
based money transfer service. RBI has also kickstarted a regulatory sandbox framework for the
fast evolving fintech sector. Blockchain was one of the technologies chosen to be a part of this
sandbox.

The potential of blockchain in the banking and fintech space lies in the following:
i. Remittances – According to a McKinsey report, the market for cross-border
remittances is at $600 billion and growing at a rate of 3% a year. India topped the
list of countries making foreign remittances in 2018 with $80 billion.
But remittance fees tend to be high and processing of these transactions are often
clunky. Transaction fees can be as high as 10%.

If the exchange between the counterparties happens in cryptocurrency rather than

fiat currencies, the transaction costs would be reduced significantly. According to
the same McKinsey report, the savings could be $4 billion annually.
Also, by using blockchain-based payments, compliance and data related inquiries
that delay payments will also reduce.

Some barriers to introducing this technology into mainstream banking are the
volatile nature of cryptocurrency, and the limitations to anonymity while transacting
through blockchain.

ii. KYC/Fraud Prevention – Banks lose

$15billion worldwide due to identity
theft and fraud, and $8billion due to
money laundering. Blockchain offers
a solution by creating a digital
signature for the customer while
onboarding, and storing this
signature on a blockchain database
for any other bank to see. This helps
in reducing KYC compliance when a
Fig iii. Source – McKinsey Report on Blockchain in banking
 customer opens accounts in multiple banks. This can lead to an annual savings of
$1 billion in operation costs and reduce regulatory fines by $2-3 billion.

iii. Risk Assessment using Customer Data – Blockchain has the potential to pool
together large amounts of data, that can be anonymized, and protected by the
ledger encryption protocol. Banks could view any data that has been uploaded in
the ledger by any other bank and assess the customer based on that. The result
would be faster decisions and more efficient processes.

 Artificial Intelligence – This technology is nascent in the case of fintech till now. But the
sector it can serve most effectively is the digital lending sector, as it can predict the risk of lending
money and the creditworthiness of a particular customer based on his/her previous loans and
other financial transactions. Following are the ways in which AI could revolutionize the digital
lending space:
i. Simplifying the borrowing process – With AI, it will be very easy to process and
disburse small loans especially if the borrower is a repeat debtor. Repeat debtors
can have their payment history checked in a matter of seconds and their
creditworthiness judged in a few minutes. This can help in fixing a rate of interest
based on the default risk of a particular customer. Also, AI will eliminate racial
biases, profession and age while calculating creditworthiness. It is important to note
that AI will only facilitate the process and provide recommendations to the credit
manager in order to help him/her make the final decision

ii. Filtering borrowers by behavioral traits – Lending apps ask for partial access to
social media accounts of their borrowers to add another layer of AI verification
while onboarding a new customer. Also lending apps track other economic
behaviors of customers and feed the raw information in to AI to assess default risks

 Quantum Computing
According to a report by BCG, the financial sector will be soon disrupted by the advent of
quantum computing. IBM has already released a prototype of a commercial quantum computer
called the IBM Q. Quantum computing promises exponential growth in computation speeds and
number of calculations handled at a time.
In the financial sector, Quantum Computing is expected to be utilized in the area of portfolio
optimization (in the short term) and risk analytics (in the long term)
Recent Developments – JP Morgan Chase and Barclays have joined IBM in their quantum
computing network called Q-network. This cloud-based network will provide access to quantum
computing resources and simulators for like-minded parties to experiment their ideas in an
‘approximate quantum environment’.

Although, there is a clear and looming threat posed due the transformational nature of quantum
computing. The near exponential increase in computational speeds suggest that the security and
authentication standards prevalent in financial systems today may not be enough to stop hackers.
Even crypto-currency will not be safe as quantum computers will be able to crack the
cryptography underlying the currency within seconds. Most sources say that this kind of
computational power is less than a decade away from entering mainstream.

Therefore, financial entities need to prepare for both the potential opportunities and potential
threats posed by Quantum Computing.
Economics
Brief Overview
According to an India Fintech Overview report published by PwC in May 2019:

 2000 fintech companies have been founded from 2013 to 2018

 Overall transaction value is estimated to increase to $137.8bn by 2023 at a CAGR of 20.18%
 VC funding to fintech in 2018 stood at $1.79bn across 97 deals
 VC funding in Q1 of 2019 stood at $285.6mn (higher than China)
 Substantial headroom for growth in emerging markets like India

Fintech companies can be broadly divided in to 5 categories as illustrated in fig iv.

Wealth Insurance Digital

Money & Platform Reg-Tech
Transfer Mgmt Lending
Payments

Ant Financial
Cred, MyBank, (MYBank, Xiang Ayasdi,
PolicyBazaar, LU.com, Capital
PhonePe, BankBazaar,M Hu Bao, AliPay, RegisTR, Signzy,
Acko, Oscar, Float, Lending Forcepoint
GPay, Paytm oneyControl,
Lemonade Ant Fortune)
Acorn Kart

Fig iv – Categories of Fintech Companies

Money & Transfer Payments

Global funding for payments fintech companies jumped from $8 billion in 2018 to $12 billion in 2019.
This number excludes the $14 billion series funding by Ant Financial. Despite the bear market for
cryptocurrencies in 2018, payments fintech companies have thrived. In the USA, this was the segment
that got the most amount of funding (15%).

According to a PwC report,

i. Digital payments transactions values to increase from $64.8 billion in 2019 to $135.2 billion
in 2023 at a CAGR of 20.2%
ii. Best funded Fintech segment in India in 2018 attracting $709 million across 21 deals
 iii. Digital payments market is poised to become a $1 trillion market by 2023
iv. UPI technology is the single biggest platform for online payments transactions, as it grew
almost 769% in 2018
v. Third party apps like PhonePe, Google Pay, Paytm etc are dominating the payments market

The main segments within this category are:

Digital Payments

Digital Payments Outsourcing

Issuance
Eg. Card issuers,Prepaid
Instrument Providers
Device Manufacturers Core Functions
Eg. Mobile Wallets, Eg. ATM/PoS outsourcing
Eg. ATM, PoS, Card Eg. ATM Switching,
Internet Payment
manufacturers Cash Management Reconciliation etc.
Gateways

Digital Lending

According to a BCG report, digital lending will be a $1 trillion opportunity in India over the course
of the next 5 years.

The primary reason for this estimate is the slow credit growth in the Indian banking system. A
survey by the World Bank group yielded the following findings:
i. In the MSME sector there is a credit gap of Rs.16 lakh crore ($240bn) and this gap has
grown in the last five years
ii. Only 16% MSMEs are financed by formal banking system
iii. Micro and Small Enterprises account for 95% of the $240bn credit gap
iv. Most MSMEs do not have collateral to offer to avail loans
v. Working capital gap in SMEs happen due to delayed payments by larger companies.
(China solved this with an invoice discounting platform and was largely successful. India
has launched TReDs platform but it did business worth only 7000cr in FY19)
 Some estimates/predictions/observations about retail lending from the BCG report are as follows:

i. Retail lending has been robust and has had a CAGR of 16% in the last five years
ii. Bad debt level in retail lending has been relatively stable compared to corporate lending
iii. Growth in consumption in Tier 1 and 2 cities will fuel a 200% growth in retail loan
disbursement (to $730 billion by 2023)
iv. By 2023, digital footprint of financial services consumers will increase to 75%

The main business models within digital lending are as follows:

Digital Lending

Invoice Mobile Digital

P2P Lending Crowdfunding Paylater Loans
Financing Lending Mortgage

Insurance

The Indian InsurTech space witnessed rapid growth in 2018 after receiving a total funding of
approximately $378 million across 17 deals to emerge as the third best funded FinTech segment.
As of February 2019, there were 142 InsurTech startups operating in India.29 Amongst these, the
top 10 InsurTech start-ups by their amount of funding have received an aggregate of $660 million
in the past decade.

The main business models within Insurance Tech or InsurTech are:

i. Digital Insurance Advisors – Platform-based service providers that sell their own products or
recommend third-party products via a commission-based model eg. Policybazaar
ii. PoS Insurance Providers – They address customer needs while they are shopping for other
products/services. Eg. Insurance products when buying flight tickets
Wealth Management

Wealth management startups or “WealthTech Companies” use big data and advanced analytics
to offer digital solutions for wealth management and investment management services. It was the
4th best funded fintech segment in India ($122 million) across 23 deals. Total Assets Under
Management (AUM) in Indian Wealth Management Fintech companies is estimated to grow at a
CAGR of 36.2% to $145 million in 2023, according to this PwC report.

Between 2011 and 2017, the number of High Net-worth Individuals (HNIs) has been increasing at a
CAGR of 18.67% and the total wealth held by HNIs is estimated to be $3 trillion by 2025 creating a
huge opportunity for Wealth-tech Fintech companies.

Its not just HNIs but also the mass segment, that wants to tap into wealth management solutions
online. The Association of Mutual Funds in India (AMFI) has set a target of $1.47 trillion for
industry assets under management by 2025. Therefore, it would be wise for WealthTech players
to cash in on retail investors.

The main strategies in this category are as follows:

i. Highly specialized wealth investment advisory services through technology to the mass
retail segment and not just HNIs
ii. AI - powered robo-advisors can analyse web data, including social media data, to analyse
the real-time sentiments of people, thus providing insights into optimal asset allocation
strategies. For instance, with a combination of big data analytics and AI, live data from
various social media outlets is being collected. It is analysed to help traders anticipate
movement in a company’s stock price.
iii. Payment fintech companies are also entering the wealth management business with
investments as low as Rs.100. Also, they are more efficient because they can link InsurTech
to the existing wallets of customers.

Platform Banking
Fintech companies like Ant Financial have redefined the game. It is now twice as big as Goldman Sachs at
a valuation of $150 billion. The platform banking model involves connecting customers with other
banking fintech startups based on customer creditworthiness. They have a commission-based model.
This model has culminated in a $1.4 billion profit for MYbank (Owned by Ant Financial) in FY19.
Awareness and Adoption Levels of Fintech

According to the Global Fintech Adoption Index 2019 by EY, found here, India topped the list of 29
developed and emerging economies with 87% of the respondents being aware and open to using
fintech for their financial needs.

According to the same report, the adoption index has jumped sharply from 52% in 2017 to 87%, mainly
because of the entry of incumbent financial companies in to the mainstream with their fintech products.

Based on the category of fintech company as discussed above, the awareness level of the Indian
population varies as shown in figure v.

Fig v – Awareness of different sectors of Fintech - Source

Fig vi. Level of Implementation of Fintech in the world

Leading Players Across Segments
Money and Transfer Payments

Stripe, Ohio USA

- CEO – Patrick Collison
- Valuation - $35 billion
- Revenue for FY18 - $1.13 billion
- Online transactions per year – 9,79,111
- Online Payments processor for internet businesses
- Make and accept payments over the internet for businesses
- Payment API can be seamlessly integrated into most online commerce environments
- Radar feature – reduces fraudulent transactions with machine learning algorithms
- Connect feature – reduces KYC obligations and quickly identifies clients and creditors
- Atlas feature – help small internet businesses by providing a payments platform for a flat fee
- Clients such as Facebook, Lyft, Twitter, Google, Uber, Spotify, SalesForce etc.
- Notable Investors – Tiger Global, Sequoia Capital, Peter Thiel (PayPal)

Klarna, Sweden
- CEO – Sebastian Siemiatkowski
- Valuation - $5.5 billion
- Biggest Fintech Startup in Europe
- Revenue FY19 - $627 million
- Invoicing Payment Startup
- Allows users to make payments online without providing their payment details to merchant with
the following process:
o User purchases goods without any payment
o Klarna does a micro-credit check on the creditworthiness of the user
o Klarna pays the merchant instantly
o User (tracked by a national ID number) receives goods and is handed a Klarna invoice
o User has to pay Klarna within 14 days via credit, bank transfer etc
- Removal of the payment step, reduces “Cart Abandonment Rate” for merchants, therefore
fewer people hesitate before making a purchase
 - Charges merchants at the flat rate of 3% per transaction and has a monthly fee of $92 per month
- Notable Investors – H&M, VISA

Simpl, Mumbai
- Founder and CEO – Nitya Sharma, Chaitra
Chidanand
- Valuation – Unknown
- Revenue Growth – 28% since inception
- Buy Now, Pay Later Startup (Alternative to Credit Cards)
- Simpl partners with a number of online businesses like Zomato, Grofers, BookMyShow, Faasos,
Big Basket and others
- All bills of a customer from the above partners for 15 days, are clubbed in to one big bill, which
can be paid within 5 days of the due date (Rs250 on late payment)
- AI/ML algorithms are used to judge the creditworthiness of the customers and the maximum bill
limits are set accordingly
- This increases cart conversion rates by 70% according to the founders of Simpl
- Flexibility of payment is the major attraction of this app
- Notable Investors – Joseph Sauders (ex-VISA CEO), IA Ventures

Digital Lending

MYbank & Zhima Credit, Ant Financial, China

- Founder – Jack Ma
- Valuation - $290 billion
- 1 billion users
- Profits FY19 – 670 million Yuan
- Neo-Bank cum Digital Lending Firm
- 3-1-0 model: 3 minutes for credit assessment, 1 second for disbursal, 0 human touch
- MYbank assesses the customer using the data obtained from sister company Zhima Credit, which
is also under the Ant Financial Group.
- Zhima Credit uses big data analytics to profile both online and offline customer data. It is a private
credit scoring and loyalty program. Users get credit ratings based on social media interactions,
purchases carried out on Alibaba.com, loan repayments and other parameters. Due to close
 collaboration with the Chinese government, it has access to all public documents such as official
identity and financial records. Also, the social credit aspects help “well-behaved” customers get
easier access to rented flats, discounts, favorable lending terms,
- Data collection is done after consent is received from the user
- The five parameters in this credit scoring are as follows:

- Using the credit scoring model shown above, MYbank effectively obtains a pervasive KYC report
on any customer or SME and their creditworthiness

- This credit scoring has helped MYbank disburse over $290 billion to 16 million entities in china.

- Scoring Model

SoFi, San Francisco, USA

- CEO – Anthony Noto
- Founders – Mike Cagney, Dan Macklin, James Finnigan
- Valuation - $4.8 billion
- Student loans, Refinancing, Personal and Home Loans
- AI/ML based customer screening and onboarding
- Loans disbursed at lower interest rates
- Tranches of loans made and sold to pension funds and insurance funds
- 2% on loan amount is SoFi’s profit
 - The value of the total loan is 125% of the original loan amount (5% APR x 5 years in interest; 100%
in principal). They sell the loan to investors for 105%. For taking on the risk of loan repayment,
investors will get 20% (125% – 120%) over five years; SoFi will get 5% upfront to cover its cost of
borrowing funds, its operations, and the memberships perks it offers to its clients.
- Notable Investors – SoftBank, RPM Ventures, RSC Capital

Kabbage, Atlanta, USA

- CEO – Rob Frohwein
- Founders – Rob Frohwein, Kathryn Petralia, Marc Gorlin
- Valuation - $1.2 billion
- Microfinancing, Automated Underwriting, SME Lending
- Total Credit Disbursed - $5 billion
- Unsecured Loans are given to SME industries on the basis of real-time cash flow data, bank
accounts, e-commerce transactions and online reviews.
- This data is then used to assess credit risk and approve the loans
- Loan Amounts vary from $2000 to $35000
- Kabbage is a private lender, which does not accept deposits, and is therefore not regulated as a
bank. It has an available credit facility of $900million as of October 2015. This credit facility comes
from a variety of financial institutions, including Guggenheim Securities & Victory Park Capital.
There is no overlap between Kabbage’s equity investors and the providers of its credit facility.
- Notable Investors – SoftBank, Yuan Capital, Santander InnoVentures, UPS Strategic Enterprise
Fund etc.

InsureTech

Oscar Health, New York, USA

- CEO – Mario Schlosser
- Valuation - $3.2 billion
- Estimated Revenue - $750 million
- Health Insurance company operating on a product-based model
- Features of the app are as follows:
o Consultation with doctors over app
o Geo-locational data of doctors available in an area
 o Based on diagnosis, Oscar’s insurance plan covers the expenses with registered hospitals
o Fitness Tracker
o Rewards for staying healthy based on big data analysis from the fitness trackers
o Short claim-processing time due to heavy digitization of services
o Hospitals are paid when patients use their services only. There is no yearly subscription.
- Notable Investors – Alphabet Inc, Khosla Ventures, Fidelity Investments etc.

Clover Health, San Francisco, USA

- CEO – Vivek Garipalli
- Valuation - $1.2 billion
- Health insurance company looking to reduce the cost
of medical insurance for people aged 65 and above, having certain disabilities
- 24x7 access to doctors via phone, video call, or mobile app
- Free Gym Membership to 13000 gyms (Preventive Healthcare)
- In-house care visits by registered nurses
- Prescription drugs delivered to home automatically every month
- Data used to build clinical profiles of people
- Notable Investors – GreenOaks Capital, Sequoia Capital etc.

Acko, Mumbai, India

- CEO – Varun Dua
- Valuation - $300 million
- Car Insurance Company gone digital
- Premium pricing is done with big data analysis based on the following parameters:
o Driver experience
o Previous Claim History
o Car Age
o Distance Driven Everyday
o Location
- One-hour pick-up if car experiences accident/breakdown
- 3-day delivery of repaired car to home
- Accidents, Fires, Theft, Calamities, Third-party losses covered under the Acko program
Wealth Management

Yue Bao, Ant Financial, China

- CEO – Jack Ma
- Valuation - $251 billion
- Largest money market fund in the world (1/3rd of the
Chinese population has invested into it
- Invests money lying idle in Mobile Wallets (such as AliPay)
into the Tianhong Yue Bao Fund.
- By pooling small sums from hundreds of millions of people, this fund has been able to earn total
returns of 50.9 billion yuan in one year
- Annualized yield of 4% approx.

Neo Banks

N26, Germany
- CEO – Valentin Stalf
- Valuation - $3.5 billion
- No physical retail branches bank
- 2.3 million customers
- Features:
o Free Basic Account
o Two tiered Accounts – N26 Black and N26 Metal (Subscription fees – E9.90 – E16.90 per
month)
o Perks on opening account such as travel insurance, discounted hotel bookings, WeWork
memberships etc)
o No fees on mobile transactions
 o Very low fees on forex ATM withdrawals

Talent
Key Skillsets and Specializations
To set up any new venture, the top management that leads the entire business is very important. Key
talent who have prior experience setting up experience setting up ecommerce ventures are required.
People who are technology focused and can make use of it to support and advance the business are
necessary.

Other areas of focus are sales and marketing teams who understand the business and can convey the
same to consumers in an attractive and meaningful way.

Talent Sources
Recruiting top talent from other organizations who already have a presence in this field will be
advantageous since they would have relevant experience and knowledge. Apart from this, middle
management positions can also be filled up by getting in students from premier business schools.