Covid-19 Pandemic and the Fintech Industry - Key Takeaways
This is the final part of our 3 part blog series. In this blog, we discuss some insights on Covid, fintech and the goal of financial inclusion.
The pandemic has been a good time to be a fintech in India. Businesses boomed and many new products and services entered the market. The adoption of digital financial services exponentially increased as the lockdowns forced people to find socially distanced ways to transact with each other. In the face of the worst health and humanitarian crisis in history, the fintech industry saw some of its best years.
As cautiously optimistic predictions state that the worst of the pandemic is behind us, we thought it would be a good time to take a look at whether the growth that defined the last two years for fintech actually benefited all cross sections of India.
Some of you might say - “for something to be growth, it does not have to benefit everyone, as long as it benefits someone.” And yes, we agree. Partly!
Specifically in the case of fintech and Covid, not just some but many new demographies benefited from the boom, as people experienced the ease and convenience of digital finance. Knowledge about the value of financial products such as health insurance, that were typically considered non-essential also rose. Penetration of payment systems and money movement platforms across the board allowed people to achieve financial outcomes that otherwise seemed aspirational.
This moved the needle on financial inclusion, especially in tier 2 and tier 3 cities in India, creating among them an unwavering loyalty to the ‘digital first’ way of participating in the financial ecosystem. But, only for those that had access to it.
Through secondary research and discussion with some industry practitioners, we distilled our key findings in relation to inclusion during this pandemic-era fintech uprising.
#1. Access to digital financial services went beyond the digitally native and the technologically savvy
Time and again, it was noted that the pre-pandemic access to digital financial services was primarily limited to the tech-savvy and the digitally native. As such, most fintech products were created and marketed for this cohort.
But at the same time, India is home to a different smartphone-using cohort of people. This group uses islands of mobile applications either related to work or social media. They have access to technology and internet but continue to rely heavily on cash/ cards based financial transactions as well as brick and mortar outlets for financial services.
As a result of social distancing and shut downs, this second cohort ventured towards digital financial products and services. Soon, achieving a digital first approach towards their financial journeys. Features such low code/ no code and vernacular service delivery models helped move along this adoption to a large extent.
Q. The demand for fintech has increased in the last one year. But was the demand for fintech driven by wealthier, educated and tech-savvy people of India? How can the industry work towards improving this divide?
A. There exist fintech companies that have managed to build their core suite of products for all levels of tech savvy. Through features such as self-onboarding, no code/ low code alternatives - which are simple, hassle free and seamless, these products are now accessible to the digitally native customers as well as businessmen who're operating out of a small town even if they do not know a word of English or a line of code.
- Insights from a fintech professional
#2. Differentiation in the quality of available products on offer
As more people began to use digital financial services, tokenisation and bite sized product offerings gained traction. This however, has not always translated into higher usage or adoption of such products. There are a few reasons for this. First, the nature of products offered to the tech-savvy customers and other users has been different. The underserved and unbanked cohorts specifically have had limited offerings (with low customisation, less delivery options etc). Second, there have been gaps in understanding these underserved cohorts and their specific needs (women, migrant/ seasonal workers among others) at the time of product development.
Overall, this has limited their usage and has discouraged further investments in creating better products. All because it appears like the market does not exist or it is not profitable to serve this cohort.
Q. The demand for fintech has increased in the last one year. But was the demand for fintech driven by wealthier, educated and tech-savvy people of India? Has it also led to exclusions for the non-smartphone users, the non-digitally literate individuals, for people earning and transacting in cash and for people with unstable bandwidths?
A. Many fintech companies are working on the unbanked sectors as they have realised that they will need support during the pandemic. They need to be brought into the fold and banks and financial institutions have been supporting this initiative after the JAM trinity was introduced. But products/ capability of products being given to the tech savvy class is very different from that being given to the unbanked sectors. The different ticket sizes/ smarter products are not being provided to this cohort. Options are limited and customised/ tailored products are not available.
- Insights from a representative from a digital payments platform
#3. Innovation gap and the feature phone conundrum
Even as the financial product basket has evolved, the underlying necessity of a smartphone and an internet connection has remained steady.
Currently, the smartphone penetration in India is at an all-time high. A report by the Internet and Mobile Association of India (IAMAI) suggests that about 43% of the Indian population (both urban and rural) are active internet users and mobile phones continue to be the device of choice for accessing the internet and all associated perks. This is likely to rise exponentially in the next few years.1
Given the market size of smartphone users and the growth trajectory, most digital financial products have attempted to capture value in this demographic. Therefore, most products available in the market are accessible only to those people that already have a smartphone or an active internet connection.
On the flip side though, India has a large base of feature phone users. The digitization of financial services that can benefit this untapped customer base has been conspicuously missing.2 Since products are created for the smartphone users, it has been increasingly observed that as smartphone penetration increases in India, the availability of, access to and use of digital financial services follows suit.
For those that do not have a smart phone though, the ability to take advantage of the fintech products offering diminishes significantly. This, for most practitioners, is the root cause of the continued disparity in access to financial services and can be bridged only through a leap in innovation for feature phone-based financial products and services.
In conclusion
As the sum total of these observations would suggest, the pandemic and the upside for the fintech community that we have discussed in this series has been far from ideal in the context of inclusion. This is true more so because the pandemic continues to accelerate the pre-existing risks faced by those that are excluded already and has the capacity to plunge large number of peoples who are on the fringe, below the poverty line.3
Clearly, the pandemic has brought to the forefront the role played by the fintech community in driving financial inclusion but has also laid bare the disparity in its adoption and the many reasons for it.
As such, this crisis has come as the first test of resilience for fintech companies. Two years and a multitude of lockdowns later, the results seem promising. The hope for fintech and the future of digital financial services has a short term and a long term graph. In the short term, they can continue to help deliver efficient and cheaper financial services in a contactless manner to tide us over the health crisis. In the long term, they can become vehicles for quick disbursement of government support measures to people that are affected by the pandemic.4
From a retrospective lens, we believe that understanding the gaps is the only way to prepare for the future – be it a third wave or another crisis altogether.
Concerted efforts towards increasing the offer and adoption of digital financial services for the largest cross-sections of the population is the next giant leap forward for fintechs so that they optimise the value that the pandemic has already generated for the community as a whole. Onwards and upwards as they say!
All illustrations are designed by Prajna Nayak.
If you enjoyed reading this blog and would like to receive more such articles from D91 Labs, please subscribe to our Tales of Bharat blogs here.
https://www.business-standard.com/article/economy-policy/need-to-enable-payment-solutions-for-feature-phone-users-rbi-official-120090700955_1.html
https://thewire.in/rights/how-indias-financial-inclusion-infrastructure-failed-during-the-pandemic
https://www.imf.org/-/media/Files/Publications/DP/2020/English/PFFIEA.ashx