Covid-19 Pandemic and the Fintech Industry - Key Takeaways
This is the second part of our 3 part blog series. In this, we discuss the fintech industry’s commitment to expanding business through new customers, new products, and reimagined services.
In the series of shutdowns that followed the first lockdown announcement in March 2020, India’s consumption of digital products and services underwent a paradigm shift. Services considered basic among the smartphone-using, tech-savvy class such as digital payments made way to smaller centers and quickly became the preferred mode of payment.
Innovative business ideas + Vernacular processes + DIY model led to quick fintech adoption
At the heart of the new world order for digital financial services was a change in the customer base. Most fintech companies that were primarily serving a specific cache of customers found themselves with an opportunity to serve a whole new demographic. However, this came with the challenges of addressing the diversity of the newer cohorts. For instance, practitioners observed an increased need to add vernacular processes in their service delivery mechanisms both DIY or partially assisted models. Features such as E-KYC, considered aspirational, became a necessity. Quick regulatory adjustments were made to permit them, opening up a world of fintech-based possibilities to the otherwise underserved cohorts of Bharat.
Interestingly, there was an increase in micro-entrepreneurship, especially in tier 2/ tier 3 sections where people, especially women, used lockdowns to fulfill their entrepreneurial aspirations. Activities ranging from making masks and beauty products at home to online dance classes became all the rage.
In competing with e-commerce platform-backed small businesses, these newly minted entrepreneurs turned to fintech that provided end-to-end money movement for businesses to give their businesses a more professional and legitimate appearance.
Pandemic witnessed the steady growth in adoption of payment apps, QR codes, autopay features, and a rapid increase in micro-ATMs
Let’s start with payments. Intuitively, you may assume that digital payments platforms did very well during Covid and you won’t be wrong! Here are the reasons we uncovered.
Places where digital payments were offered but not preferred moved exclusively to digital payments, because, well lockdown. But, in places where they did not exist, infrastructure was scaled to ensure that payment apps and QR Codes became everyday vocabulary in most Indian households with a smartphone, regardless of their geography.
UPI transactions increased from 1.49 billion in July 2020 to 2.7 billion transactions in March 2021. The AutoPay feature for recurring transactions really contributed to the staggering growth1. Also, Person-to-merchant (P2M) payments on UPI showed a significant increase in transaction volume. Suffice to say the pandemic has been an extremely lucrative opportunity for the payments fintech ecosystem as a whole2.
Around the same time, fintech companies reacted to this widening market potential through the launch of new add-ons and features to their existing product offerings. One such example is the micro-ATMs offered by platforms that already provided money transfer and AEPS based solutions in tier 2 and tier 3 cities. With the increase in deposits of Covid relief funds through the AEPS network, micro-ATMs became the preferred mode for withdrawal. Even as opportunities to spend shrunk, the use of micro-ATMs soared in semi-urban to rural areas.
We are 18 months in, it now appears that micro-ATMs as a product is here to stay.
Q. How did Covid-19 change your product offering?
A. Money transfers were primarily used by city dwellers. Such transfers were reduced because people moved back to their hometowns from cities since most major urban markets were specifically affected by the pandemic. At the same time, Covid linked subsidies were given by the government directly to bank accounts, which increased the AEPS based withdrawals. Micro-ATMs was introduced as a consequence of this realization.
- Insights from a representative from a digital payments platform
Ample opportunity for digital-first Covid-19 specific insurance instruments, pocket-sized insurance, and hospi-cash insurance products
On the risk management front, demand for insurance naturally increased. The likelihood of hospitalization on account of the pandemic and the cost involved drove scores of Indians towards the purchase of private health insurance and the payment of premium showed a 115% Y-o-Y growth according to the data collected by the General Insurance Council3. Further, Covid specific insurance instruments, pocket-sized insurance, and hospi-cash type product offerings became popular.
Insurtech responded to the demand by going digital-first with specialized customer-oriented products. The ability to go digital-first allowed them to integrate information and learning modules onto their platforms contributing to the improved knowledge among customers about insurance products. While insurance products such as vehicular insurance and associated claims were reduced, the increase in health insurance volumes more than made up for the deficit.
Despite the upside, insurtech companies and some existing insurance companies now have a more than usual number of insured patients in the middle of an economic and health crisis. While steps such as digitizing claims settlements is a smart, efficient system for claim response and processing will have to be the next giant leap, as the system starts to feel the slight overwhelm of the responsibility to serve so many in their time of need.
The uptick in demand for working capital loans for growing micro-entrepreneur businesses
A product as old as time, credit product offerings saw an interesting demand side trend. As small businesses suffered due to non-payment by customers especially in the B2B segment, and scores of people lost jobs, the need for working capital loans increased. As more micro-entrepreneurs cropped up, newer businesses also required credit lines to sustain and scale. This increase in demand also came with a desire for smaller ticket-sized products. Regulatory interventions such as the repayment moratoriums came as welcome relief on the existing loan portfolios and allowed the credit-driven businesses to sustain themselves when businesses shut. Most such new customers found themselves turning to fintechs for their credit needs instead of banks and NBFCs. Micro-lending through e-commerce platforms or through platforms specifically designed as credit fintechs especially in urban areas saw higher adoption.
On the supply side, the moratoriums and the general economic downturn on account of shut down made it much harder for credit fintechs to continue to serve their customers. Even as others faced closure such as peer-to-peer lending platforms, those that managed to reduce the ticket size and to serve their existing customer pools survived. An interesting development in this space was the visible need for alternate underwriting models and data points, which fueled a large number of conversations around cash flow-based lending and account aggregator systems4.
Q. Has the engagement with your product been impacted by Covid-19?
A. From a user perspective, digital engagement with credit products has been impacted favorably. But fintech lenders faced issues as their supply-side collapsed. Fintech lenders rely in part on banks and NBFCs to provide them borrowing using which they on-lend. During Covid, banks and NBFCs acted conservatively and pulled their lines of credit back. Further, since credit fintechs tend to operate in the low to middle income/ sub-prime/ near-prime segment, their existing portfolios took a big hit on their collections performance on their pre-Covid books.
- Insights from our conversation with a lending fintech professional
It is fairly evident that the expansion of fintech across products and geographies was strongly catalyzed by the pandemic and all that came along with it. Changes were observed even in non-financial products. Traditionally used products like physical gold lost some of their lustre as Indians displayed an inordinate amount of interest in digital gold5. Job portals for gig workers, migrant workers, and blue and gray collar workers were an interesting addition to the digital products basket. Even as non-financial product offerings, these have the potential of opening up new use-cases for associated financial products.
Q. Can you share with me the seasonality aspect of your business for a typical year and how did it change for the last year?
A. One of the other things which is not seasonality per se but more a result of macroeconomic headwinds is a huge growth in the gaming sector. After the pandemic, people who are stuck at home, wanted ways and means to entertain themselves. Further, Health-tech and Ed-tech saw an increased uptake since as more and more people were left alone at home, they wanted to become fitter and to up-skill themselves.
- Insights from our conversation with a fintech professional
But were all these processes inclusive?
But even with the upwards trend, we have to ask the all-important question of whether it was inclusive. The reality of expanded and new product offerings and services is also the fact that there continues to exist a sea of differences in the product offerings for the ‘digitally enabled’ class and the underserved or unbanked cohorts. Lesser options and lack of customization pervades those that have smartphones in these sections of Bharat. Even more, disparity exists for those that do not have smartphones.
Insightfully referred to as an innovation gap in fintech, we will be discussing our key takeaways on financial inclusion and the information asymmetry for fintechs and the customers they serve in times of covid in our next blog. Watch this space for more!
All illustrations are designed by Prajna Nayak.
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