Financial technology (Fintech) mainly describes new tech that improves and automates financial services delivery and use. The fintechs have been in a trend by overcoming challenges faced by fintechs. At its core, Fintech is utilized to help finance-related businesses, business owners, fintech players, and clients better manage their day to day financial operations, processes, and lives by using specialized software and algorithms. However, nowadays, when we talk about fintechs, we relate computers and, increasingly, smartphones. Fintech is the word which is a combination of “financial” and “technology.”
Widespread internet penetration in the Indian subcontinent, multiple players in the market and governmental policies that focus on digitization have led to a surge of the Fintech sectors. Fintech start-ups are revolutionizing the financial services landscape in India. Recent innovations like multiple mobile wallets and the Unified Payment Interface (UPI) platform are meaningful contributors to recently adopting mobile technologies in finance-related transactions.
Thanks to these, the Indian population today has benefits like hassle-free account setup, easy access to a wide variety of financial services and 24/7 access that fintech companies usually offer. Moreover, individuals are favoring innovative products from fintechs when compared to traditional financial institutions. A sudden rise in the number of Fintech start-ups in the Indian finance sector has contributed to many other sectors’ growth through their efficient financial strategies.
The scope propels the industry in itself for growth and profitability. But this doesn’t leave the road for fintech very smooth. There are multiple challenges faced by fintechs in the long run. Before discussing hardships, we shall initially throw light on their significance.
Significance of Fintech
Historically, the financial services in India have been known to be willing to adopt the latest technologies to streamline operations & increase profits but have always been held by a diversity of factors like;
- The complexity in the financial markets
- Legacy systems usually expensive to maintain
- Strict regulations
Nevertheless, the sector greatly benefits from extensive network distribution, a large and loyal customer base unwilling to switch financial service providers, unique product expertise, & protective regulations. Established finance institutions have always generated good profits despite many of them being behind in technology and innovation.
With the increase in the use of the internet and mobile technology globally, Fintech is continually playing a critical role in the financial services industry, including:
- Online lending
- Wealth management
One of the fintech sector’s key advantages is that it is almost free from the tight regulations that affect traditional finance institutions. Additionally, the industry boasts of user-friendly digital channels and the ability to address essential customer needs. Despite enjoying a plethora of favorable conditions, there are multiple challenges faced by fintech companies.
Benefits of Fintechs
The advantages of Fintech in the financial services sector can be summarized in:
Improving the Modes of Customer Acquisition
Fintech start-ups use technology more than traditional physical setup. As a result, they can efficiently serve customers from a wide geographical area. The mode of acquiring the customers may be challenging initially, but once the company has made its reputation, customers worldwide would get associated with it.
Lowering the Cost of Services
The fintech start-ups do not need a physical presence in every location. They operate at reduced costs. As a result, they offer cost-efficient services to customers. Time taken in financial services such as lending/borrowing is also substantially reduced, lowering the cost.
Advanced analytics & big data infuse significant advantages to finance-related organizations. The same enables institutions to redesign their products to meet customer needs and preferences. It also is an excellent trigger in overcoming the challenges faced by Fintech.
Segment Specific Offering
Fintech start-ups have focused on specific market segments, mainly millennial, unbanked, and small businesses. As a result, Fintech has helped meet clients’ needs that have been otherwise overlooked by traditional financial institutions.
Challenges Faced by Fintech Startups
Challenges faced by Fintech in India are unlimited with limited solutions but sure shot ones. Long fundraising cycles, missed out targets and increasing losses are common issues Fintech lending companies face. These issues arise mainly due to mismanagement of the lending lifecycle. There are multiple challenges faced by Fintech start-ups in the country face every day.
We can discuss a few of them below:
Customer Experience in the Financial Service
One of the significant challenges faced by Fintech is customer related experience. Customer experience is the most critical issue that most firms come across in the corresponding financial industry. Today, customers only focus on availing mobile banking, and they are least interested whether that bank is Fintech or not. The trend will change slowly with time and need patience and efforts to bring the changes. However, most of them have now opted for an open mindset.
Regulatory Compliance Laws
Many laws unavoidably contribute to the slowdown of the Fintech start-ups in Indian financial markets. Not only are these regulations challenging to cope with, but they also make it difficult for Fintech players to sustain the Indian markets. Compliance laws are laid in place as a restrictive regulatory framework to prevent fraud. However, they too act as massive barriers for the new Fintech entrants. There is a big list of formalities that Fintech start-ups need to fulfill before they even start operations. Thus, we can say that this is one of the significant challenges faced by Fintech in the current scenario.
More Reliability on Cash
Most Indians follow a very conservative approach when it comes to daily transactions and end up using cash. We can say that this component is another significant threat apart from the challenges faced by Fintech. Customers trusted money as a medium of sales for ages and found it challenging to change their habits and adapt to new avenues. Providing financial services in an unbanked market is problematic since these services are often related to digital scams. Several Indians fail to see the utility that Fintech offer through their innovative products and service due to financial illiteracy.
Other Challenges Faced by Fintech Players
Unbanked and Under Banked Population
Firstly, Fintech had tottered growth because of poor infrastructures like low internet penetration and India’s literacy level. Although the Indian government is tackling these issues with generous policies, the benefits will only be visible in the long run. The truth is that even today; a large segment of the Indian population is unbanked and thus prefers cash transactions rather than online purchases. Considering the same, not holding bank account is one of the vital challenges faced by Fintech.
Another hurdle for Fintech growth in India is low financial literacy in the Indian community. For example, India launched the Pradhan Mantri Jan Dhan Yojana to improve financial inclusion in the country. However, the efforts got in vain due to the dormancy of those accounts. Despite all the initiatives in place, India is far from the road to financial inclusion.
Lack of Proper Government Strategy and Initiatives
Lack of proper mechanism to regulate Fintech and lack of support are some of the challenges faced by Fintech. Fintechs face a dire shortage of governmental support and incentives to protect their interest in the Indian financial markets. The same can be highly demotivating for new Fintech players. Fintechs play a crucial role in driving economic growth and must be offered all the necessary means to thrive.
Fintech companies deal with sensitive customer data. Multiple cyber security threats result in massive monetary losses that make whole things unwarranted for customers. The technology that offers convenience also opens up people’s online accounts to fraudsters looking to steal their assets. The same is a constant barrier to the popularity of Fintechs. Fintechs need to fortify against any challenge posed by hackers. A massive amount of financial data of individuals and companies made available digitally increases the risk of cyber security breaches.
Fintechs are designed in a way to work with a sophisticated working model. The same makes it difficult for them to maintain a smooth relationship with other financial institutions. Banks, on the other hand, fear to work with Fintechs risking reputation loss.
These are not the challenges faced by Fintech; these are beneficial in one or another way. It’s just that whenever someone is working with the Fintech, he should understand its characteristics. When someone can identify the market opportunities, develop differentiated business models, and stimulate them in the more significant opportunities, they will benefit from it. It is hard to force any industry to use the Fintech Application, but it is easy to teach them its benefits. When every industry starts using the new digital banking technologies, it will give birth to a whole new Digital Era.
When fintech emerged in the 21st Century, it got initially applied to the technology employed at established financial institutions‘ back-end systems. Since then, there has been an enormous shift to more consumer-oriented services & more of a consumer-oriented definition. Fintech now includes different sectors & industries such as education, retail banking, fundraising and nonprofit, and investment management, if we name a few.
Indian Lenders Association is pushing hard to overcome the challenges faced by Fintech and accompany them in doing away with the hurdles. We shall ensure a stable platform and a detailed mechanism to surmount the issues associated with Fintech players.