Written by Amit Shah® • March 22, 2023 • 3 min read
From boosting employee efficiency with computerised systems to modern internet-enabled banking, the financial sector has always embraced technology to meet the expectations of its many users. In growing economies like India, the “money” industry is a key driver of growth, with studies forecasting India to have the world’s 3rd largest banking system by 2025. In a country where the aspirations of both individuals and enterprises are rooted in the availability of funds, this sheer abundance of cash will demand a drastic restructuring of the financial system designed to handle that cash. Concretely, more of the system will be necessary to handle the growing influx of cash.
Beyond driving growth, the financial sector also plays a crucial role in enabling social betterment. Financial inclusion, alongside equitable access to funds, remains the core focus for both governments and policymakers to create widespread prosperity. Today, the ability to build digital capabilities to ensure seamless access to capital for all in need remains at the forefront of financial institutions’ priorities. However, given the scale and importance of these tasks, it’s difficult to imagine this future without an even more profound technology-driven transformation across the sector.
As it happens, this change has already begun rippling through the financial sector. There are 5 key ways in which digital technology has begun transforming the world of financial services; this showcases the unlimited potential that can be realised when synergies between the financial sector and technology are drawn.
Even before the pandemic, India experienced rapid growth in the online banking domain, with populations from both urban (majority) and rural areas migrating to online banking channels. Much of this traction was fuelled by a slew of government initiatives that promoted transparent digital payments whilst placing considerable restraints on high-value physical cash transactions post the 2018 Demonetization event. I remember a visit to a friend’s native place in a small town in Gujarat. To my surprise, I found that my friend’s dad, who was well-known to be suspicious of technology (always visited the bank, not even the ATM) was buying vegetables from the small shop near their home and scanning the PayTM QR code off a printed board to make a payment via his PayTM wallet. This has now become the norm in just 3 years. To me, the acceptance of digital payments is an amazing real-life example of how people from different walks of society are now confidently climbing aboard the digital bandwagon for their financial needs. In fact, my friend tells me that his dad now has a netbanking app on his phone and, in a twist of irony, he’s constantly checking the app if his pension has been deposited and to pay his electricity (and other) bills.
Rather than visiting a branch for banking transactions, customers were increasingly relying on the self-service web portals and mobile apps of financial institutions. Services as minuscule as checking account balance, to as large as availing crores worth of instant loans and insurance policies, were processed in just a few clicks. The fact remains that today, people across India are becoming increasingly familiar with transacting their banking business with the mobile in hand.
In the late 90s and early 2000s, the average Indian household had significant scepticism about the prospects of investing their hard-earned savings into the stock market. This was true irrespective of whether you spoke of mutual funds or the direct purchase of stocks. In a period crystallised with financial uncertainty, to many, it was a form of gambling – it was simply too big a risk and there was no confidence that science was involved. At this time, stock markets in India, with their high barriers to entry, had not taken significant measures to become accessible.
The present-day, however, tells a drastically different story. A former colleague’s story has some lessons here. A couple of years ago, he felt the urge to do more for his small village in UP. He wanted to focus on greater financial inclusion and moved out of his corporate job to preach the mantra to his region and community. I was pleasantly surprised to hear recently just how many people back in his village are now investing a portion of their savings every month in the mutual funds and making decent returns. Change is coming fast here.
It is important to recognise that today, the market is more accessible and transparent than ever before. With a growing technological transformation, the financial sector has become an ecosystem that is attracting a clutch of new investors as a result.
The year 2020 alone saw nearly 8.1 Lakh new investors in the mutual fund industry, with a total base of over 9.78 Crore investors. The key drivers behind this growth are the rising purchasing power of the middle class, better education about the markets, and technology making trading easier and more transparent. These observations coincide with a sizeable growth in the number of younger individuals with a disposable income looking to take on investment risks earlier in their careers.
The gathering momentum of digital transformation in this space has enabled these individuals to easily run assessments on funds to find out potential returns, risks involved, and a predictable investment timeline for lower risks. Unlike in the past, today, there are hundreds of digital apps and platforms available for Indians to use and invest in the markets. With over 3.6 million active customers, Zerodha – a tech platform for brokerage and investments- is India’s biggest brokerage firm surpassing even established names like ICICI and HDFC. It can be noted that Zerodha contributed over 20% of the money that underlay Zomato’s recent IPO.
In the past, apart from “trade instinct”, the performance of stocks was assessed manually or through algorithmic trading systems, and both methods were limited in their ability to predict market risks and sudden crashes. However, with today’s cutting-edge AI-powered predictive systems, nearly all financial institutions, fund managers and brokerage firms have the capabilities of mining into the most granular forms of market dynamics to enable wiser investment decisions. As a result, private banks, PMS companies, and wealth management firms can generate much greater value for their clients.
However, the greatest disruptors in the financial advisory segment may not be the banks. India is at the apex of witnessing the emergence of independent personal financial advisors. Not only can these individuals deliver more accurate wealth management and investment advisory, but they are also not bound to the business goals of traditional financial institutions or banks. Today, there are over 1,000 independent financial advisors in India who manage assets of over INR 100 Crore each. With technology-backing, these IFAs stand poised to disrupt the market and I’m happy to stick my neck out and say that in less than 3 years we could be looking at nearly 10,000 new independent financial advisors managing that level of assets. Using digital services, they can increase their visibility and grow their reach, provide transparency to their clients, and deliver superior investment outcomes.
Big data and AI-powered fintech companies are quickly growing to help individuals manage their finances. By swiftly drawing savings plans based on consumer spending patterns, these companies are making personal finance increasingly accessible and efficient.
During the pandemic year, more people became aware of the importance of maintaining disciplined financial health to thwart future threats. As a result, personal finance apps in India witnessed close to a 150% increase in daily usage. With better management of funds, there is more money available to save and invest, and this is always a good thing.
The digital payment sector in India is expected to hit a market size of nearly INR 7 Trillion by 2025 post the recovery from the COVID 19 pandemic. Alongside this, government bodies too are increasingly promoting services like the Unified Payment Interface (UPI) which enables peer-to-peer payments. Adopting is surging because making a payment is now as simple as sending a message on any modern IM platform. Today, paying for a commodity from even your local roadside Mom and Pop store doesn’t have to be via cash. All stores of any size now accept digital payments via UPI even if they do not accept traditional digital banking options like credit and debit cards. The ease of digital payments is a great indicator that the Indian consumer is willing and able to “go digital” across other financial transactions too.
The Indian financial sector is bursting with enthusiasm for digital transformation. Going digital has enabled a level playing field for people from all walks of society and is eliminating traditional adversities like biased customer experiences and poor manual risk assessment, which are often seen as the Achilles Heel of Indian banks. We are on the cusp of a revolution, and the first signs are already visible.
The world is undergoing a digital transformation around us and the financial sector is not exempt. There is a lot of discussion around what technologies will drive the transformation. I thought of writing a note of what changes would be caused by all that technology.