Chapter 1: Fintech Revolution
Due to the fast use of digital technology, India is currently making significant development in the Fintech environment.
With e-commerce and smartphone adoption, as well as multiple banks pushing toward digitization and a majority of cashless transactions, the Fintech revolution is transforming India’s status from a cash-driven economy to a digital one.
What Exactly is Fintech?
Fintech refers to the use of technology by the financial services industry to make financial processes more accessible and efficient. Digital payments, digital lending, BankTech, InsurTech (technological penetration in the insurance industry), RegTech (application of technology in regulation), bitcoin (based on block chain technology), and other Fintech technologies are part of the Fintech landscape.
Income, investment, insurance, and institutional credit are the four pillars that support India’s fintech sector. In India, digital transactions have become increasingly popular in recent years.
Factors that contribute to the expansion of the Fintech business in India include the increasing availability of smartphones, increased internet penetration, and high-speed connectivity. According to the FICCI,
India’s FinTech sector is estimated to be valued at USD 150-160 billion by 2025, meaning a USD 100 billion in incremental value creation potential.
Fintech employs a number of different technologies, which are listed below:
Cloud computing refers to the hosting of computer services over the internet. Because of the flexibility in computer capacity and the availability of on-demand services, it saves money.
Biometrics are measurable human features that can be used to identify people, such as iris or fingerprint scans.
The aggregate of a user’s activity on numerous portals is known as big data. For example, when individuals interact with various posts on Facebook, they generate large amounts of data. It’s a collection of structured and unstructured data that may be accessed via digital tools and information systems.
Distributed Ledger Technology (DLT) is a computerised method for simultaneously recording asset transactions in different locations. It is block chain technology’s very base, which has led to the development of cryptocurrencies.
Artificial intelligence refers to a computer’s or a computer-controlled robotic system’s ability to do tasks without the need for constant human interaction.
FinTech 1.0 (1885–1967): This stage stressed the development of infrastructure to facilitate global financial services. The advancements of this age have helped to lay a firm basis for Fintech’s future.
Historians consider the year 1866 to be the first authentic fintech footprint, but a technology called the Pentelegraph was invented in 1860 to verify signatures by banks. The effort to make payments cashless began with the Diner’s Card in 1950, as part of Fintech 1.0. Amex followed up with a credit card in 1958. With the launch of Screen based on stock data by Quotron in 1960, the financial industry witnessed a major successful deployment of Fintech ideas.
Fintech 2.0 (1967–2008): The 1990s saw a shift toward digital banking, with clients beginning to manage their money in new ways, such as through phone banking.
Fintech 2.0 techniques include the development of an ATM by Barclays in 1967, which ushered in the digitalization of finance. NASDAQ, the world’s first computerised stock exchange, and the Society for Worldwide Interbank Financial Telecommunications were also founded during this time period (SWIFT).
Fintech 3.0 (2008-present): This phase saw the creation of regulatory requirements for incumbent banks as well as the opening of new markets for smaller firms. The consumer’s ease of use has improved as new technologies such as P2P, Wallets, and Bitcoins have been adopted. RegTech, Digital Lending, InsurTech, Digital Wallets, and many other industries are experiencing constant expansion and innovation.
Fintech 3.5 (Continued): In the past decade, China and India experienced remarkable expansion in the Fintech sector. These, as well as other rising economies, are seen as development engines for the Fintech sector in the future.
This may be seen in the creation of financial software by Indian IT businesses, the emergence of Payment Banks in India, and Chinese concepts such as Alipay.
India’s Fintech Industry
Payment infrastructure has grown quickly in the last decade, with the development of new payment methods and interfaces such as the Immediate Payments Service (IMPS), Unified Payments Interface (UPI), and Bharat Interface for Money (BHIM), among others. This has made digital payments more accessible to the general public.
Teledensity in India: India currently has a teledensity of roughly 834 million internet users. Since 2003, the number of digital payments in India has increased 160 times. Similarly, in July 2021, BHIM UPI processed over 3.2 billion transactions, indicating a game-changing level of digital payment penetration in India.
Digital transactions in India are estimated to add 26 lakh jobs and Rs 2.8 lakh crores in economic value by 2025, resulting in socio-economic growth. India has the greatest rate of Fintech adoption in the world.
Growth of Digital Payments: By 2010, digital transactions had increased by more than twofold. Due to a lack of education and cellphone penetration, this was limited to premium retail and B2B segments. The digital environment has been further bolstered by the introduction of 3G and 4G technology. By 2013, digital wallets had processed 3.3 crore transactions, and mobile transactions had increased by tenfold.
Governmental projects include: Government actions like demonetization in 2016 strengthened the digital payment system even further. Rural internet use has expanded dramatically over this time, and there have been a record number of person-to-merchant (P2M) transactions.
Digital payment systems have unquestionably been the flag bearers of the Indian FinTech business, with the introduction of new ways of payment such as Paytm, PhonePe, MobileKwik, and others.
Artificial Intelligence (AI) in Fintech
Acceptance of New Transaction Modes: India’s Fintech achievements are dependent on a number of factors, including the banking sector’s adoption of digital technology and the construction of a complete digital payments infrastructure.
UPI, different Wallet software, and RuPay cards are all examples of this. Aside from that, Blockchain technology is widely seen as having the ability to open up new doors.
Artificial intelligence and data analytics have helped to effectively assess the information, including forecasting how to control bad loans, selecting the right individual for loans, and looking for better reinvestment prospects. Artificial intelligence can be used to detect fraudulent patterns, Ransomware, money laundering, identity theft, credit card fraud, and other criminal activities.
Aadhar card linking: Using an Aadhar card and a mobile connection, we may access financial services from the comfort of our own homes, saving time and effort. It can help with the opening of Demat accounts, bank loans, investment accounts, and so on. Know Your Customer (KYC) may be simply performed using Aadhar and a mobile connection to verify the actual account holder on the fly.
Buy Now, Pay Later: Technologies like Big Data, AI, Data Analytics, and Quantum Computing are becoming increasingly important in evaluating consumer behaviour and can be used to predict loan requirements and repayment ability. This has resulted in a surge in lending applications and the “Buy
Now, Pay Later” (BNPL) concept, which is being exploited by digital conglomerates such as Flipkart and Paytm in the form of Pay Later and Paytm Postpaid.
Chatbots: The use of AI-enabled chatbots is on the rise these days. It refers to programmes that may analyse pre-existing data and respond to consumer enquiries using an existing knowledge base. These chatbots may communicate with hundreds of users at once and provide answers to their concerns, particularly frivolous ones and general doubts, allowing the workforce to focus on more important activities.
Benefits of the Fintech Revolution
Catalytic role: In India, digital infrastructure is catalysing the use of technology by public platforms. It has also aided in the attainment of citizens’ financial empowerment and provided the economy a boost.
Increased Absorption of Government Initiatives: Absorption of government initiatives such as the ‘Jan Dhan Yojana’ (the world’s largest financial inclusion scheme), e-RUPI (for cashless transactions), India Stack (API-based public digital infrastructure), Fastag, and the UMANG App has increased in the country.
Financial Inclusion: Fintech is also helping the left-behind parts of society gain access to financial services. Digital transaction expansion is a critical step toward a more egalitarian, prosperous, and financially inclusive India.
Demand-driven Innovation: The Pandemic’s problem presented an opportunity for the digital payment ecosystem to expand more quickly. To avoid personal interaction, businesses were compelled to go digital and migrate to online services. This has occasionally accidentally boosted access to government services.
Cybercrime: As data becomes more digital, hackers might target finance systems. Financial data theft and abuse of personal information are important concerns in the Fintech industry. According to media reports, certain governments are discreetly investigating this as a means of foreign sabotage during international conflicts.
Over-regulation: Regulatory uncertainty in the fintech sector is posing challenges for both customers and service providers. In India, the Fintech sector is governed by banking laws, which can be overbearing at times. Despite the RBI’s decision to authorise payment banks and other initiatives to encourage Fintech in the country, several roadblocks remain in the way of innovative fintech businesses.
KYC simplification: The fintech industry is currently facing a huge hurdle in the form of a lack of sufficient awareness and intricacy of KYC rules. A major difficulty is a lack of infrastructure, such as a lack of customer credit data, inadequate payment systems, and limited internet connectivity. As a result, formulating a comprehensive plan to govern the entire Fintech sector is difficult.
The utilisation of emerging technologies such as Blockchain, geo-fencing, geo-tagging, Big data, Quantum computing, and Artificial Intelligence, as well as policy support in the areas of data security and fraud control, is crucial for the Fintech industry’s growth. At the same time, guidelines and regulations are needed to avoid sabotage of new technology, such as QR Code-based phishing attempts.
Collaboration with Other Entities: India has used new technologies as a springboard for collaboration with other countries in the area of linking national payment infrastructure. India and Singapore, for example, have agreed to link Indian UPI with Singapore UPI and PayNow by July 2022, allowing customers to send money from India to Singapore directly.
The government has enforced the use of One-time passwords (OTP) for securing the banking sector and protecting a person’s identity by using the cellphone number as the primary identification entity. Experts around the world regard OTP as a gift from India’s financial ingenuity. OTP is a reliable and effective technique of confirming the identification of the individual doing the transaction.
Consumer Awareness: Increasing customer awareness by establishing technical protections and providing training and education is crucial to the Fintech sector’s growth. Capacity building in the sector would aid in the speedier adoption and expansion of innovative technology.
Government attempts to encourage FinTech revolution present a big growth potential for the business. The Reserve Bank of India’s adoption of fintech sandboxes to assess the impact of technology in the sector is a positive move in the right direction. Apart from technological safeguards, consumer education and training, and expanding cyberattack awareness, it is critical to further democratise FinTech to make it more accessible.
UPSC Previous Year Questions
- It is argued that the strategy of inclusive growth is intended to meet the objectives of inclusiveness and sustainability together. Comment on this statement. (GS3 – 2019)
- Electronic cash transfer system for the welfare schemes is an ambitious project to minimize corruption, eliminate wastage and facilitate reforms. Comment. (GS2 – 2013)
Chapter 2: Digital Identity
Context: The Aadhar programme has been instrumental in removing barriers to citizens receiving government welfare benefits. However, it is vital to maintain a constant focus on improving the plan, especially given the country’s rural areas’ lack of digital and financial literacy.
Aadhar Card as a Digital ID
Digital Identity is information about any entity that is utilised by a computer system for user assessment and authentication when interacting with another computer system without the involvement of humans.
Data Points: Digital identity is described by ISO/IEC as “a set of qualities associated to an entity.” Date of birth, username and password, medical history, social security number, and other data points can all assist establish a digital identity.
The Aadhar Project was begun in 2009 with the goal of establishing the necessary technological infrastructure to reach over 1.3 billion Indians by enrolling them in a centralised database and providing each of them a unique number, the ‘Aadhar.’
India’s Unique Identification Authority (UIDAI):
The UIDAI was founded by the Indian government to carry out the Aadhar project. The UIDAI issues inhabitants of India with an Aadhar number, which is a 12-digit random number. A citizen must present her demographic and biometric information to a UIDAI-authorized agency outlet in order to receive an Aadhar number.
Each person only needs to register for Aadhaar once. To achieve uniqueness and eliminate repetition, just one Aadhaar should be generated after de-duplication.
The UIDAI currently verifies citizens via OTP, fingerprints, and iris scans.
The launch of the Aadhar project has made online verification of digital identification simple, and it is a vital tool in India’s digital transformation. The Aadhar-based public digital infrastructure was deployed, and it has altered the way government assistance programmes are implemented. This system has improved financial inclusion in the country tremendously.
According to McKinsey Global Institute’s March 2019 report, “Digital India,” “the public sector has been one of the key accelerators for India’s fast digitization.” The government’s initiatives to expand Aadhar have played a crucial impact.’
Aadhar has been linked to the Jan-Dhan initiative, which seeks to bring unbanked Indian households into the official financial system. The Jan-Aadhar-Mobile (JAM) trinity, which aids service delivery, is the result of this relationship.
Aadhar Payment Gateway (APB)
The Aadhar Payment Bridge (APB) system is a one-of-a-kind payment system developed by the National Payment Corporation of India (NPCI) that uses the Aadhar number as a central key to electronically channel government subsidies and benefits to the intended beneficiaries’ Aadhaar Enabled Bank Accounts (AEBA).
India’s National Payment Corporation (NPCI):
It is a joint project of the Reserve Bank of India (RBI) and the Indian Banks’ Association (IBA) to build a strong payment and settlement infrastructure in India under the provisions of the Payment and Settlement Systems Act, 2007. It was established as a “Not for Profit” corporation under the Companies Act of 1956.
APB System Advantages:
It has reduced the previous system’s latency and delays, as well as the various channels and paperwork needed, allowing benefits to be transferred directly into Aadhar-enabled bank accounts. It’s safe and secure, and it works with Aadhar to support government programmes including NREGA, Social Security Pension, and Handicapped Old Age Pension.
Digital Identity’s Importance
Aadhar as a proof of identification: By using Aadhar as a digital identity, a person’s personal data can be saved in servers and linked to their civil or national identities. The storage of digital identification in internet servers has the potential to improve service delivery efficiency.
Electronic KYC for Bank Accounts: Aadhar is a single document that serves as verification of identity when creating a bank account. Because it maintains personal information, it can be used for e-KYC. It facilitates the exchange of demographic data and photos with a service provider. This has made the consumer acquisition process more affordable and straightforward.
Authentication from a single source: When a resident enrols for financial services (such as banking, insurance, stock brokerage, and government services), she is not obliged to provide her Aadhar number to authenticate and confirm their identity every time they use the service.
Aadhar is a tool for social and financial inclusion by design, and it does not profile people based on their caste, religion, income, or health. It’s worth noting that, while Aadhar is a confirmation of identification, it doesn’t grant you citizenship or a place of residence. At the same time, digital identity ensures that services are accessible to everybody.
Public Service Delivery: In India’s social security and cash transfer programmes, the Aadhaar Payment Bridge (APM) has served as a catalyst. The government currently uses APB-enabled direct benefit transfers in 314 programmes and schemes. Various state governments use this for 450 different programmes.
Issues Concerning Digital Identity
Lack of financial and digital literacy: The prevalence of fraudsters and scammers in the country makes it difficult to absorb digital initiatives. Innocent citizens may fall prey to such fraudsters’ intricately designed schemes, resulting in a lack of faith in new technology like UPI.
Critics contend that there is a mismatch between the omnipresent services that consumer digital identities provide and the absence of sufficient security of the data collected. Unsecured websites, phishing efforts, location sharing, strangers on social media, public Wi-Fi networks, and other methods may disclose digital identity information.
Lack of Appropriate Skill Sets: Current Digital Infrastructure technologies, such as APIs, are very new and still evolving. They demand highly trained and competent personnel, which is a challenge because the curriculum in the country is not updated on a regular basis.
Aadhar in Fintech Services: Aadhar infrastructure, in conjunction with other technologies such as Blockchains, IoT, and others, can aid in the collection of data for citizen welfare. It is necessary to investigate the possibilities presented by emerging technologies such as Block chain in order to maximise the advantages to people.
Fintech innovation has increased dramatically in India during the previous decade. India ranks second in the strength of the Fintech movement, according to a survey, with 76 percent of consumers utilising at least one unconventional financial service. Simultaneously, the Aadhar Enabled Payment System (AEPS) has brought banking services to citizens’ doorsteps. More collaboration between banks and fintech businesses is needed to support the fintech wave.
Private sector innovation: In order to stimulate innovation, the government has created an enabling environment for the private sector. Regulatory sandboxes, policy lapse, incubation centres, and other testbeds, for example, have been established to accelerate efforts toward Digital India. The private sector must take advantage of the available infrastructure to increase India’s footprint on the global technological map.
Face identification is the digital identification of the future. It can also be used to give customised content and promote services and products based on a user’s previous internet history. It is necessary to investigate such technologies in the public sector in order to improve welfare plan access and service delivery.
One of the most important components in India’s exponential rise in fintech services is Aadhar. With Fintech becoming the face of the financial world, an identity system that can work alongside the financial landscape might make all the difference.
At the same time, if properly cultivated in the future, Aadhar infrastructure, coupled with other technologies such as Blockchains and IoT, can generate value.
UPSC Previous Year Questions
- Pradhan Mantri Jan-Dhan Yojana (PMJDY) is necessary for bringing unbanked to the institutional finance fold. Do you agree with this for financial inclusion of the poorer section of the Indian society? Give arguments to justify your opinion. (GS3 – 2016)
- Implementation of information and Communication Technology (ICT) based Projects / Programmes usually suffers in terms of certain vital factors. Identify these factors, and suggest measures for their effective implementation. (GS3 – 2019)
Chapter 3: Rural Banking and Financial Services
Fintech adoption in rural India is still lower than predicted, owing to infrastructure problems and a lack of financial awareness in rural areas.
Various projects, such as Digital India and Bharatnet, have been effective in extending the benefits of fintech to rural regions, thanks to the brilliance of JAM trio.
Fintech Promotion in Rural Communities
The acronym JAM stands for Jan Dhan, Aadhar, and Mobile. It is essentially a technological grouping of PM Jan Dhan Yojana accounts that have been seeded with Aadhar numbers and linked to a cellphone number in order to facilitate user identification.
In India, the JAM trinity has shown to be effective, especially given the lack of financial and digital literacy, as well as the existence of migratory labour in practically all regions, making it impossible to offer appropriate identity to all inhabitants.
AEPS (Aadhar Enabled Payment System):
After authenticating her identification with Aadhar, a user can execute basic banking services like cash withdrawal or balance inquiry. Through banking agents, such as the Soochnapreneurs, AEPS enables the deployment of financial services in hard-to-reach locations.
Bharatnet is an initiative of the Indian government to connect village panchayats in rural areas to high-speed internet connections. Bharatnet, according to the Indian government, is the world’s largest rural internet access programme. In June 2021, it began to show results with a data consumption of 13,000 Terabytes.
BCs (Banking Correspondents):
BCs are also known as Soochnapreneurs (information entrepreneurs). They are bank agents who help banks reach out to more rural locations. Because many of the country’s outlying habitations lack the population to support a functional bank branch, BCs are crucial to financial inclusion. Their utility has grown as technology has advanced, such as the JAM trinity.
The National Payment Corporation of India (NPCI) launched the United Payment Interface (UPI) in 2016. The capacity to conduct financial transactions without knowing the beneficiary’s account details is the fundamental benefit of UPI. Due to poorer financial knowledge and less usage of banking services in the formal sector, this is especially important in rural areas.
Rural Areas’ Share: The value of UPI transactions in 2021 was Rs 6.39 trillion. Rural areas, on the other hand, account for only 28% of UPI transactions. This is a result of rural areas’ lesser adoption of the UPI payment technology.
The adoption of digital technology in the country has increased as smartphone penetration and internet costs have decreased. At the same time, rural India is transitioning from an agriculture-based economy to a more diverse economy. Non-agrarian activities, for example, now account for two-thirds of rural income.
Soochnapreneurs’ Advantages (Banking Correspondents)
Access to banking services is a problem that extends beyond digital and financial literacy. It is also influenced by variables such as the country’s wide expanses and sparsely populated distant habitations. BCs have been effective in boosting people’s access to banking services in such places where there aren’t enough physical branches.
During the pandemic, fintech and financial activities were extremely important since they allowed people to transact while sitting at home. Owing to the difficulty of accessing banks due to the requirement for physical isolation, BCs stepped in to fill the void, resulting in the manifestation of its benefits in times of crisis.
Accessibility and Convenience:
India’s ATM density is low in comparison to its population. According to the World Bank, India has one ATM per ten villages, with only 20% of total ATMs in rural regions. As a result, having a BC makes it easier for customers to use banking services and withdraw money from banks.
Cost-Effective: India is a price-sensitive market. In addition to time and effort, a journey to the bank or ATM in the next hamlet costs money. As a result, placing BCs in close proximity to people boosts their access to banking services. At the same time, users can access financial services even when the bank is closed for holidays, reducing their reliance on bank branches.
One of the advantages of having access to money at any time is that it eliminates the need to hold huge sums of money at home to meet varied needs. Robbers and burglars are less likely to target your home if you have less money. At the same time, it reduces the likelihood of injury from such attacks.
Transparency: One of the benefits of adopting fintech in financial transactions is the instant access to data, which eliminates the need for regular bank visits. Because the spending are visible on the smartphone screen, it is easier to keep track of the family’s budget.
Lack of Infrastructure: Despite significant progress in delivering internet connections to rural areas, many users experience frequent interruptions in service, resulting in a greater rate of transaction failure. This is detrimental to the growth of Fintech technology in rural regions because it undermines public trust.
Financial Literacy: Despite the government’s efforts to encourage financial literacy, the huge population and lack of fundamental functional literacy have made it a difficult climb. The issue is especially serious for older generations, who are hesitant to try with new technologies.
Refund Delay: While the RBI and banks have worked hard to reduce transaction failure rates, it is impossible to avoid in Toto. Users experience worry and anxiety, as well as a lack of trust in the system, in such situations. Despite the agents’ repeated assurances that the money would be repaid to their accounts at some point, they are unable to leave the outlet in limbo.
Unprofessional Attitude of Bank Workers: Users routinely complain about non-responsive helplines and impolite bank officials, jeopardising the banking services’ Grievance Redress Mechanism. Users’ faith in online banking services is further eroded as a result of this. This, combined with an increase in fraud instances, has the potential to reduce the adoption of Fintech-based banking services.
Fintech Service Use by Women: It has been discovered that only a small percentage of women use Fintech services. It is mostly attributed to society’s patriarchal mindset. Other factors include a lack of knowledge with phone operation as well as a lack of experience with outdoor employment.
Rural development is a priority for India because rural regions still house two-thirds of the population. Though the government has made attempts to make internet services easier to use and convenient to access, technologically illiterate consumers in rural regions find it difficult to do so. To ensure that development is really inclusive, it is necessary to ensure that digital services reach the farthest reaches of the country.
UPSC Previous Year Questions
- How can the ‘Digital India’ programme help farmers to improve farm productivity and income? What steps has the Government taken in this regards?(GS3 – 2015)
- “In the villages itself no form of credit organisation will be suitable except the cooperative society.” – All Indian rural credit survey. Discuss this statement in the background of agriculture finance in India. What constrain and challenges do financial institutions supplying agricultural finances? How can technology be used to better reach and serve rural clients? (GS3 – 2014)