In the first, and second posts of this series ‘Beyond Health: How the COVID-19 pandemic is impacting financial services in India’, we presented insights from discussions with MFI heads and sector experts on how the current crisis is impacting financial services and the rural economy. In this post, we discuss learnings from discussions with founders of two fintech companies on the challenges faced by the fintech sector, as well as highlight potential opportunities and areas of growth.
What are Fintechs?
Generally speaking, fintechs use a wide range of technological platforms to provide financial services such as payments, loans, savings/investment, and insurance to their clients. In recent years, fintechs have accelerated the financial inclusion drive by providing niche financial products for traditionally underserved customers, innovative tools for B2B transactions, and better customer service options. The Indian fintech sector has grown tremendously in the last few years and is one of the top ten markets in this sector, globally. It is also worth noting that many fintechs, particularly in developing countries, still include “low-tech” components and often employ local agents to bring their services to the poorer, less digitally literate, and more isolated sections of the population.
We spoke to two fintech firms – Fingpay and Kyepot, to understand the implications of the COVID crisis on the sector. Fingpay provides several solutions to enable different segments of the population to transact digitally. One of their solutions is via a business correspondent model. Kyepot, on the other hand, provides digital saving and credit solutions through virtual chit groups.
The Immediate Impact
As fintech players primarily use technology and digital tools for service delivery, one would expect the impact of lockdown measures to be minimal on the sector. However, a number of factors are at play. Discussions with experts reveal that the volume of transactions on fintech platforms have considerably reduced during this period. One of the fintech founders that we interviewed mentioned that transactions on their platform have dipped to a third of the pre-lockdown levels. There are several reasons for this.
- First, during the lockdown many businesses and services, including e-commerce and travel, were non-operational. Hence, there has been a drop in online payments. Even though the nation-wide lockdown has been lifted, some forms of restrictions continue. It has also been seen that there has been a drop in digital payments as people want to hoard cash, in these uncertain times.
- Second, even though not all fintechs come under the purview of RBI regulations, many have given their clients the option of deferring loan repayments, in-line with the six months moratorium on loans announced by the RBI. Similarly, fintechs that have MFIs as their clients have seen a reduction in transactions due to no loan repayments for six months. This has reduced the revenue sources for these organizations.
- Third, fintechs that provide digital savings products may see a reduction in the customer base as clients do not have enough liquidity to save, due to the economic shocks and livelihood losses during the lockdown. This piece by Microsave also suggests that there may be a drop in short-term savings.
- Fourth, as mentioned before, some fintechs use business correspondents (like ration or kirana shops), who have a local presence to extend their services to the last-mile. However, the lockdown and restrictions on movement along with physical distancing measures have meant that these BCs have faced several challenges in providing their services. As highlighted in this report, even though BCs were listed as an essential service during the lockdown, they faced challenges in continuing operations due to restrictions from the local authorities.
What role can fintechs play during and post the lockdown era?
Experts are of the view that fintechs should focus on building customer relations and strengthening systems that enable smooth communication between the field staff and clients, and focusing on reassuring clients’ confidence in the organization. While lockdown and social distancing measures were in effect, fintechs could use their network of agents to ensure that last-mile customers are able to access cash from their bank accounts, especially the relief packages that have been deployed by the state and central government. Although the lockdown has been lifted, fintechs can continue to provide these services to their client base, as the economic shocks from the lockdown may not dissipate anytime soon. During the lockdown, several fintechs had advocated to list their services as essential, so that their agents can travel, withdraw cash, and provide it to citizens at a time when they need it the most.
Fingpay, one of the companies with whom we spoke, had received permission to operate in some areas. Hopefully, this Fintech-mediated and emergency-driven increase in the usage of bank accounts will continue after the lockdown as well, contributing to advancing financial inclusion more broadly. The apps developed by fintechs can also be used to disseminate information and check eligibility for government schemes. This will ensure that the information on these schemes reaches the poor and, in case of DBT schemes, payments could also be linked through the app. Some fintechs, like Fingpay, are exploring this option with central and state governments.
Will fintechs be able to recover in this new normal?
Although fintech players are facing several challenges, experts are of the opinion that they might have a fast recovery from this economic downturn. As the lockdown is lifted, more and more people are likely to switch to digital payments, due to the fear of the virus spreading through cash transactions. As pointed out by Microsave, MFIs and NBFCs will also look to partner with fintechs as they move their processes and transactions to digital platforms. It is also expected that consumption will rise in the post lockdown phase, as many goods and services could not be availed during the lockdown. As a recent article in businessline points out, we can already see a rise in transactions on various digital platforms. It is also believed that, post the moratorium period, recovery of loans will be easier for fintechs as they have a well-established digital infrastructure.
Although digital infrastructure has its advantages, it also comes with its fair share of new problems, during this pandemic. Many fintechs use Aadhaar enabled payment systems (AePS) to facilitate payments and withdrawals. Under this system, the fingerprint of the client is used to authenticate the transactions. Several studies and reports have highlighted challenges with this system, especially for the low-income populations. These challenges include unreadability of thumbprints of older people and people engaged in manual labor, lack of internet and connectivity issues, and lack of power supply. The COVID-19 pandemic has brought about a new challenge, wherein the use of AePS could lead to the spread of the virus, as several people touch the machine used to authenticate the transaction. Although, appropriate sanitization measures can be taken to overcome this issue, ensuring implementation of these measures will continue to be a challenge. Lack of liquidity is another area of concern for fintechs, as the moratoriums are leading to reduced revenues for fintechs in the near to short term.
Fintechs are continuously innovating and designing new product offerings for their customers. In our discussions with Fingpay, they highlighted the unmet demand for insurance and small loans. This unmet demand has been observed especially in tier-3 cities and provides an untapped opportunity for the sector to expand its product offerings. Their ability to innovate quickly and tap into field agents can be leveraged by the government in the post-lockdown era, to promote recovery and relief initiatives, particularly among low-income populations.
While fintechs can strategically partner with the government, they need to ensure that appropriate mechanisms are in place with respect to data privacy. The Personal Data Protection Bill, passed in India, in December 2019 mandates a number of steps for protection of personal data of citizens. These include, but are not limited to, measures to prevent misuse of personal data like encryption of data, explicit consent of individuals when sharing data, especially outside the country, and sharing of non-personal data with the government. In addition, the bill also mandates setting up grievance redressal mechanisms. Strengthening these mechanisms will also enhance the user experience for fintechs.
In addition to aspects of data privacy, fintechs also face a number of regulatory issues. Fintechs in India are not governed by a single entity and there is a lack of clear guidelines for the sector as a whole. Thus, the guidelines and rules may differ depending on the products that they offer. A recent World Bank report recommends a single regulatory entity for fintechs, (referred to as “innovation hubs”) to provide guidance on legal, regulatory, and policy aspects. As experts have pointed out, this pandemic is far from over. Even as lockdown restrictions ease, we might continue to practice some form of physical distancing. Given this new normal, fintechs can play an integral role in leveraging digital tools and platforms to provide financial services to clients and ensure uninterrupted service delivery.
About the Authors
Anoushaka Chandrashekar is a development sector professional with a strong foundation in research and evaluation design. She currently works as a Project Manager with LEAD, managing research projects on women collectives and agriculture. She has over five years of experience in stakeholder management, data collection, and data cleaning and analysis, in India. Anoushaka holds a Master’s degree in Social Work from The University of Texas, and a bachelor’s degree in Economics from Shri Ram College of Commerce, Delhi University.
Fabrizio Valenti heads LEAD’s Financial Inclusion vertical, overseeing the organization’s research portfolio on this topic. Commanding an extensive portfolio of international experience in development, he has previously worked for KSAR, Save the Children in Sierra Leone, UNDP in Indonesia as well as the University of Rome Tor Vergata, for which he has led projects in Italy and Bangladesh. Fabrizio has a PhD in Economics from the University of Rome Tor Vergata.