Creating a Conducive Ecosystem for the FinTech Sector to Thrive

Creating a Conducive Ecosystem for the FinTech Sector to Thrive

Fintech startups form the second largest segment (14% share) in India’s startup space (7,200-7,700 startups). Lending, digital payments and wealth management are the three main focus areas for Fintech startups.

Given its growth potential and the deep interest of BFSI players to engage with Fintech startups, NASSCOM through its 10000 Startups initiative, invited BFSI Industry Leaders and Startup Founders for Roundtable discussions led by NASSCOM Industry Partnership Programme (NIPP), to address the disruptions in Fintech and how Open Innovation Practices are driving the future in BFSI segment. These roundtables were held in May 2019 and we present the discussion points in this blog and the next (to be uploaded on Jul 10th).

Key reasons for rapid growth in the FinTech sector in India:

• Entry of MNCs, large corporates and traditional financial sector players on the one hand, and the collaboration, investments, mentoring, incubation, acceleration and other engagements with startups, has accelerated growth of FinTech
• Government’s supportive regulatory framework, pro-startup policies, thrust towards digitization, demonetization and GST initiatives helped players thrive and carve a niche for themselves; e.g., Paytm, PhonePe, UPI
• Smartphone revolution and deeper internet penetration has aided growth esp. in the payments and e-wallet space
• FinTech players have made personalized financial services the norm through their innovative solutions and the use of AI and Blockchain technologies. Also, their turnaround time is much shorter than traditional players. So, traditional players must either collaborate with startups or build in-house teams to create such solutions for maintaining their edge in the market
• Increasing interaction and collaboration between startups, large organizations and Ecosystem players outside the sector such as NASSCOM has helped create a strong FinTech ecosystem in the country. Through mentoring and networking events, conferences, roundtables, etc. different stakeholders are given a platform to put forth their concerns and get them addressed, build networks and so on

Key challenges faced by FinTech startups in working with large organizations:

These challenges were pointed out by FinTech startups that participated in the NASSCOM Roundtable for FinTech startups.

• Unclear mandate/ processes for working with startups: Some large organizations may not have clear mandates and processes in place for working with startups. As a result, startups are unclear about their point of contact (PoC) within these firms. Often, the PoC may be different for different processes or the partner firm may not have a specific PoC at all. Identifying the right PoC consumes considerable time and effort; sometimes, the PoCs change and the startups have to re-establish the relationship from scratch
• Different ways of functioning: Large organizations tend to have a centralized way of functioning with a strong top-down approach and the decision-making powers reside largely with the top management. The pace of work, be it in decision-making, communication, approvals or regular functioning, is also slower in large organisations.
• Frictions from within the organization in working with startups: It takes enormous time, effort and resources to build mutual trust with large organizations. Sometimes, conflict between building in-house solutions vs. working with startups could lead to friction within the organisation.
• Standard evaluation templates: Evaluation templates applied to mature firms may have various criteria not relevant to startups; e.g. certain certifications, documents related to last 5 years, etc.
• Strict rules and demands: Very often, the terms of agreement do not favour startups. Large firms may prohibit startups from licensing their products/ services in the market for a period of time, which could hurt the profitability and long-term sustainability of startups
• IP related challenges: Sometimes, large organisations esp. if they are an MNC, may insist on retaining the IP; i.e., the IP will not belong to the startup. Since majority of the banks are international, such a term would be big issue for startups

Expectation of large organizations when working with FinTech startups:

• Provide the first POC (Proof of Concept) with quick turnaround time and in a cost-effective manner in different environments. This allows them to put it internally, anticipate roadblocks in adoption and enrich the solution. The pricing also needs to be low to ensure long-term association with the organization
• The product may not be usable in its present form and startups should be willing to make necessary customizations. Product design should be adaptable, realistic and flexible
• Startups should not use open-source solutions for demos as it makes the product less detailed and generic

FinTech startups Point of view:

• Large organizations tend to ask startups for details wrt long-term impact/ implementation/ operations/ on-going support, etc. Disclosing such information may prove detrimental to the startups and when they are an early stage startup, they may not have these details
• Startups believe if a ‘change management’ team is in place in the partner firm, it will help overcome this challenge by providing critical support to the startup while also preparing the internal ecosystem for the change
• Startups do not necessarily have an understanding of the unique needs of the organization nor the relevant information to make solutions specific to the organization. So, the challenge of making demos more specific and validating proof of concepts in multiple scenarios is a tough one.
• When faced with the ‘Build v Buy’ scenario, there have been situations where some corporates have used the ideas of the startups and implemented it themselves. So, the startups face high risks in making specific demos, a risk they are reluctant to take

Possible solutions to these challenges:

Third-party organizations and ecosystem players like NASSCOM must play a pivotal role to help build bridges between large organizations and startups to collaborate better and take innovation to the next level.

While the corporates insisted that a platform to be set up to help them find trustworthy players for collaboration, FinTech startups insisted on a whitepaper on corporate rankings as well as case studies on best practices in working with large organizations and based on this, a matrix of success stories.

FinTech Landscape: Upcoming challenges and opportunities

• Players such as Amazon, Google, Facebook, etc. are expected to disrupt the insurance market in a big way as they have all the data they need for targeting the market
• Flipkart, PayTM and Amazon have received corporate agent licences to sell insurance in India and may soon get into micro-insurance which can be set up in a much easier manner from the regulatory perspective

These developments could see the emergence of new competitors to traditional financial services players and FinTech startups alike, unless they take necessary steps to retain their customer base and market share:

• With Indian payments and wallets players receiving attention globally, it is important to help them scale and forge critical partnerships with global players
• Despite innovative solutions that leverage AI, Blockchain, etc., solutions need to reach large untapped markets in India by raising awareness among rural and unbanked populations and by crossing linguistic barriers

In this context, there is a need to create common platforms where startups, corporates, regulators and other ecosystem players can come together to find solutions to challenges, update themselves on the latest trends in FinTech, forge critical partnerships and build networks. The India FinTech Day is one such platform that had a successful first year in 2016 and is coming back with the Fourth edition in August 2019.