The Reserve Bank of India’s Financial Inclusion Index has shown a noteworthy 16% increase from 2017 to 2023³. This growth is attributed to the increased accessibility of financial services. Fintech firms are leading the way in driving transformative change through innovations like digital wallets, mobile money, peer-to-peer lending, and inventive micro-insurance products.

Gender Disparities in Fintech Usage: Insights from Global Research

The research paper titled The Fintech Gender Gap published in the Journal of Financial Intermediation in 2023⁴ explores gender disparities in fintech usage based on user attitudes. The study utilized the 2019 EY Global Fintech Adoption Index, surveying 27,103 adults across 28 countries, with 50% female representation and an average age of 43 years. The data indicate that women, often have lower incomes than men. They are less likely to live alone, work, or hold higher education degrees. Women also exhibit greater uncertainty about future planning.

Key insights of the study:

1. Digital Usage in Developing Countries: In developing countries, the usage of mobile phones and internet access among individuals was found to be 89% and 80% respectively (Figure 1). The proportion of men using mobile phones is 2% higher than that of women. This difference is much smaller than the global gap of 6%.

Figure 1: Digital disparity in developing countries

Source: Chen, S. & Doerr, S. & Frost, J. & Gambacorta, L. & Shin, H.S., 2023. “The fintech gender gap,” Journal of Financial Intermediation, Elsevier, vol. 54(C).

2. Fintech Adoption Disparity: While fintech holds promise to narrow financial service gender gaps, the study reveals that men’s fintech adoption rate is 29%, surpassing women’s at 21%.

3. Drivers of Fintech Gender Gap: It includes attitudes towards technology especially concern for privacy and security, price sensitivity, and product suitability. These factors explain 75% of the gender gap in fintech usage (Figure 2).

Figure 2: Factors influencing the gender gap in fintech adoption

Source: Chen, S. & Doerr, S. & Frost, J. & Gambacorta, L. & Shin, H.S., 2023. “The fintech gender gap,” Journal of Financial Intermediation, Elsevier, vol. 54(C).

4. Financial Gender Dynamic: Men use traditional banks (7.1%) and fintech (5.2%) more than women. Integrating fintech with traditional services reduces the gender gap. The gender gap was approximately 50% smaller when fintech complements traditional financial services. This indicates that women are more receptive to fintech when it complements rather than substitutes traditional financial services.

Thus globally, men use fintech more than women. The study suggests that policymakers tackle underlying issues for greater inclusivity in fintech services.

Implication in the Indian Context

India made notable strides in narrowing the gender gap in mobile internet adoption between 2018 and 2020. Unfortunately, a recent surge in mobile internet adoption among men has reversed this progress, emphasizing the need for sustained efforts to promote financial inclusion (Figure 3)⁵ .

Figure 3: Mobile internet adoption in India, 2017-2022

Source: GSMA Consumer Survey, 2017-2022

To bridge the digital gender gap by 2030, over 800 million women must embrace the mobile internet, but based on prevailing patterns, the expected mobile broadband adoption is forecasted to be limited to 360 million.⁶

Fintech Bridges the Gender Gap in India

Empowering Financial Inclusion: The initiative of Pradhan Mantri Jan Dhan Yojana (PMJDY) is effectively narrowing the gender gap. India ranks 135th out of 146 countries, with a gender gap closure of only 62.9%. The LXME fintech company aims to address the market gap created by gender disparity to capitalize on the opportunity through its unique Neo Banking Platform. It intends to have a lasting impact on how Indian women manage finances⁷.

BNPL (Buy Now, Pay Later) Revolution: Additionally, the rise of BNPL solutions contributes significantly to financial inclusion, offering women easier access to credit. Fintech’s influence democratizes credit, with 66% of women finding it accessible and 51% expressing a preference for BNPL over credit cards⁸.

Tailored-made products by fintech: Fintech firms in India are adapting by developing tailored products to meet women’s specific needs. For example, Dvara SmartGold offers doorstep services for assaying gold for loans, empowering women to gain control of their finances⁹. Another key strategy involves empowering women through financial literacy programs. Initiatives such as the Saksham mobile app, by the National Bank for Agriculture and Rural Development, educate rural customers, including women on various financial topics available in multiple Indian languages. This app can be used both in online and offline mode.

Enhanced financial reach: Fintech firms leverage technology to extend financial access to underserved populations, including women. Platforms like Grameen Financial Services, aided by digital wallets like Phonepe and Paytm, enable secure cashless transactions and provide essential services to women. PayNearby has also launched a ‘zero investment plan’ for women entrepreneurs, empowering them across various PIN codes⁹.

Conclusion

Fintech companies are proactively utilizing technology to overcome barriers, enhancing the accessibility and user-friendliness of financial services for women. Strategies include tailored products, government initiatives, financial literacy programs, improved access, and a customer-centric approach. Ongoing efforts to address discrimination and societal norms are the key to significant progress. By steadfastly implementing these strategies, fintech can play a transformative role in diminishing gender disparities and fostering a more inclusive financial environment in India.

Sources:

1. https://www.boomlive.in/explainers/only-31-of-women-in-india-use-mobile-internet-says-gsma-report-22198
2. https://bfsi.economictimes.indiatimes.com/news/fintech/breaking-barriers-fintechs-role-in-achieving-gender-equality/98418216
3. https://www.statista.com/statistics/1421253/india-financial-inclusion-index/
4. Chen, S. & Doerr, S. & Frost, J. & Gambacorta, L. & Shin, H.S., 2023. “The fintech gender gap,” Journal of Financial Intermediation, Elsevier, vol. 54(C).
5. GSMA Mobile Gender Gap Report 2023
6. https://telecom.economictimes.indiatimes.com/news/industry/india-largely-drives-gender-gap-in-mobile-internet-use-across-south-asia-lmics-gsma/100652947
7. bfsi.eletsonline.com
8. https://business.outlookindia.com/news/technology-bridging-the-gender-gap-in-financial-inclusion-news-185862
9. https://blogs.adb.org/blog/how-fintech-can-enable-financial-inclusion-and-reduce-gender-gaps-india

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India’s Banking, Financial Services, and Insurance (BFSI) sector has witnessed a notable surge in mergers and acquisitions (M&A) activity. This trend is set against a global backdrop where financial services M&A is also on the rise, particularly involving fintech companies, reflecting a broader shift in the financial industry’s landscape.

In FY22, India’s M&A activity in the BFSI sector reached a three-year high with deals amounting to $90.4 billion in the first nine months of 2021, according to Refinitiv¹. The global financial services M&A landscape remained robust in 2022, with announcements totalling $15.47 billion by February, reflecting a significant 43.7% year-on-year increase. The US (58 deals) led the pack, followed by the UK (14 deals), and India (9 deals), underlining the country’s prominence in the global financial services M&A arena².

Deal activity by value increased ~2.5x in the Financial services sector attributable primarily to deals driven by portfolio restructuring by leveraging cross-selling opportunities and expansion of offerings through investment in fintech and digital capabilities.

The ongoing adoption of digital tools and the need for transformation is expected to continue driving M&A activity³. With India marking its presence prominently in this arena, it becomes imperative to understand the dynamics and potential outcomes of such mergers and acquisitions, especially in the context of fintech firms.

Success Factors in Bank-Fintech Mergers: Insights from a Comprehensive Study

The paper titled “When do M&As with Fintech Firms Benefit Traditional Banks?” published in the British Journal of Management in 2023⁴ aims to explore the factors that determine whether mergers and acquisitions (M&As) with fintech companies are advantageous for traditional banks. Using Refinitiv Eikon database, authors analysed 5856 deals worldwide from 2010 to March 2020, focusing on 60 Fintech M&As. The study focuses on the sustainability of the acquiring bank, the extent of minority ownership in the fintech company, and the institutional differences between the fintech’s home country and the bank’s home country.

Key findings and insights from the study:

1. Acquirer Sustainability: The sustainability of the acquiring bank has a U-shaped effect on the bank’s expected performance. Banks that prioritize environmental, social, and governance (ESG) factors tend to perform well in fintech mergers. However, the costs associated with sustainability initiatives can also negatively impact performance. Overall, a balance is needed.
2. Minority Acquisition: Acquiring a minority stake (less than 25%) in a fintech company tends to positively affect the acquiring bank’s stock prices. Gradual integration of knowledge through open innovation is a key benefit of minority acquisitions.
3. Institutional Distance: When banks merge with fintech firms from different regulatory and institutional backgrounds (institutional distance), their stock prices tend to increase. Cross-border mergers offer opportunities for innovation and knowledge diversity.

Implication of the Study

Based on the insights of the research paper, Indian banks considering M&As with fintech firms should develop a strategic approach that incorporates the following elements:

Balanced Sustainability Approach: For Indian banks, this implies a strategic approach to sustainability. Banks need to integrate ESG principles into their core operations and investment decisions, aligning them with long-term profitability and shareholder value. This could involve investing in green technologies, developing sustainable lending practices, or engaging in community development projects. However, it is critical that these initiatives are cost-effective and contribute to the bank’s overall strategic goals.

Selective Minority Investments: The study highlights the positive impact of acquiring minority stakes in fintech companies. For Indian banks, this finding offers a strategic path to innovation and digital transformation. By acquiring minority stakes, typically less than 25%, in emerging fintech firms, banks can gain access to new technologies and innovative business models without the complexities and risks associated with full ownership.

This approach allows Indian banks to tap into the agile and innovative culture of fintech start-ups. It enables a gradual integration of new technologies and business models into the traditional banking framework. This open innovation strategy can be particularly beneficial in the rapidly evolving Indian financial market, where there is a constant need for innovation to meet changing consumer demands and regulatory challenges.

Cross-Border M&A Opportunities: Cross-border fintech M&As can offer Indian banks access to advanced technologies and practices that may not yet be prevalent in India. This can provide a competitive edge in the domestic market. Additionally, these mergers can facilitate the entry of Indian banks into new geographic markets, expanding their customer base and diversifying their revenue streams.

The data on recent M&A deals in India’s BFSI sector provides a practical context to the implications of the study (Table 1).

Table 1: Recent M&A Deals in India’s BFSI sector

Source: Globaldata.com⁵

The acquisition of BillDesk by PayU and HDFC Life Insurance’s acquisition of Exide Life Insurance, both involving 100% stakes, illustrate the confidence and commitment of acquirers to fully integrate the target companies into their operations. This aligns with the strategic objective of acquiring complete technological and operational capabilities, market share, and customer base.

In contrast, the Sumitomo Mitsui Financial Group’s acquisition of a 25% stake in Fullerton India and Alphabet Inc’s acquisition of a minority stake in Bharti Airtel represent the strategic benefit of minority acquisitions as outlined in the study. These deals allow the acquirers to benefit from innovative capabilities and market presence without the complexities of full integration, as well as gradual knowledge integration and shared innovation.

Conclusion

There is significant potential for growth and innovation through strategic M&As with fintech firms. However, this requires a balanced approach to sustainability, a strategic focus on minority acquisitions, and an openness to cross-border opportunities. By carefully considering these factors, Indian banks can leverage fintech M&As to enhance their competitiveness, drive innovation, and ensure long-term profitability in an increasingly digital financial landscape.

Sources:

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The research paper on the Impact of Fintech Firms on Bank Financial Stability in the Journal Electronic Commerce Research (2022) discusses how the growth of Fintech companies, which use technology to provide financial services, impacts the stability of traditional banks. The sample consists of 26 Islamic and conventional banks from Malaysia from 2003 to 2018¹. It was found that FinTech companies came into existence because traditional banks had problems, especially during the global financial crisis in 2007-2008. Fintech stepped in to offer solutions to these problems.

Fintech companies offer cheaper and more efficient services, impacting traditional banks’ loan profits. To stay strong, banks should invest in innovation. Banks can respond to Fintech competition by incorporating Fintech services to enhance efficiency and stability or taking risks to maintain profits. Smaller banks adapt faster due to their size and flexibility, while larger banks should protect their customer base with competitive services. Banks with weak corporate governance may be more inclined to adopt Fintech services to address governance issues.

India Perspective

In India, large banks are actively integrating with fintech companies. The future of India’s financial sector depends on these partnerships, combining traditional banking strengths with fintech innovation. We expect more such collaborations in the coming years thereby, playing a crucial role in India’s $5 trillion economy goal⁴.

Figure 1: Partnership between Banks and Fintechs

Rise of Fintechs

The rising trajectory of Fintech companies in banks seems to improve the system’s financial soundness. A recent report by CRISIL Research highlighted the various aspects that have impacted Fintech firms³.

1. Expanding Market Size

Owing to the rise of Fintechs, private banks, and brokerage players have been quick to adapt to changes. But smaller and mid-sized public sector banks have been lagging. The reason can be high initial investments and smaller customer bases which lead to slower adoption rates. Small banks have started embracing neobank architecture. This approach enables them to operate at a lower cost while maintaining compliance. But overall Fintech has pushed the traditional players to relook at their growth strategies positively.

2. Enhancing operational efficiency

Fintechs have been at the forefront of automation. Today, automation has become a crucial factor in the success of brokerage players and large private banks. Smaller NBFCs and PSUs are however lagging in embracing automation. The reason may be their risk-averse nature or scale of operations. They should consider automated solutions to streamline their loan processing workflow and improve their ability to bear risks. With advancements in technology like artificial intelligence and robotics, the initial investment in automation may seem daunting, but the long-term benefits are undeniable. The potential reduction in costs and improved efficiency will serve as a competitive advantage for smaller banks in the financial market.

3. Offering new products

The use of technology in cross-selling has become crucial for large private banks to manage and expand their product offerings. With data mining at their disposal, these banks can target existing customers and offer them personalized products such as personal loans. Small and mid-sized NBFCs and PSUs lag in this aspect due to a limited customer base and changing market demands. These banks need to take a proactive approach to increasing their product portfolio to stay competitive and ensure financial stability. By leveraging technology and data analytics, smaller banks can also tap into the potential of cross-selling and provide their customers with a wider range of services.

4. Customer service and engagement

Fintechs upended the conventional wisdom that you need a large branch presence to drive customer satisfaction. Larger new private banks have harnessed the power of digital channels to improve customer engagement and query resolution. With the implementation of AI bots and automated processes, these banks have not only enhanced efficiency but also instilled a sense of security in their customers. Small and mid-sized NBFCs and PSUs who have been lagging on this front, need to consider this an opportunity to offer personalized and relevant products.

5. Reach more unserved and underserved customers

The collaboration between large private banks and digital solution providers has led to innovative solutions for semi-urban and rural sectors. However, there is still room for growth in reaching out to more customers, especially in the small and mid-sized PSU segment. To bridge this gap, small banks must focus on expanding their reach and offerings, while also keeping up with the advancements made by fintech competitors. These banks need to evolve from focusing on payments and branching into core areas like savings and credit. With such efforts, we can expect to see increased financial stability and improved access to financial services for all segments of society.

6. Lowered Cost for unserved and underserved customers

On this front, surprisingly large new private banks are lagging in responsiveness to fintech. The brokerage players of small and & mid-sized NBFCs, and even large PSUs are more responsive towards an accelerated focus on fintechs to serve the unserved market. Large new private banks may still prioritize established markets to maintain profit margins.

Figure 2: Impact of Fintech
On a scale of 1 to 10 where 1 = Lowest adoption and 10 = Highest adoption

Source: CRISIL research

Conclusion

Overall, the growth of Fintechs has been hugely positive for India; with Fintechs providing higher accessibility and affordability of financial services. Traditional banks will need to adapt to these changes by incorporating Fintech services. Smaller banks are often quicker to adapt, and banks with low corporate governance may rely more on Fintechs to address their governance issues. With the right balance between innovation and customer protection, the industry has the potential to grow even further.

Sources:

1. Safiullah, M., Paramati, S.R., Impact of Fintech firms on bank financial stability. Electronic Commerce Research (2022).
2. The Economic Times
3. https://issuu.com/humanxdesign/docs/impact_of_digital_transformation_on_incumbents_ful
4. livemint.com

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In the past five years, the Indian Start-up ecosystem has raked in around $100 billion in venture capital funding. However, FY22 witnessed a drop in Indian VC funding to $25.7Bn (0.7x of 2021 funding) possibly due to the market pullback by VC funds that were picky about their investments. Nonetheless, FY22 investments were still 50% higher than investments in Start-ups in 2019.

Impact of SVB Crisis on the Indian Start-ups ecosystem

As per our research, the SVB crisis can potentially have both negative and positive spillover impacts on Indian start-ups as outlined below:

• Reduced funding from international investors
  Due to increased caution and risk aversion among many international investors as a direct result of the SVB crisis, investments in Indian start-ups could possibly decline. The start-ups can become vulnerable to a funding crunch which can result in a scale-down of operations or shutdown. International investors are important for late-stage start-ups, the unicorns & decacorns, and so the slowdown in international investors can adversely affect the scaling-up plan of late-stage start-ups.
• Increased scrutiny of start-ups’ financial standing and its effect on innovation
  The current crisis may result in investors giving more consideration to the financial stability and risk profile of Start-ups and giving more weightage to their revenue, profitability, and cash flows. Also, we expect a stronger emphasis from investors toward joint ventures & consolidations between new Start-ups and established ones.
• Potential positive spillover impact of the US economy
  Despite the negative impacts, there are potential positive spillover effects from the risk of a slowdown in the US economy driven by high inflation, and the US investors are eventually forced to seek out higher growth regions such as India. Indian Start-ups especially late-stage Start-ups just need to navigate the brief period of volatility and slowdown in International capital. A slowdown in the US economy is expected to be positive in the medium to long term with a higher influx of capital into the Indian venture market.
• Positive impact on new opportunities for Financial Service Providers
  There are many financial service companies in India that offer the same services as SVB, albeit on a smaller scale, and the collapse presents a chance for new businesses to offer new products and services. For instance, some of the active private sector banks in the Start-up space such as HDFC Bank, ICICI Bank, IDFC Bank, and Kotak Mahindra Bank, through their branches in Gujarat International Finance Tec-City (“GIFT City”), can use this opportunity to replace SVB as a safer home for the foreign currency Start-up capital that has been raised.
• Regulatory oversight and reporting
  The SVB problem is expected to lead to further regulatory control and scrutiny of financial institutions, making sure that other banks and financial services providers are properly managing and disclosing their risks. However, in the near term, this would also throw up more opportunities for RegTech Start-ups.
• There could be a shift in investment focus to later-stage Start-ups
  Investors may wish to change their focus from early-stage to later-stage Start-ups with tested business models and stronger revenue-generating skills as they become more risk-averse. One can also argue that a reduction in international funding and a shift of investment focus to later-stage Start-ups can put to risk the rate of innovation in India. However, we do not foresee this risk at this stage. There are officially 82,000 Start-ups and counting, along with a multitude of investors, Incubators, Accelerators & Government supported programs. So, we believe that the Indian start-up ecosystem has attained critical mass to sustain global shocks. From a funding perspective, India has a vibrant ecosystem of Government supported players & Angel investors; who have hitherto been largely unaffected by the SVB crisis. So, innovation at the founding stage is unlikely to be significantly affected.

Strategies for Indian Start-ups

In response to the potentially changing investment landscape, Indian Start-ups can adopt various strategies to navigate the challenges posed by the SVB crisis.

• Focus on profitability and sustainable growth
  Start-ups will need to prioritize revenue, streamline operations, and make wise financial decisions while focusing even more on profitability and sustainable growth, and also consider securing funds from multiple sources such as Angel Investors, Venture Capitalists, or Crowdfunding Platforms to minimize the risk of relying on a single source and increase chances of long-term sustainability.
• Improve operational efficiency
  Improving operational efficiency results in enhanced financial stability and attractiveness to investors. Start-ups will need to pay special attention to reducing their overheads and optimizing their marketing and supply chain strategy.
• Diversify funding sources
  Indian Start-ups must look for alternate sources of finance and growth, such as forming alliances with other businesses, signing contracts with clients, accessing Venture Debt, and participating in government-sponsored programmes.
• Transparent governance and risk management
  Start-ups will need to be more transparent to demonstrate their overall strength as an operational firm in order to assuage investor fears and improve their reputation.
• Government and Institutional support
  Indian government should respond more aggressively to the SVB crisis to ensure there is no materially adverse impact on Indian Start-ups. The last 5 to 7 years have shown tremendous benefits to Start-up ecosystem from various visionary initiatives of the Government such as The Atal Innovation Mission, Start-up India, and the National Start-up Awards. Government should enhance the budget allocation to Start-up ecosystems & Start-up Seed Funds. Moreover, the government should create incremental discretionary allocations to invest in incubators and to make further capital available for investment in early-stage Start-ups. Incubators & Accelerators are force multipliers that catapult Start-ups to the next level.

In conclusion, the SVB issue may significantly impact Indian start-ups, investors, and the venture capital industry as a whole. Start-ups will be able to overcome many obstacles by focusing on profitability, operational efficiency, finding alternative sources of finance, and enhancing governance standards.

This article was originally published in Times of India.

Link to the article: https://timesofindia.indiatimes.com/blogs/voices/impact-of-svb-crisis-on-the-indian-start-up-ecosystem-a-comprehensive-analysis

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