SUMMARY

The combination of finance and technology has led to the emergence of groundbreaking business models that have transformed the financial sector by offering affordable, efficient, and user-centric solutions.

Key factors such as demographic changes, the Covid-19 pandemic, and the government-driven India Stack have significantly contributed to the growth of the fintech sector.

India boasts over 10,000 financial technology (fintech) firms and holds the position of third globally.

Adapting to Market Changes

Andrew Grove’s saying about the necessity for constant vigilance underlines the imperative for companies to adapt in light of fast-paced technological changes and climate issues. To maintain a competitive edge, firms must enhance their ability to change and ensure financial resilience. Strong leadership plays a vital role in promoting digital transformation, innovation, and sustainable practices. Only by developing these qualities can companies stay ahead.

Innovative Business Models

The intersection of finance and technology has generated pioneering business models that are reshaping the financial landscape through accessible, efficient, and user-focused solutions.

As indicated in the latest PIB publication, India is home to more than 10,000 fintech entities and ranks third in the world. The growth of the fintech industry has been propelled by demographic shifts, the impact of the Covid-19 pandemic, and government initiatives like India Stack.

The 2023 Elevation Capital Indian Fintech Report highlights that the fintech sector is set to create INR 33.2 Tn in value by 2030. Innovations emanating from sectors like paytech, lendtech, wealthtech, insurtech, and regtech are reimagining the foundations of traditional finance.

They are revolutionising the commercial environment with unconventional products, including buy now pay later (BNPL) options, peer-to-peer (P2P) lending, white-label robo-advisors, risk management solutions, and fraud detection systems.

Regulatory Technology and Compliance

Amidst the complexities and evolving regulations, regtech solutions facilitate compliance and provide timely alerts regarding potential infractions. Whether it’s concerning taxation, intellectual property, financial reporting, or environmental, social, and governance (ESG) regulations, AI technologies such as robotic process automation and predictive analysis can help reduce the regulatory pressures on businesses.

Banking as a Service

Today’s banking-as-a-service (BaaS) framework allows any digitally active business to provide essential banking services under its own name through application programming interface (API) integrations.

For example, embedded banking permits e-commerce businesses to partner with financial institutions to deliver highly personalised services such as instant account creation, card issuance, or small loan options, all without the need to develop in-house technology or obtain a financial institution licence.

Additionally, the Reserve Bank of India’s (RBI) regulatory sandbox promotes a ‘learning by doing’ methodology, allowing startups with a minimum net worth of INR 1 Mn to invest in new and responsible financial products. This initiative facilitates the live testing of new ideas for a limited time, enabling fintech firms to establish a lasting roadmap that integrates AI, blockchain, and data analysis while also attracting international funding partnerships.

Challenges in the Fintech Landscape

However, in an industry characterised by rapid innovation, data-driven strategies, and global networking, challenges regarding security breaches, platform downtime, and targeted user engagement are unavoidable.

The recent actions by the RBI against Paytm Payment Bank and Kotak Mahindra Bank’s digital division for significant failures in know your customer (KYC) protocols and IT system weaknesses underscore these concerns. Implementing a zero-trust framework, based on the principle of ‘never trust, always verify,’ can fortify security protocols for businesses, protecting sensitive data from unauthorised access.

To ensure a balance between innovation and oversight, the RBI has mandated self-regulation for diverse businesses within the fintech sector.

The regulatory sandbox also requires participating firms to adhere to the Digital Personal Data Protection Act, 2023, and imposes a clear prohibition on crypto-asset services and initial coin offerings (ICOs) that currently lack specific legislation.

Energy and Sustainability Initiatives

The rise of AI-enabled applications is driving significant increases in energy consumption in data centres, making it vital to monitor the digital carbon footprint. According to research from Goldman Sachs, the anticipated demand for energy in data centres worldwide is projected to rise by 160% by 2030.

Recognising the imperative to tackle the climate emergency, the Government of India has initiated a policy for 100% foreign direct investment (FDI) in renewable energy initiatives and launched a carbon credit trading scheme in June 2023. The RBI’s report on currency and finance indicates that a minimum annual investment equal to 2.5% of gross domestic product (GDP) is essential for funding sustainability projects throughout this decade.

Pursuing Purpose-Driven Finance

Given the increasing demand for purpose-driven financing, businesses are set to embrace a ‘double bottom line’ strategy. By focusing on commercially viable projects that also drive social or environmental outcomes, they can achieve beneficial impacts alongside financial gains. This is evident in sectors such as edtech, fintech, and medtech, as well as in greentech projects like carbon capture and regenerative agriculture, which present a strong case for combining investment returns with positive impact.

A recent survey by Impact Investors Council (IIC) shows that equity investments in impact-focused enterprises delivered an average internal rate of return (IRR) of about 30% over the past decade. Clearly, the pathways for fundraising are shifting towards initiatives that enhance community empowerment and address climate challenges.

The 2023 Fitch Ratings Report indicates that issuances through Green, Social, Sustainability, and Sustainability-linked (GSSS or GS3) bonds represent only 3.8% of the overall corporate debt market. This reveals that while the segment for GS3 bonds, which includes climate, marine, and solar bonds, is steadily expanding, there is substantial room for growth. Innovations in sustainable financing methods are crucial for enhancing companies’ green credentials and securing funding at reduced costs.

With a policy commitment to achieving carbon neutrality by 2070 and investors demanding ESG disclosures, businesses should enhance their adaptive resilience through creativity, collaboration, and effective risk management.