Technology is Reshaing Indian Financial Sector

The Indian financial sector is undergoing a transformative revolution. The growth and transformation is fueled by the rapid adoption of technology. From digital payments to artificial intelligence-driven lending, technology is creating new opportunities, improving efficiency, enhancing user experience, and even democratizing finance for Indian users and investors.

Let us look into the key technological advancements reshaping India's financial landscape and explore how they impact businesses, consumers, and the economy as a whole.

Major Developments that changed the financial sector

Let us look at the developments in the Indian financial sector:

1. Digital Payments Revolution

The biggest game-changer in the Indian financial sector has been the digital payments boom. The Unified Payments Interface (UPI) launch by the National Payments Corporation of India (NPCI) in 2016 was a game-changer.

The Reserve Bank of India (RBI) has supported this trend by promoting digital wallets and payment banks, aiming to make digital transactions as ubiquitous as cash. This shift has also encouraged businesses to go cashless, reducing black-market activities and bringing more of the informal economy into the financial mainstream.

2. Artificial Intelligence and Machine Learning in Lending

AI and machine learning (ML) are revolutionizing lending by enhancing credit assessment and risk management. If you have been around for a while (as a consumer or business), you would know that traditional lending relied heavily on credit scores and lengthy paperwork. Most times, the process led to the exclusion of vast portions of the population who lacked formal credit histories. Fintech companies now use AI and ML to assess loan eligibility based on alternative data, such as mobile usage, transaction history, and even social media activity.

3. Robo-Advisors and Automated Wealth Management

Robo-advisors are becoming increasingly popular for wealth management in India, particularly among the younger, tech-savvy demographic. These platforms use algorithms to create and manage investment portfolios based on individual goals, risk tolerance, and time horizon. This democratization of wealth management is significant in a country where financial literacy is low, as robo-advisors also help users understand their financial goals and investment options in simpler terms.

4. Digital-First Banking and Neobanks

Neobanks, or digital-only banks, are rapidly gaining popularity in India. Unlike traditional banks, neobanks operate exclusively online, without any physical branches, providing a range of banking services, directly through mobile apps.

The Rise of FinTechs

Fintechs are all around us, and it is no surprise that India has emerged as a global fintech hub. But an essential question is why have been fintechs so successful in India?

The rise of fintechs in India can be linked to a unique confluence of factors: a large population, increasing internet penetration, and a supportive government. The country's fintech sector has experienced explosive growth, revolutionizing traditional financial services.

Let us look at some of the reasons for the rise of fintech in India:

Digital India Initiative: The government's Digital India initiative has accelerated the adoption of digital technologies, including in the financial sector (details were also covered in previous section)
Demonetization: The 2016 demonetization pushed people towards digital payments, leading to a surge in digital wallets and mobile banking.
Rise of Mobile Payments: Mobile payment platforms like UPI (Unified Payments Interface) have made cashless transactions seamless and accessible to millions of Indians.
A Young, Tech-Savvy Population: India's young and tech-savvy population is eager to adopt new technologies, driving the demand for innovative financial solutions.
Government Support: The government has implemented supportive policies and regulations to foster the growth of the fintech sector.

What impact has the digital transformation caused?

The digital transformation in India’s financial sector has profoundly impacted various aspects of the economy and daily life. Here are some of the key effects:

1. Accessibility to Financial Services: With mobile banking, digital wallets, and UPI, millions of Indians, especially in rural areas, now have access to formal financial services. Initiatives like Aadhaar and Jan Dhan Yojana have enabled previously unbanked populations to open accounts, receive government subsidies directly, and participate in the digital economy.

2. Wider Reach of Credit: Fintech companies use alternative data sources and AI-driven credit scoring to assess the creditworthiness of people with limited access to traditional banking. This has expanded access to loans for small businesses and individuals in rural and underserved areas.

3. Lower Operational Costs: With digital-only platforms like neobanks, financial institutions can operate without physical branches, which reduces overhead and allows them to offer lower fees and better interest rates.

4. Small Business Empowerment: The digitalization of payments and lending has allowed micro, small, and medium enterprises (MSMEs) to access formal credit, pay digitally, and streamline operations, thereby driving entrepreneurship and economic growth.

5. Increased Consumer Spending: With easier access to credit and digital payment methods, consumer spending has increased, which has boosted various sectors such as retail, e-commerce, and real estate.

What is the future of the Indian Financial Sector?

As discussed above, India's financial services sector has witnessed remarkable growth in recent years. And this is only the beginning, the upward trajectory is poised to continue, making India a global financial powerhouse. Let us look at the future of different areas of the Indian financial sector.

1. A Booming Wealth Management Industry

India's high-net-worth individual (HNWI) population presents a significant opportunity for the wealth management industry. With an estimated 16.57 lakh HNWIs by 2027, India is set to become the fourth-largest private wealth market globally. This growth is fueled by factors such as increasing entrepreneurial activity, rising incomes, and a growing middle class.

2. A Vibrant Insurance Market

The Indian insurance market is also experiencing rapid growth, driven by increasing awareness of insurance products and government initiatives. The market is projected to reach US$ 250 billion by 2025, offering significant potential for both domestic and international players. The relaxation of foreign investment norms has further opened up the sector, attracting global insurers to form strategic partnerships with Indian companies.

3. A Thriving Mutual Fund Industry

The Association of Mutual Funds in India (AMFI) has ambitious growth targets, aiming to increase assets under management (AUM) to Rs 95 lakh crore ($1.15 trillion) and investor accounts to 130 million by 2025. This growth is fueled by factors such as increasing investor awareness, rising disposable incomes, and the convenience of investing through mutual funds.

4. A Digital Revolution

India's mobile wallet industry is witnessing exponential growth, with a projected CAGR of 23.9% between 2023 and 2027. The widespread adoption of digital payment platforms, such as UPI, has revolutionized the way Indians make payments, leading to increased financial inclusion and efficiency.

5. A Rising Stock Market

India's stock market has attracted significant global interest, with investors pouring money into Indian equities. Goldman Sachs predicts that India's stock market could surpass the UK to become the fifth-largest in the world by 2024. This growth is driven by strong economic fundamentals, a favorable demographic dividend, and a supportive government policy environment.

Major Roles of Digital Platforms in the Financial Sector

Digital platforms have revolutionized the Indian financial sector, playing several major roles that enhance accessibility, efficiency, and security. Here are some key functions they serve:

Microcredit and Microfinance: Digital platforms offer microloans to small businesses and individuals who may not qualify for traditional credit, boosting financial inclusion and economic development.
Direct Benefit Transfers (DBT): Government schemes, linked to digital payment platforms, ensure welfare benefits reach intended beneficiaries directly, reducing leakage and fraud.
Digital Wallets: Platforms like Google Pay, PhonePe, and Paytm allow users to store money digitally and make payments across merchants, utilities, and services, boosting the cashless economy.
Online Investment Platforms: Investment apps offer a user-friendly interface for stock market investing, mutual funds, and bonds, making investing accessible to new investors.
Robo-Advisory Services: Automated platforms provide personalized investment advice based on algorithms, allowing users to receive low-cost, data-driven financial guidance.
P2P Lending Platforms: Platforms such as Faircent and Lendbox facilitate peer-to-peer lending, providing alternative investment opportunities and credit options for borrowers.
Buy Now, Pay Later (BNPL): BNPL services, offered by many fintechs allow consumers to purchase items instantly and pay later in installments, driving consumption and supporting small businesses.

Before you go

The fusion of technology, with finance in India is bringing profound change. From digital payments and AI-driven lending to blockchain and insurtech, every aspect of the financial sector is being reimagined. This digital transformation is not only improving efficiency and accessibility but also helping to bridge financial divides and boost economic growth.

As India continues to advance technologically, the financial sector will keep evolving, driving financial inclusion and empowering consumers and businesses alike. The future of finance in India is digital, inclusive, and data-driven—a testament to how technology is reshaping the country’s economic landscape.