Author: Arvind Agarwal, Founder & CEO – C4D Partners
Publication: Economic Times
The Fintech sector in India has witnessed remarkable growth in the past half a decade. With over four thousand active fintech start-ups, the US$31B industry is estimated to reach US$150B by 2025. This development can be accredited to several factors like rapid adoption of technology, high internet usage, the tremendous response to the PM Jan Dhan Yojana that led to the opening of over 440 million bank accounts, and most recently, the upsurge in digital transactions accelerated by the pandemic.
Despite this optimistic picture painted by huge numbers, the sector has thus far not been able to bridge urban-rural India divide in terms of adoption of fintech services. Here are a few reasons why leading fintech companies that are riding high on the back of urban India have not and will not venture into rural markets anytime soon.
As per the World Bank, 190 million Indians are unbanked, i.e., “without an account at a financial institution or with a mobile money provider”, making it the second-largest unbanked population. This can be imputed to the fact that over 65 per cent of the Indian population resides in rural regions without a formal banking infrastructure designed for them.
For instance, India has only one bank for every 12 villages, serving around 17,000 people, whereas, in urban areas, a bank branch is available for every 4,700 people. Consequently, the rural population lacks access to essential financial services like bank deposits, ATMs, credit, insurance and cash transfers. This absence of basic infrastructure is a significant barrier for fintech companies to grow in the rural markets.
The digital divide between urban and rural populaces in the country is discernibly evident. The literacy rate in rural India stands at 73.5%, which is considerably lower compared to urban areas, where the literacy rate is 87.7%. This gap forms a matter of concern for the fintech companies, as a higher literacy rate usually results in more digital literacy and helps build people’s trust in new technologies, which is essential for FinTech companies to grow in any geography.
Offering financial services to lower-income groups can be perilous for fintech companies. Not only will the costs be high but there would also be no guarantee of investment returns. Arguably, it must also be considered that in rural regions where only a handful of fintech players are present, improved financial services are not a privilege but a prerequisite to ensure security in transactions. There is a need for these services to be accessible in rural regions to ensure financial inclusion is achieved across the country.
Only 28% of the rural population has access to internet-enabled smartphones and internet connectivity in these regions is inferior. Additionally, lack of comfort with technology, little or no smartphone know-how and poor network encumber the rural populace from availing digital financial services. In these conditions, it is difficult for fintech companies to venture into the rural markets and enable services that are majorly based on people having access to technology.
The Fintech sector needs to work towards building an ecosystem that enables the distribution and consumption of fintech services across regions. To do this, companies must integrate their technology with low-cost physical infrastructure underpinned by a strong distribution network. Considering the current status quo, fintech needs to go “phygital” in rural India. This will aid the process of building awareness as well as trust and also enable excellent customer service.
Though we have achieved notable milestones, moving toward India’s financial inclusion goal is still a distant dream. The largely underserved and untapped Indian rural heartland holds immense potential for fintech businesses but sustaining these businesses will be a challenge. If any fintech company is to fill these gaps themselves, they would undoubtedly incur high customer acquisition costs, a significant hindrance for them in replicating the success achieved in urban regions. The challenge before Fintech companies is tough but whoever cracks this rural puzzle will not only unlock a goldmine of market opportunities but also help India achieve its financial inclusion goals.
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