• Ishaan Gvalani

Creating A Successful FinTech Startup Ecosystem


In recent years, FinTech (short for Financial Technology) has caused large-scale disruption in the finance industry. According to a 2016 study by Accenture, global FinTech investments rose 67% year on year. In another study conducted by PwC in the same year, 83% of financial institutions believed that different parts of their companies were at risk due to the growth of FinTech. Its rapid evolution can be attributed to the growth in Information Technology (IT), business-friendly regulations and environments globally, and a growing sharing economy. This article aims to explore the rise of the industry and shed light on creating a sustainable ecosystem for FinTech startups to thrive in.



The Birth of FinTech


To understand the important position that the industry holds today, it is essential to shed light on its history and gradual emergence.The internet boom of the late 1990’s provided a platform for the beginning of the FinTech revolution. Lower transaction costs and continuous technological advancements led to the birth of e-finance.


E-Finance comprised of any financial transactions undertaken with the help of technology, including, stock trading and net banking. The next biggest contributor to the FinTech revolution was the explosion in smartphone usage that followed in the late 2000’s. This in turn resulted in the creation of mobile payments and mobile banking, both being extensions of e-finance. Further, the 2008 financial crisis led to several customers losing faith in traditional financial institutions, thereby giving the FinTech industry yet another boost.


Today, FinTech has come a long way, and by using technologies such as Big Data, Social Media, and Artificial Intelligence, it is proving to be a game changer for the finance industry.



What is an Ecosystem?


Essentially, an ecosystem is comprised of a network of organisations. These include, but are not limited to: suppliers, distributors, consumers, competitors and the government. Each of these entities is affected by another, thereby creating a competitive and constantly evolving relationship between them. In an ecosystem as dynamic as the FinTech industry, it is essential for stakeholders to be flexible in order to adapt to the changing needs of the market. In 1993, business strategist James Moore suggested that a company must be viewed as:

a “member of a business ecosystem with participants spanning across multiple industries” rather than as a “single firm in an industry”.

When an ecosystem is said to be thriving, it implies that stakeholders have developed a mechanism that streamlines the flow of ideas, capital and talent throughout the system.



A Case Study


In order for a startup ecosystem to thrive, it is essential that entrepreneurs, financial institutions, and the government participate and collaborate with each other. In addition to these three stakeholders, technology developers and financial customers are an integral part of the FinTech ecosystem. These five stakeholders are equally important as they enable competition, collaboration and innovation in the industry. However, the success of these startups largely depends on government regulations and legalities. This brings us to the central question of the paper. How can a successful FinTech startup ecosystem be established? This section aims to address the above question by using India and Singapore as case study examples.


“The direct top-down approach and indirect bottom-up approach are two ends of the spectrum in the role of government in developing an innovation ecosystem”.

- ORF Occasional Paper, 2019.


In a top-down approach, the government intervenes directly and involves itself in the innovation process. On the other hand, in a bottom-up approach, the government merely facilitates and promotes innovation via market mechanisms and indirect incentives. India seems to have chosen the latter. In recent years, the Indian government has pushed for the ease of doing business in the country. Considering the fact that 45 million SMEs (Small and Medium Enterprises) contributed to 40% of India’s GDP in 2016, the government’s ambitious plans to stimulate the sector are understandable. Prior research shows that the various determinants of startups and entrepreneurship development can be divided into three categories: a) Regulatory framework, b) Values, culture and skills, c) Access to finance, market, R&D and technology. Unfortunately, India ranks poorly in all three categories, even when compared to other developing economies. A lack of entrepreneurial training, weak enforcement of regulatory laws and negative views towards entrepreneurship are the major causes for these dismal results. Despite these barriers however, at 52 percent, India surprisingly has the second highest FinTech adoption rate globally.


These statistics show that the Government, albeit with certain challenges, has been successful in establishing a FinTech ecosystem in India. In 2016, the “Startup India” campaign was launched with the aim of supporting a booming startup ecosystem. Under this campaign, several incentives were introduced, including but not limited to: tax exemptions, a $1.5 billion investment in a corpus to support startups, exemption from capital gains and so on. Further, the ‘Digital India’ and ‘Smart Cities’ campaign have been created with the aim of pushing for a digital economy.


Additionally, the United Payments Interface (UPI), introduced by the government of India, has rapidly emerged as the fastest and primary payment instrument in the country. Despite its unique hurdles, India has come a long way in the finance sector. Today, the country is known as the “poster child of emerging markets” and is poised to be another Asian success story.


On the other hand, Singapore’s FinTech story is different. The Singapore government has successfully created a conducive business environment in the country via the establishment of government related entities such as SPRING Singapore, and IE Singapore. The biggest of these entities however, is the ‘Singapore FinTech Consortium’. It is essentially a representative/unitary organisation responsible for supporting the entire FinTech ecosystem in Singapore. Research shows that countries with a unitary organisation for an industry tend to be far more successful in establishing a booming ecosystem. These entities have pushed for an increase in innovation and have been instrumental in shaping Singapore’s FinTech success story. Further, the country’s strong legal framework provides comfort and stability to companies looking to build and expand in the nation state . For example, the Monetary Authority of Singapore (MAS) has been heavily involved in the development of the FinTech ecosystem. Additionally, the government is currently working on capitalising on the synergies that exist within other tech sectors, such as Ed Tech and Health Tech. The government’s efforts seem to be paying off as Singapore is now a global FinTech hub. The country is currently ranked the 4th largest financial centre in the world, and ranked 1st in the World Economic Forum’s IT Report 2015 .


Factors that have contributed to Singapore’s thriving FinTech ecosystem include, but are not limited to: large number of startups and entrepreneurs, availability of investment capital to fund startups and a highly skilled community of mentors and experts. Several Venture Capitalists (VCs) are observing finance trends in Southeast Asia, and Singapore in particular. As a result, there is a large inflow of funds into the country. Further, Singapore hosts several global networking events such as Echelon, FinTech social and so on. These events play a key role in bringing the community of entrepreneurs closer, and strengthening the exiting ecosystem.


It is evident that the Singapore government has chosen a ‘top-down’ approach in establishing the nation as a global hub for finance. With investment in Singapore poised to soar, there is no doubt that Singapore will continue to dominate Southeast Asia in the FinTech sector.



Challenges Specific to India


A country as diverse as India is bound to have a unique set of challenges.

First, due to the country’s regional diversity, building a pan-India startup is often difficult as languages, cultures and perceptions vary from state to state. Second, the digital divide between rural and urban India leads to an information gap between startups and consumers. 70 percent of India still continues to live in rural areas and hence, their exposure to technology and financial products is still limited. Owing to starkly different living environments and routines, startups often have little to no understanding of the challenges rural Indians face.



Conclusion


In conclusion, it is evident that the government plays a major role in determining the success of any entrepreneurial ecosystem, and FinTech is no exception. Fortunately, most governments across the world have adopted a FinTech friendly approach since the 2008 financial crisis. By passing simpler and favourable regulatory laws, it is clear that governments are aware of the benefits that the industry brings. For example, the Singapore government is currently making changes to its online payment regulations to improve the ease of doing business for payment service providers and boost payment technology growth. Additionally, it is likely that the pandemic-induced crisis of 2020 will provide another major boost to the industry as consumers prefer to go cashless and avoid any direct contact. According to research conducted by McKinsey in December 2020, approximately 60 percent of the US population has begun using FinTech products since the start of the pandemic in March. Additionally, 40 percent of the users surveyed stated that they used at least one FinTech product between May and November 2020.


In India, the future holds several opportunities and tremendous potential. Entrepreneurship is increasingly being seen in a positive light, and a growing tech-savvy population is a lucrative market for companies across the world.



 

References:


Lee, In, and Yong Jae Shin. "Fintech: Ecosystem, business models, investment decisions, and challenges." Business Horizons 61.1 (2018): 35-46.


Hayes, Adam. “Business Ecosystem.” Investopedia, 20 Jan. 2021.


Korreck, Sabrina. "The Indian Startup Ecosystem: Drivers, Challenges and Pillars of Support." ORF Occasional Paper 210 (2019).

https://www.orfonline.org/research/the-indian-startup-ecosystem-drivers-challenges-and-pillars-of-support-55387/


Krivkovich, Alexis, et al. “How US Customers' Attitudes to Fintech Are Shifting during the Pandemic.” McKinsey & Company, 19 Jan. 2021.

https://www.mckinsey.com/industries/financial-services/our-insights/how-us-customers-attitudes-to-fintech-are-shifting-during-the-pandemic


Gnirk, Markus, and Gerben Visser. “Singapore, the FinTech Hub for Southeast Asia.” https://www.researchgate.net/publication/301775305_Singapore_the_FinTech_Hub_for_Southeast_Asia


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