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0 3 1 1 A N A L Y S T B I O G R A P H I E S H O W F I N T E C H S A R E A N D A B O U T O U T M A N C R A C K I N G T H E C O N S U L T I N G W O R L D ' S B I G G E S T M A R K E T 0 4 K E Y S T A T I S T I C S 1 5 H O W I N D I A B U I L T A 0 5 N E W F I N A N C I A L S Y S T E M F I N D I N G I N D I A ' S M I S S I N G I N V E S T O R S 1 7 0 6 K E Y R E C O M M E N D A T I O N S I N D I A ' S M U T U A L F U N D B O O M 1 8 0 7 R E F E R E N C E S

T H E F I N T E C H R E V O L U T I O N 1 9 M E T H O D O L O G Y A N D D I S C L A I M E R 0 8 I N D I A ' S F I N T E C H P I O N E E R S

0 9 W H O A R E T H E N E W F I N T E C H L E A D E R S ?

1 0 T H E D I R E C T I N V E S T M E N T M A R K E T

P A G E 0 2 ALISTAIR JOHNSTON SENIOR ANALYST

Alistair holds an MA in Economics from the University of Cambridge and leads Outman Consulting's fintech research.

A trained writer and analyst, Alistair has worked for both fintech startups and hedge funds, and is fascinated by the impact of technology on society, in particular the potential for tech to solve difficult problems such as financial inclusion.

MARIO LOMBARDO PRINCIPAL ANALYST

Mario Lombardo is Outman Consulting's founder and principal analyst. He has over 12 years of experience in the market research sector, supporting a number of leading international ICT market intelligence firms.

Mario designs and manages bespoke projects which support clients in their marketing strategies, business plans and research and development. His contribution varies from data-driven product-tracking all the way to thought leadership pieces.

ABOUT OUTMAN CONSULTING

Outman Consulting provides expert research and advisory services to some of the world’s largest market intelligence consultancies.

We specialise in emerging technologies and early-trend analysis, empowering our clients with the information they need to make informed decisions in a rapidly changing market landscape.

An agile and focused team, we provide bespoke qualitative research and analysis with an international perspective.

O U T M A N C O N S U L T I N G P A G E 0 3 1.3BN 33M

Soon to be the world's most populous A rapidly growing financial country,¹ is on track to overtake services market is predicted to the UK as the fifth largest global add more than 33 million new economy.² Its enormous internal investors in the next five years.³ market and favourable demographics bode well for its future growth story. 73% $75BN

Assets held by the Indian Mutual Almost three quarters of all Funds industry are set to double by digital investment is now going 2023, reaching INR 52 trillion, $75 through mobile.⁴ billion at current exchange rates.⁵

P A G E 0 4 FINDING INDIA'S MISSING INVESTORS

The Indian financial regulator SEBI recently commissioned a nationwide survey to solve a key mystery in the Indian economy.⁶ Its stated goal:

“to gain insight into why so many of those households who can potentially invest in the securities markets, do not.”

Until recently, financial investment in India has been the preserve of a tiny minority: overwhelmingly male, city-dwelling and wealthy.

The under-development of the financial system has not only denied millions the opportunity to increase their prosperity, it has also hampered the efficient allocation of capital within the economy, slowing growth and economic development.

While the old financial infrastructure is struggling to adapt to a rapidly-modernising India, an emerging generation of fintech pioneers is creating an entirely new financial ecosystem,

Not only are these innovations revolutionising and democratising investment in the subcontinent, they are serving as a inspiring model for all financial markets, whether developing or developed.

P A G E 0 5 INDIA'S BOOM

The biggest story in Indian finance is There are around 20 million mutual the soaring popularity of mutual fund fund investors in India. In a country of investments. more than 1.3 billion people, this amounts to only 1.5% of the population. A mutual fund pools money from Nevertheless, the industry is expanding multiple investors in order to purchase quickly. Between March 2017 and June securities like and bonds. Any 2019, assets under management in gains or losses are then shared between Indian mutual funds rose by more than the fund’s members. Mutual funds may 40%, from 17.5 trillion to 24.5 trillion be relatively straightforward and track a rupees (around US $340 billion).⁸ exchange like the BSE (Bombay ), or they may be Figure 1: Indian Mutual Fund Assets Under actively managed in an attempt to Management (Rupees Trillion) secure returns which outperform the 30 market.

These vehicles are often the easiest way for new investors to obtain exposure to new asset classes: paperwork is 20 relatively low, portfolio management decisions are outsourced to professionals, and investors can choose options which broadly match their 10 investment goals and risk profile.

India is the sixth biggest economy in the world, with many predicting that it will overtake the UK for fifth place by 0 the end of this year. However, its Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18 Dec-18 Mar-19 Jun-19 industry is notably underdeveloped, ranking 17th for Source: Association of 2019 assets managed.⁷ Mutual fund investment as a percentage of GDP is This is an industry with tremendous catch- low compared to developed economies up potential. Surging public interest, like the USA and UK, but also economic growth and technological significantly lags behind other change are set to more than double the emerging economies like Brazil. investor base in the next 5 years.

P A G E 0 6 THE FINTECH REVOLUTION

The Indian mutual fund industry has Figure 2: Indian Mutual Fund AUM Forecast set itself the ambitious target of (Rupees Trillion) 60 quadrupling its assets under management to INR 100 trillion by the middle of the next decade. To do this it will have to reach an entirely new type of customer: the young, the 40 less affluent, and people from outside the major metropolitan areas. The arrival of digital investment platforms is essential in meeting 20 these goals.

Though in absolute terms the proportion of assets held by digital 0 platforms is still low, they are 2018 2019 2020 2021 2022 2023 increasingly responsible for Managed by Digital Managed by Non- Digital investment inflows. It is widely Platforms Platforms Source: Outman Consulting, 2020 estimated in the industry that as much as $500 million of new money Figure 3: Indian Mutual Fund Investor Forecast flowed into mutual funds last year via 60 (million) the digital route.

Based on extensive conversations with key market players, Outman Consulting estimates that digital is 40 set to take an increasing share of total assets under management, rising to 16% of total held investments by 2023. More than 20 20 million new investors will be brought into the investing universe over the next 5 years, and nearly half of them will be using digital 0 platforms. 2018 2019 2020 2021 2022 2023

Digital Investors Traditional Investors

Source: Outman Consulting, 2020

P A G E 0 7 INDIA'S FINTECH PIONEERS

Indian fintech is creating an entire financial ecosystem. What started with apps now includes a growing network of loan and investment options.

Figure 4: Indian FinTech Categories

PAYMENTS LOANS INVESTMENT

Source: Outman Consulting, 2020

The digital revolution in Indian finance These days Indian consumers, particularly got underway with the arrival of the young, are far more likely than their mobile payment apps in the early European and American equivalents to years of this decade. use their mobile devices for in-store purchases.⁹ Once that comfort in digital While early growth was promising, the payments had been established, other tipping point into widespread financial services quickly followed. adoption came from the Indian government’s demonetisation of The next wave in Indian fintech was large denomination banknotes in 2016. made up of loan and financing This shock to the economy, and the companies. Recognising that millions of resulting cash shortages, pushed Indians were denied access to credit by millions into digital payments. the old financial structures, these loan platforms allowed users to prove their The enormous potential of these identities in new ways, and used data platforms was quickly recognised by analytics to establish creditworthiness. foreign investors, with , one of the original digital wallets, attracting Now Indians could use their mobile devices to spend and borrow money. investment from both Alibaba and With household wealth increasing, the . obvious next step was to digitise investment.

P A G E 0 8 WHO ARE THE NEW FINTECH LEADERS?

The established business model for mutual fund distributors was to receive a commission from mutual funds for new investments. This gave distributors a strong incentive to push their clients towards the funds with the highest commissions.

In 2013 the Securities and Exchange Board of India (SEBI) began to undermine this cosy arrangement when it mandated that all Asset Management Companies (AMCs) had to offer their customers the option to invest directly in mutual funds, without any involvement from or distributors.

Existing distributors had little interest in exploring the options of the direct investment route as they would have had to overturn their business models. However, the new rules offered emerging fintech platforms an entirely new market.

Founded in 2010 as an online equities : A Case Study in for professional traders, Zerodha quickly realised the untapped potential of the New Indian Finance the Indian retail market.

Recognising the importance of usability and Figure 5: Nithin Kamath, Founder and CEO of Zerodha financial literacy, It has consistently focused on improving its platforms' usability, while educating its investors through its Varsity and TradingQ&A knowledge bases.

In 2017 Zerodha launched Coin, a mutual fund investment platform. Within two years Coin had gained 200,000 active users and now manages half a billion USD of client funds.

Serving a million customers, Zerodha has become the largest retail stock broker in the country, and is currently responsible for around 2% of all trading volume on Indian stock exchanges.

Now, through its Rainmatter startup incubator, it is nurturing the latest generation of fintech innovators.

Source: Zerodha, 2019

P A G E 0 9 THE DIRECT INVESTMENT MARKET

Broadly speaking there are two types of vendor in the digital investment space. First, there are the startups, like Orowealth, Kuvera and . These companies have attracted funding from angel investors and offer a specialised mutual fund service. They rely on word of mouth and social media to attract customers.

The second group is made up of companies which had already achieved great success in a related field. Seeing the potential of the market they then opened up a mutual fund direct option. PaisaBazaar is India's leading financial marketplace, Paytm is the country's most popular wallet, and Zerodha the largest broker. These companies do not need to make a profit from their mutual fund offering. Instead investment forms part of a suite of financial services available to their customers.

Figure 6: Indian Direct Mutual Fund Investment Market Share in 2019

Others 11.5% Paytm 19.9% 2.7%

4.5%

5.3%

FundsIndia 9.6% 18.6%

10.6%

17.3%

Source: Outman Consulting, 2020

P A G E 1 0 HOW FINTECHS ARE CRACKING THE WORLD'S BIGGEST MARKET

Around half of new mutual fund investors are Figure 7: Mobile interface for Groww millennials (aged between 20 and 34).¹⁰ This age group has grown up with the internet and ecommerce, and is the most likely to use its mobile devices for purchases.

They are also the demographic least understood by traditional banking and financial institutions.

However, digital investment platforms have had startling success reaching young people. What are they doing differently?

MOBILE FIRST

Previously lagging behind international trends in smartphone adoption, India is now catching up quickly. By 2022 60% of the country is expected to have a smartphone, while mobile data consumption is predicted to increase by a factor of five, thanks in part to much improved connectivity through new 4G networks.¹¹

Millennials are the generation most comfortable with both mobile and ecommerce, laying the groundwork for app-based financial services. Source: Groww, 2019

In order to persuade a new market of young, tech- All the leading players are keenly aware of savvy Indians to invest, digital platforms have had to the importance of user experience (UX) make themselves approachable, intuitive and and user interface (UI) design to the simple to use. Better connectivity and increased success of their products. This focus on smartphone penetration will do little if the apps clean and uncluttered interfaces has themselves are complicated and difficult to use. allowed investment to go “mobile first”.

According to Outman Consulting research, Though the majority of this generation of fintech over 70% of online trading is already pioneers comes from the financial world, a sizeable going via mobile rather than desktop, and minority are from ecommerce. This latter influence this trend will only become more has been vital to the industry’s success. pronounced.

P A G E 1 1 Figure 8: Route to Digital Investment in 2019

Mobile Investment 27%

Desktop Investment 73%

Source: Outman Consulting, 2020

Figure 9: Indian Smartphone Penetration Forecast

2017

2022

0% 20% 40% 60%

Source: Cisco Global Mobile Data Traffic Forecast Update 2019

P A G E 1 2 LOW COST OF ENTRY GROWING MARKET

In order to persuade the uninitiated into their As the fastest growing large economy in first investment, digital investment platforms the world, Indian GDP is predicted by the have made some key innovations. IMF to rise by nearly 1.5 trillion USD between 2018 and 2023.¹² First, the minimum investment required is often extremely low - for example, 100 With this economic growth will come rupees, which is less than $2. Not only does increased capital looking for investment. this encourage the participation of those of all Estimates from Karvy suggest that total income levels, it also allows potential investors individual wealth will almost double to test the platform by buying and selling tiny during this period, creating a huge investments at minimal risk. opportunity for the investment industry.¹³

Figure 10: Indian GDP (Historical and Forecast)

5000

4000

3000

2000

1000

0

2010 2012 2014 2016 2018 2020 2022 2024

Source: International Monetary Fund, 2019

P A G E 1 3 O U T M A N C O N S U L T I N G .

Not only is India getting richer, it is also getting Figure 11: Indian Youth Population younger. By 2020 the average Indian will be (Historical and Forecast) just 29 years old, and the country is predicted to add 11 million new young people between 600.000.000 2018 and 2023,¹⁴ a new market the size of Belgium in just 5 years. At the same time, millions are moving to cities. This younger, more urban population is the target market for the digital investment platforms, and it's a 400.000.000 market which is set to grow well into the next decade.

Young adults far from retirement have more 200.000.000 time to accumulate wealth, which means that they can take riskier investment decisions. Assets with a higher risk/reward profile, such as equities, are more appealing to this

0 demographic than lower risk/reward choices like government bonds or money market 0 2 4 6 8 0 2 1 1 1 1 1 2 2 0 0 0 0 0 0 0 2 2 2 2 2 2 2 funds. Increased participation by the young is likely to further move Indian investment Source: World Bank, 2019 towards the stock market.

P A G E 1 4 HOW INDIA BUILT A NEW FINANCIAL SYSTEM

Figure 12: Indian Fintech Pyramid A truly democratic financial system needs to offer services at scale. In a country of more than 1 billion INCLUSION people, this means both innovative technological solutions and progressive government policy. ACCESS

Three huge issues must be solved: identity, access and inclusion. IDENTITY

Source: Outman Consulting, 2020

IDENTITY

Without a technological way of proving Government support for financial identity, investment will always have to innovation is also seen with the Unified rely on branch offices or people to check Payments Interface (UPI), a system documents. which facilitates instant real-time transactions between participating Through the government’s banks. Not only can users combine project, every Indian citizen has the right multiple bank accounts in a single app, to a permanent digital ID, allowing them they can also link their mobile numbers to prove their identity without the need and Aadhaar IDs and transfer money to carry paper documents. Aadhaar has without the need for bank details - now generated over 1.2 billion unique convenience that the European or IDs,¹⁵ and covers a staggering 93% of the American consumer can only dream of. vast total population. The Royal (RBI) is actively Almost as significant are the other promoting the next generation of systems built on top of this identity financial services with its Account foundation, such as eKYC (electronic Aggregator scheme. This allows users to Know Your Customer), a way for consent to 3rd parties accessing, though companies to verify the identities of not storing, their information, further their potential clients, and ESign, which speeding up the application process. allows Aadhaar-holders to digitally sign documents.

P A G E 1 5 ACCESS INCLUSION

Potential investors need access to the The fintech investment platforms have internet in order to use the new platforms. made great progress in making their By 2022 the proportion of internet users is services as intuitive and simple as predicted to reach 59.5%, more than possible. Many of the founders have a double the 2017 figure . Internet speeds are background in ecommerce, and it shows set to triple over the same period. ¹⁶ in their products.

The biggest driver here is mobile. Still, while extraordinary progress has Previously lagging international trends been made, there remain significant in smartphone adoption, India is now obstacles to truly widespread adoption. catching up quickly. The number of smartphones is predicted to rise by over India is home to hundreds of languages, 15% per year, climbing above 800 29 of which have more than 1 million million devices by 2022. This represents native speakers. While the fintech apps an increase in market penetration from normally provide their services in Hindi 26% to 60% of the population between and English, almost half of the 2017 and 2022.¹⁷ population speak neither of those languages. With that increased connectivity has come greater use of mobile in While educated middle class Indians are commercial transactions. The Indian well-served by these new platforms, consumer has adapted quickly to much of rural India is still excluded. mobile payments: 44% of Indian . smartphone users have used their device to buy something in-store, compared to just 9% of Brits and 23% of Americans.¹⁸

Figure 13: Aadhaar Card

Source: indiandailylive.com, 2019

P A G E 1 6 KEY RECOMMENDATIONS

Replicating India's fintech progress in other countries will take coordinated effort from three groups: government, financial institutions and new startups.

GOVERNMENT

To truly expand financial inclusion governments need to offer a reliable way to prove identity online. Though progress has been slow, there are now schemes which can be used as models, for instance India's Aadhaar and the Estonian e-identity programme. Not only do these open up financial systems to disruptive new players, they can also improve the efficiency of public service provision. However, governments will need to be strong-willed and ambitious to fight the many special interest groups resisting such changes.

It is essential to have regulators who are on the side of innovation and expansion. The Indian regulator SEBI has been notably supportive, though it has viewed some aspects of fintech, most notably blockchain, with some suspicion.

FINANCE

Incumbent financial institutions are facing their biggest challenge in 50 years. The digital revolution which has transformed so many industries, from music to hospitality, has finally reached finance. Many major financial companies, locked-in to legacy IT systems and vanishing business models, will not survive.

The more forward-thinking will realise that they will have to adapt by either partnering with, or acquiring fintechs, This has already happened in retail brokerage, and is set to spread rapidly across financial services.

START-UPS

There is an explosion of energy and innovation in the Indian fintech space, one which should provide inspiration to startups trying to disrupt their own markets. While we are used to looking to Silicon Valley for glimpses of the future, the American financial system is now years behind China and India, and the gap is growing. A whole generation of financial innovators is blooming in Asia, and the rest of the world would do well to notice them.

P A G E 1 7 REFERENCES

1.World Population Prospects 2019, United Nations. 2.World Economic Outlook 2019, International Monetary Fund. 3.Outman Consulting (2020) 4.Outman Consulting (2020) 5.Outman Consulting (2020) 6.SEBI Investor Survey 2015, published April 2017 7."Unlocking the ₹100 Trillion Opportunity” (2019): Association of Mutual Funds in India and Boston Consulting Group. 8."Unlocking the ₹100 Trillion Opportunity” (2019): Association of Mutual Funds in India and Boston Consulting Group. 9.Global mobile consumer trends, 2nd edition, Deloitte 2019. 10.CAMS survey, July 2019. 11.Cisco Visual Networking Index: Global Mobile Data Traffic Forecast Update, 2017–2022 White Paper. 12.World Economic Outlook 2019, International Monetary Fund. 13.India Wealth Report, 2019, Karvy Private Wealth. 14.World Population Prospects 2019, United Nations. 15.Unique Identification Authority of India, 2019. 16.Cisco Visual Networking Index: Global Mobile Data Traffic Forecast Update, 2017–2022 White Paper. 17.Cisco Visual Networking Index: Global Mobile Data Traffic Forecast Update, 2017–2022 White Paper. 18.Global mobile consumer trends, 2nd edition, Deloitte 2019.

P A G E 1 8 METHODOLOGY AND DISCLAIMER

The data presented in this report provides what Outman Consulting considers to be the best overall assessment of the current and future marketplace.

Data is drawn from a wide range of primary research, including interviews with fintech founders, official bodies and industry associations.

Background information and supporting data is obtained from a range of secondary research sources, including trade publications, company financial reports and conference proceedings, in order to allow data to be further cross-checked and put into context.

For full details of the other reports and services available from Outman Consulting, please refer to our website www.outmanconsulting.com, or contact a member of our team.

While every effort is made by Outman Consulting to provide accurately researched information and carefully supported conclusions and recommendations, in no event will the company or its professionals be liable for information, analysis, advice or recommendations provided to clients, or be liable for actions and decisions taken as a result of this report.

This report is intended for general guidance and information purposes only. This report is under no circumstances intended to be used or considered as financial or investment advice, a recommendation or an offer to sell, or a solicitation of any offer to buy any securities or other form of financial asset. Please note that this is not an offer document. The report is not to be considered as investment research or an objective or independent explanation of the matters contained herein, and is not prepared in accordance with the regulation regarding investment analysis.

The material in the report is obtained from various sources per dating of the report. We have taken reasonable care to ensure that, and to the best of our knowledge, material information contained herein is in accordance with the facts and contains no omission likely to affect its understanding.

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