The Indian government launched the Pradhan Mantri Ujjwala Yojana (PMUY or Ujjwala Scheme) in May 2016. This initiative aims to provide clean cooking fuel to households that have traditionally relied on either firewood, coal, or dung cakes or a combination of the three as a primary source of cooking. Since its inception, the Ujjwala scheme has already provided low-cost LPG connections to more than 50 million beneficiaries.
However, a little over a year after the scheme’s launch, media reports highlighted the challenge of low refill rates by PMUY beneficiaries. MicroSave conducted an independent assessment of PMUY beneficiaries in M.P., Chhattisgarh, and U.P. from November 2017 to January 2018, to understand the reasons behind the low uptake of PMUY refills. The objective of the study was to examine the efficiency, efficacy, and operational aspects of the scheme and understand the triggers and barriers that drive the behaviour around usage and refills of LPG by the PMUY beneficiaries. The study tries to answer the following key research questions:
How effective has the PMUY scheme been in reaching the intended target segment?
How different is the profile (demographic or usage) of PMUY beneficiaries from “typical”
LPG users?
Have PMUY beneficiaries who use LPG stoves stopped using traditional fuels such as
Firewood or biomass completely?
What are the triggers and barriers that impede the high uptake of PMUY refills?
What are the ways to improve the uptake of PMUY refills?
In our first blog in this series, we highlighted how the low- and middle-income (LMI) segments in India present immense opportunities for ecosystem players.
Concisely, the processes through which the ecosystem players can engage with the LMI market effectively requires rethinking from the ground-up. This rethinking would include a redesign of products and services, explorations around combination of digital and physical outreach efforts, and effective, pro-poor communication from the supplier-side. Incumbents need to collaborate with fintechs and build on their respective strengths. Moreover, considering the economics of the supply-side, certain experiments would require philanthropic capital to create viable business models.These players may include fintechs, incumbents, investors, and donors, among others. In the earlier blog, we also deliberated on how the ecosystem has been moving towards an inflexion point, and why the time is right for stakeholders to venture into this space. This blog is the concluding part in this series. It highlights how ecosystem players can serve the LMI market and tap its potential.
To read our report on the fintech landscape in India, click here
To know more about the Financial Inclusion Lab and to apply, click here
The exhibit below presents seven possible ways in which ecosystem players can tap the opportunities in the LMI market. These ways require innovation and re-engineering that focuses on client-centricity and spans channels, communication, products, and partnerships.
The need for a dedicated innovation lab
To boost the LMI space, an innovation lab dedicated to early-stage fintechs is a potential solution. MicroSave and CIIE, with support and guidance from J P Morgan, have used the research findings, their experience and expertise to conceptualise, set up, and manage a ‘Financial Inclusion Lab’.
The Fintech Inclusion Lab would aim to achieve the following:
Be dedicated to provide customised support to the fintechs that focus on LMIs;
Become a platform that brings together fintech start-ups that show an intent and willingness to serve the LMI segments;
Support early-stage fintechs to innovate and provide digital financial solutions to the LMI market;
Offer differentiated support, high-touch consulting, and local-level mentorship to the start-ups;
Facilitate effective partnerships between fintech start-ups and incumbents that operate in the LMI space;
Provide opportunities to fintechs to connect with investors which might be interested in follow-up funding for their business venture.
To support the larger innovation space, we will create and share learning and knowledge products in the public domain. Watch this space for more updates on the Lab.
Geo-cloning is the term given to the act of replicating successful business models from other geographies in a new geography.
In our first blog in this series, we highlighted how the low- and middle-income (LMI) segments in India present immense opportunities for ecosystem players.
Concisely, the processes through which the ecosystem players can engage with the LMI market effectively requires rethinking from the ground-up. This rethinking would include a redesign of products and services, explorations around combination of digital and physical outreach efforts, and effective, pro-poor communication from the supplier-side. Incumbents need to collaborate with fintechs and build on their respective strengths. Moreover, considering the economics of the supply-side, certain experiments would require philanthropic capital to create viable business models.These players may include fintechs, incumbents, investors, and donors, among others. In the earlier blog, we also deliberated on how the ecosystem has been moving towards an inflexion point, and why the time is right for stakeholders to venture into this space. This blog is the concluding part in this series. It highlights how ecosystem players can serve the LMI market and tap its potential.
To read our report on the fintech landscape in India, click here
To know more about the Financial Inclusion Lab and to apply, click here
The exhibit below presents seven possible ways in which ecosystem players can tap the opportunities in the LMI market. These ways require innovation and re-engineering that focuses on client-centricity and spans channels, communication, products, and partnerships.
The need for a dedicated innovation lab
To boost the LMI space, an innovation lab dedicated to early-stage fintechs is a potential solution. MicroSave and CIIE, with support and guidance from J P Morgan, have used the research findings, their experience and expertise to conceptualise, set up, and manage a ‘Financial Inclusion Lab’.
The Fintech Inclusion Lab would aim to achieve the following:
Be dedicated to provide customised support to the fintechs that focus on LMIs;
Become a platform that brings together fintech start-ups that show an intent and willingness to serve the LMI segments;
Support early-stage fintechs to innovate and provide digital financial solutions to the LMI market;
Offer differentiated support, high-touch consulting, and local-level mentorship to the start-ups;
Facilitate effective partnerships between fintech start-ups and incumbents that operate in the LMI space;
Provide opportunities to fintechs to connect with investors which might be interested in follow-up funding for their business venture.
To support the larger innovation space, we will create and share learning and knowledge products in the public domain. Watch this space for more updates on the Lab.
Geo-cloning is the term given to the act of replicating successful business models from other geographies in a new geography.
In our previous blog in this series, we presented recent trends in the fintech space in India. In that blog, we also defined the low- and middle-income (LMI) segments and examined the challenges that fintechs and investors face in catering to these segments.
This blog is the second in this series. It provides details on:
a. The opportunities present in the LMI market
b. The willingness of the LMI segments to take up fintech solutions; and
c. The transition of the current fintech ecosystem towards an inflexion point.
To read our report on the fintech landscape in India, click here
To know more about the Financial Inclusion Lab and to apply, click here
Opportunities present in the LMI market
Various stakeholders we interacted with in this research suggested that irrespective of the challenges pertaining to the LMI market, it offers huge potential. These stakeholders include investors, fintechs, and incumbents. Most of them, however, have been taking a cautious approach and waiting to see a proven business model before venturing into this space. A 2017 Deloitte report suggests that in the medium term, fintech players will consolidate their position in urban areas and metro cities, and will extend to the rural and semi-urban space over next 3-5 years.
Based on our analysis, here are the top three reasons that indicate that there exist significant opportunities in the LMI market:
Affordability and willingness to adopt fintech solutions
It is interesting to note a few differences between a non-LMI and an LMI customer. For most non-LMI urban users, the convenience of using fintech solutions is obvious. They mostly decide on the basis of affordability and the economic incentives offered to use such solutions. This is the reason we see a continuous stream of cash-backs offered by fintechs, which lead to a high rate of cash-burn to serve the non-LMI urban market. LMI customers, however, favour convenience over affordability to minimise their opportunity-cost in accessing similar financial services.
The ecosystem is transitioning towards an inflexion point
Our analysis indicates that the LMI market in the country will be ripe for fintech solutions by 2020. The adjoining graph suggests that the digital financial services (DFS) market is heading towards an inflexion point.
At this point, the level of efforts required to promote DFS would be less than the cost of providing the services. This is spurred by various technological innovations, such as IndiaStack and other open APIs, reduction in data cost, and fast adoption of smartphones.
An enabling ecosystem largely drives such a transition.
The graph below shows four developments that have played a critical role in building such an ecosystem:
These insights suggest that the LMI segments indeed present opportunities for fintechs and financial service providers like microfinance institutions (MFIs) and public sector banks (PSBs). As the ecosystem becomes more conducive for fintechs in the coming years, the time is ideal for them to shift their attention towards the LMI market. In our next blog in this series, we present some potential ways in which players in the ecosystem can serve the LMI market and unleash the untapped potential of this segment.
In 2017, J.P.Morgan commissioned MicroSave and IIM Ahmedabad’s Centre for Innovation Incubation and Entrepreneurship (CIIE) to undertake a study on the fintech landscape in India. This comprehensive study focused on the low- and middle-income (LMI) segments in the country. The research team consulted over 60 stakeholders spread across various industries, institutions, leadership levels, and geographies. The research sample had representation from fintechs, incumbents, investors, donors, industry bodies, experts, regulators, government and allied bodies, and incubator and accelerator managers.
We have captured the findings of the study in three blogs – this being the first in the series. This blog covers the definition of the LMI segments, the fintech landscape in India, and the challenges that prevent various players like fintechs, incumbents, and investors from catering to these segments. The second blog in the series highlights the potential opportunities present in the LMI market and how the current fintech ecosystem is approaching an inflexion point. The third blog highlights seven potential ways in which the fintechs can serve the LMI market and unleash its potential.
To read our report on the fintech landscape in India, click here
To know more about the Financial Inclusion Lab and to apply, click here
Understanding the LMI segments
For the research, we have categorised the LMI segments based on daily household income. A snapshot of the entire population including the LMI segments is as follows:
The current trend and focus of incumbents and fintechs suggest that the top of the pyramid is financially well-served. However, the bottom-most segment, that is, the ultra-poor, is currently not ready to use and adopt most of the fintech solutions. The middle section of the pyramid, which comprises aspirers and strugglers, is classified as the LMI segments. Our analysis suggests that it is this middle section of the pyramid that offers an expansive new market for fintechs. The skewed focus of fintechs on the elite and affluent segments leaves an addressable market of ~320 million (84%) LMI customers untapped.
The fintech landscape in India
Over the past few years, there has been a growing influence of fintechs in India. The fintech landscape has seen rapid growth in terms of numbers and reach, as well as investments in fintechs. According to a 2017 PwC report, there are more than 1,500 fintechs in India. Two-thirds of them started in the last two years. An earlier KPMG report from 2016 estimated that the transaction value for fintechs in India would increase from USD 33 billion in 2016 to cross USD 73 billion by 2020.
As expected, the fintech sector continues to witness acquisitions for a variety of reasons. This has mostly to do with a tendency within the fintech sector to deriving synergy and consolidation. Our analysis of data from Tracxn suggests that between 2011 and 2017, there have been 27 notable acquisitions in the fintech sector in India. Some of these include FreeCharge by Axis bank, PhonePe by Flipkart, and Citrus by PayU.
From the data, it appears that the fintech sector is growing. However, it is restricted to certain geographies and service lines. Moreover, only a few large, established players are able to emerge and receive major investments in India.
As per the data from Tracxn, 82% of fintechs are located in the three metro cities, that is, Delhi-NCR, Mumbai, and Bangalore. Moreover, a significant proportion (57%) of fintechs offer either payments and transfers or personal/business credit products. This leaves behind savings & investments, and insurance products. The analysis also suggests that since 2011, 87% of the total investment in the fintech space has gone into fintechs that deal with payments & transfers, and credit products. Moreover, the investment pattern is highly skewed towards select fintechs. For instance, 75% of the total investments since 2011 have been made in only 10 fintechs. Of these, Paytm alone cornered 47% of the total investment. Moreover, most of the fintechs receive large investments at an expansion stage, that is, at the Series D, E, or F stages.
Our research suggests that most fintechs serve only the affluent, tech-literate customers in tier-1 geographies. These fintechs typically serve two types of non-LMI personas – millennials and micro-entrepreneurs. These personas have the following characteristics
Challenges in catering to the LMI segments
While our research indicates that there is a huge opportunity in the LMI market, the current fintechs have not been able to yet tap this effectively. This is due to multiple challenges that they face in their understanding of the pulse of the LMI segments. Some of these challenges are:
In general, investors understand the value that fintechs create and assess the viability of their business models.However, when it comes to the LMI market, investors have their own apprehensions due to a host of factors.
Most investors continue to look at the per-unit economics for investment and remain sceptical if this would work in the LMI market. Their go/no-go calls for investment decisions are generally driven by metrics of the long-term value (LTV) of a potential customer against the cost of acquisition (CoA). A thumb rule that is used is LTV/CoA > 2.
Although there are various challenges that fintechs and investors face in serving the LMI segments, there are players like microfinance institutions (MFIs) and public sector banks (PSBs) that cater to these unserved and underserved segments. Like other players, in a few years, some fintechs might be willing to look beyond the opportunities in the non-LMI segments and make a dent in the LMI market. This, however, is likely to happen only if fintechs and investors recognise that there is sufficient opportunity in the LMI space and are willing to increase their risk appetite and invest for a long gestation period. This is the subject matter of the next blog where we highlight key insights drawn from the positive experiences of players that operate in the LMI market.
i Fintech is a hybrid of financial services and technology. Fintech refers to technologically driven innovations that support or disrupt the existing financial system to improve the delivery of existing financial services and offer new financial products and services to consumers in an economically viable manner. Fintechs are technology-focused or technology-led start-ups that use or provide modern, innovative technologies.
ii There are 600 million people in the LMI segments in India. As per the 2011 census, 62.5% of the population falls under the working age group, that is, 15–59 years. As a result, there is an addressable market of ~380 million in the LMI market. Assuming that fintechs in India serve ~200 million customers of whom 70% (140 million) belong to non-LMI segments while 30% (60 million) belong to LMI segments, there are ~320 million untapped customers in the LMI market.
The current landscape suggests a growing influence of fintechs in India. However, growth and investments have primarily confined in the payments and credit domains, and in a few metro cities. Most fintechs serve the affluent, tech-literate customers in Tier-1 geographies, leaving over 80% of the addressable low- and middle-income (LMI) customer market untapped.
While the LMI segment offers a blue ocean for different stakeholders such as fintechs, investors, donors and incumbents, there exists a significant disconnect between fintechs and investors, and fintechs and incumbents. Moreover, most incubator and accelerator programmes in India are sector-agnostic, and offer standardised, light-touch and shallow support with no focus on the LMI segments.
This report highlights the support areas for fintechs to offer convenient and affordable financial solutions to the LMI segments. It also proposes to set-up a dedicated ‘Financial Inclusion Lab’. The Lab will provide high-touch, immersive consulting, catalytic support, and customised services to early-stage fintech start-ups in India.
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