India’s fintech ecosystem needs to move from financial access to investor outcomes, experts say

New business data points to the fact that India’s fintech ecosystem needs to move beyond expanding access to financial products and focus on whether market participants are actually achieving their financial goals, experts stated at the Global Fintech Fest on September 10.

India’s digital public infrastructure has enabled financial services to reach the population at unprecedented scale. More than 1 billion Aadhaar-linked identities, over 14 billion monthly UPI transactions and around 100 million Account Aggregator-linked profiles have helped expand access to the financial system, stated Smita Jha, Partner, Banking and Finance, Khaitan & Co., who moderated the panel.

But the next challenge is to ensure that access translates into better financial decisions and outcomes, speakers stated during a session on building India’s financial advice stack as part of the digital public infrastructure.

More products do not necessarily mean better outcomes

Jeet Ketan Marwadi, Founder & Managing Director, 1 Finance stated rapid digitisation has enabled people to access and accumulate financial products, but many market participants keep look at their finances in silos.

Mutual fund folios have grown threefold during the past five years to around six crore individual market participants, he stated. That stated, accumulating financial products does not necessarily mean that households are moving closer to their financial goals.

Market participants often look at mutual funds, insurance, loans, real estate and other assets separately rather than considering their entire financial position, Marwadi stated.

“The biggest challenge for that is that people are looking at their entire financial picture in silos and focusing too much on investing rather than cash flow management, rather than liability management, rather than looking at their real estate portfolio and looking at where the opportunities are in ensuring that their real estate investments are aligned to their financial objectives,” he stated.

The problem is not limited to market participants. The advisory ecosystem itself faces a structural gap, Marwadi stated. There is an income parity gap between registered investment advisers and distributors of financial products. Distribution-linked incentives can create a conflict with customer interests, while fiduciary advice carries a elevated standard of responsibility, he stated.

“If we want to solve for outcomes and if we want to solve for aligned incentives, so that advisors or fintechs that are aligned to customer outcomes flourish, we need to solve for recurring payment mechanism for earning fees that's not linked to the product manufacturer, but that's an arrangement and agreement between the investor and the advisor or the fintech platform,” he stated.

Marwadi additionally called for greater portability of financial investments. Market participants should be able to move their holdings from distributors to registered investment advisers, or from regular to direct mutual fund plans, with less friction. At present, moving from a regular to a direct mutual fund plan can result in a capital upside tax event, creating a barrier for market participants who want to change their arrangement, he stated.

Industry needs to measure investor outcomes

Mohankumar Swaminathan, Chief Product Officer, Scripbox Wealth Managers stated the industry should reconsider the metrics it uses to measure the success of financial inclusion. Assets under management, the number of SIPs and other participation metrics are useful activity indicators, but they do not necessarily show whether households are becoming financially better off, he stated.

The industry should instead track metrics such as how many SIPs are linked to specific financial goals, whether those SIPs continue until the goal is achieved and whether market participants restart SIPs after discontinuing them.

“These are all activities we should measure. That is leading indicator, but additionally outcomes should be measured, and outcomes should be incentivized to do,” Swaminathan stated. This could mark a shift from measuring how many market participants are participating in the financial system to measuring whether those market participants are making progress towards their financial objectives.

Data portability key to financial advice

Sharath Bulusu, Senior Director – Product Management, Google Pay stated technology-led solutions will be essential if financial advice is to reach India’s population at scale. Even human advisers will need technology to manage larger numbers of clients effectively, he stated. One of the biggest challenges today is that an individual’s financial information stays fragmented across different providers and formats. Gaps stay in the frequency, granularity and completeness of data, Bulusu stated.

Greater portability and interoperability could additionally improve competitive pressure among financial service providers. “Wherever portability comes in, wherever interoperability comes in, rent-seeking behavior disappears, and instead, what you end up getting is people compete on the value they create for the customer. They compete on innovation, and that is the need of the hour,” Bulusu stated.

He stated greater portability could allow market participants to move between advisers and providers more easily, while forcing businesses to compete on the value they provide to customers.

Financial profile needs to go beyond risk appetite

Marwadi stated a financial advice stack should create a more comprehensive profile of an investor rather than relying only on conventional risk profiling. His approach includes factors such as financial personality, generational profile, life stage, profession, income potential, expenses, liabilities and asset allocation.

The panel additionally discussed the growing number of first-time market participants entering the formal financial system. Swaminathan stated the initial enthusiasm among new market participants can fade when they encounter a financial shock or lifestyle change. One of the first things market participants may do when their bank balance comes under pressure is stop an ongoing SIP, he stated.

He argued that market participants should first focus on basic financial priorities such as insurance and debt management before taking on more complex investment decisions. “Investment should be boring,” Swaminathan stated.

Linking investments to specific goals can additionally help market participants overcome behavioural hurdles, he stated. When an SIP is connected to a meaningful goal, market participants may be less likely to discontinue it because of short-term financial pressures.

AI could bring greater personalisation

Artificial intelligence could add another layer of personalisation to financial advice, Bulusu stated. Technology can analyse not just financial information but additionally an individual’s behaviour and interactions with digital platforms to understand preferences. He stated people can sometimes be more candid with large language models because they may feel less judged than when speaking to another person. This could help technology better understand an individual’s preferences and financial behaviour.

For market participants with relatively simple financial situations, technology could potentially provide much of the required guidance. More complicated financial situations, in the meantime, may keep require human intervention.