By Sarvjeet Virk
The narrative of India’s financial sector is undergoing a significant revision. For decades, the spotlight shone brightly on major metropolitan areas, often referred to as ‘Tier 1’ cities, where the pulse of finance throbbed. However, a seismic shift is taking place, driven by a potent combination of factors: the explosive growth of digital penetration.
The burgeoning aspirations of a young and upwardly mobile population residing in India’s Tier 2 and 3 cities. These previously peripheral locations are now emerging as vibrant hubs of financial activity, rewriting the script of financial inclusion and opportunity in the process.
The sheer scale of this phenomenon is undeniable. Kantar TGI’s 2023 report paints a compelling picture: Tier 2 and 3 cities are now home to a staggering 139 million consumers aged between 15 and 55, a figure nearly reaching parity with the population of Tier 1 cities. This demographic powerhouse, coupled with rising incomes and an increasing number of graduates and postgraduates, is fueling an unprecedented demand for financial services in these regions.
One of the most significant consequences of this boom is the rapid progress in financial inclusion across Tier 2 and 3 markets. Gone are the days of limited access to banking facilities and the need to navigate complex bureaucratic hurdles.
Today, digital platforms are acting as a game-changer, empowering individuals to open bank accounts, access loans, and manage their finances conveniently, fostering a sense of financial autonomy previously out of reach for many.
According to the latest report by the Internet and Mobile Association of India (IAMAI) in partnership with Kantar, internet penetration has grown across the nation at a modest 8% YoY. Rural regions of the country, with 442 million internet users account for over ~53% of the total user base.
Another report by the Boston Consulting Group (BCG) estimates that by 2025, nearly 800 million Indians will be digitally connected, further propelling financial inclusion efforts and empowering individuals to take control of their financial destinies.
Financial inclusion has seen extensive improvement in recent years, with nearly 90% of Indians now having accounts with financial institutions. The National Strategy for Financial Inclusion 2019-2024 aims to provide access to formal financial services in an affordable manner, thereby broadening and deepening financial inclusion.
This strategy has been pivotal in bringing more people from Tier 2 and Tier 3 locations into the fold of financial services, enabling them to make investments in the stock market and explore various financial options.
This newfound financial access is not merely facilitating basic financial needs. It is also unlocking a world of investment opportunities for individuals in Tier 2 and 3 cities. The Indian stock market is witnessing a paradigm shift with increased participation from these regions.
More individuals are embracing online trading platforms, taking advantage of the democratization of wealth creation. A report by the National Stock Exchange of India (NSE) reveals a remarkable 52% growth in the retail investor base from Tier 2 and 3 cities in 2023, showcasing their growing appetite for long-term financial planning and wealth creation.
The financial landscape in Tier 2 and 3 cities is no longer confined to the traditional realms of banking and investments. The increasing penetration of internet and smartphones has enabled the availability of low-cost and user-friendly digital solutions for financial services, such as mobile wallets, unified payment interface (UPI), Aadhaar-enabled payment system (AEPS), and Bharat Bill Payment System (BBPS).
These solutions have helped in overcoming the barriers and challenges of financial inclusion in these markets, such as the lack of physical access, the high cost and inconvenience of cash transactions, the low trust and confidence in formal institutions, and the complex and cumbersome documentation and verification processes.
Technology has streamlined backend processes for financial institutions, leading to improved operational efficiency. This, in turn, allows for cost savings and the potential to offer more affordable financial services to individuals in the last mile.
Moreover, the amalgamation of AI with vernacular languages holds the promise of transforming financial services, improving accessibility, and fostering economic and social development in Tier 2 and Tier 3 cities. AI-powered natural language processing (NLP) facilitates seamless access to information for local residents who may not be well-versed in English, thereby contributing to addressing local challenges and elevating the financial services.
Government initiatives like Digital India, Jan Dhan Yojana, and Aadhaar have also created a digital infrastructure that allows for seamless and secure transactions. This digital revolution has not only facilitated the expansion of digital payments but has also been an important driver of economic development, helping stabilize incomes in rural areas and boost sales for firms in the informal sector.
Beyond government initiatives, fintech startups are also rapidly expanding outside India’s Tier 1 cities. In 2015, only 22% of DPIIT-recognized fintech startups were based beyond major urban centers. This figure jumped to an impressive 46% by 2022-23, demonstrating fintech’s increasing nationwide reach, which subsequently led to a surge in entrepreneurial activity in these regions.
Armed with the power of digital tools and access to funding, individuals are launching businesses, creating new employment opportunities, and contributing significantly to the economic growth of their regions. This grassroots entrepreneurship is fostering a spirit of self-reliance and innovation, further propelling the economic engine of the nation.
Despite the significant progress, navigating an evolving financial landscape is not without its challenges. Financial literacy levels in Tier 2 and 3 markets still lag behind those in Tier 1 cities. Addressing this knowledge gap is crucial to ensure individuals make informed financial decisions and avoid potential pitfalls.
Moreover, ensuring robust cybersecurity measures and data privacy for individuals using digital financial services is paramount. Building trust and security in the digital ecosystem is essential for sustained growth and inclusivity.
Nevertheless, the future of the Indian financial sector looks optimistic, painted with the vibrant hues of opportunity and inclusion. By addressing existing challenges, leveraging the power of digital technology, and fostering financial literacy, Tier 2 and 3 markets have the potential to become the cornerstone of financial growth and inclusivity for the entire nation.
(Sarvjeet Virk, Co-founder & MD, Finvasia Shoonya by Finvasia in India. Views expressed are the author’s own. Please consult your financial advisor before investing.)