Why AI could be the fire that fuels India’s next financial leap

This quote frames the conversation around Artificial Intelligence (AI) in financial services quite perfectly. Much like fire, AI in itself is not the solution; it is an enabler. 

When combined with human judgement, ground-level experience, and a deep understanding of real-world complexity, it can power transformative outcomes. Without this balance, it can just as easily lead to unintended consequences (think of burning down the hut instead of cooking dinner).

In India, where the population is enormous, the regulatory environment is stringent, and the cultural and economic diversity is staggering, the potential of AI in financial services is immense. Traditional approaches to banking and financial services have often struggled to scale effectively in such an environment.

AI’s success in Indian BFSI won’t be defined by its sophistication but by its inclusivity. In a country as diverse as ours, intelligence isn’t intelligent if it’s not inclusive.

AI and the Indian banking landscape

India’s banking and financial services industry has historically been shaped by two competing forces:

1. Inclusion — bringing millions of unbanked and underbanked individuals into the fold.
2. Risk and regulation — ensuring stability and trust in a system serving such a massive population.

AI is starting to impact both sides of this equation.

On one hand, it is enabling financial institutions to extend services deeper into rural and semi-urban India, tailoring offerings for people who have never set foot inside a branch. On the other hand, it is helping banks manage fraud, compliance and credit risks at a scale that manual processes could never sustain (no matter how many cups of chai the compliance team drinks). 

1. Credit and lending: Moving beyond collateral

Traditionally, lending in India relied heavily on collateral and lengthy documentation. This left out vast sections of society—micro-entrepreneurs, small shopkeepers, and gig economy workers, who often lack traditional credit histories.

AI is helping change this by analysing alternative data: digital payment behaviour, GST filings, utility payments, and even footfall trends for small retailers. For instance, fintech lenders are now able to extend loans to kirana store owners and customers based on their UPI transaction history, something unimaginable earlier.

It’s almost poetic: the same QR code used for selling a packet of biscuits can now become the gateway to formal credit. That’s a big shift from the days when the local bank manager would only approve loans if you had land, gold, and possibly filled out three more forms for consideration.

2. Fraud detection and compliance: Staying ahead of bad actors

India’s digital payments ecosystem, while world-class, is also a prime target for fraud. Traditional rule-based monitoring systems often flag too many false positives or miss emerging threats altogether.

AI models, especially those leveraging machine learning (ML), are helping banks spot suspicious patterns in real time. From identifying unusual login behaviour to monitoring cross-border transactions, AI is making compliance teams more effective and regulators more confident. For consumers, this translates into safer digital experiences. 

3. Customer experience: Hyper-personalisation at scale

With hundreds of millions of customers, no two financial journeys in India are the same. A millennial urban professional expects seamless digital-first experiences, while a farmer in Bihar may need simple vernacular interfaces.

AI is enabling hyper-personalisation at scale. Chatbots powered by natural language processing (NLP) are now handling millions of customer queries in regional languages. 

The result: higher customer satisfaction, lower servicing costs, and more meaningful engagement. And yes, unlike the old IVR systems, these chatbots don’t make you press ‘1 for English’ 10 times before transferring you to the wrong department.

4. Merchant payments: From acceptance to enablement

For BFSI players, digital payment acceptance was just the starting line. The real opportunity lies in how AI transforms transaction data into actionable intelligence, enabling banks and payment providers to deliver smarter, personalised solutions to merchants at scale.

From surfacing merchant-specific business insights like peak sales hours or fast-moving SKUs, AI-driven payment platforms are helping BFSI institutions become proactive growth partners rather than passive processors.

By leveraging payments data, banks can enable contextual cross-selling, recommending value-added services like inventory management tools or online store solutions exactly when merchants need them. This not only deepens merchant stickiness but also unlocks new revenue streams for BFSI players.

(Ground) reality check

For all its promise, though, AI is not a silver bullet. 

Algorithms are only as good as the data and assumptions they are trained on. In India, where data quality is patchy and human behaviour can be unpredictable, ground experience matters immensely.

Banks and fintechs that pair AI capabilities with on-the-ground understanding of customers, markets, and regulations will be the ones that truly unlock value. Think of it as a well-trained GPS: great at giving directions, but you still need someone who knows the local shortcut when the highway is blocked by a wedding procession. 

Is AI India’s next leapfrog moment?

With UPI, India has shown the world how leapfrogging works. With the right regulatory guardrails, ethical safeguards and industry collaboration, AI can help us:

• Bring millions more into the financial mainstream
• Create globally benchmarked solutions for fraud and compliance
• Build hyper-personalised financial journeys

If we get this right, who knows, maybe in a few years, regulators in the West will be saying, “Let’s just copy what India did.”

AI in financial services is no longer a futuristic idea. It is here, shaping decisions, processes, and experiences in ways that are already visible. But its real potential lies ahead.

For a country as vast, diverse, and complex as India, AI offers not just incremental improvement but the chance to rewrite the rules of financial services fundamentally. The challenge and the opportunity are to wield this powerful tool like fire: as an enabler that fuels growth, inclusion and trust.

If UPI was the payments revolution, AI could be the moment that redefines Indian BFSI for the decades to come.

Raman Khanduja is the co-founder and CEO of Mintoak, a fintech startup backed by HDFC Bank, PayPal Ventures, and British International Investment, among others. It offers merchant payment services to banks and lenders across India, Africa and the Middle East.

(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of YourStory.)

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