Future of fintech – What are the key themes to look out for? | Episode #35
Lending to make a comeback, credit cards to be ubiquitous, wealth tech to scale and much more.
Last two weeks were amazing in terms of founders and investors met. Met Aurko, one of the co-founders of Epaylater. They are creating a revolution in the B2B pay later product (One of the pay later sectors where I am very bullish). They have been able to do more than 180Cr+ monthly loan volumes processed on their platform in a very short span of time, with strong delinquency numbers.
We also met Niro, which is an embedded finance solution, Xpresslane which is an one-click checkout operating system from the merchant’s side. And then, there’s Paytail, which increased its revenues by 3x in a tough July month. I have always believed great firms are made in crisis times and some of these startups are validating the same.
Note – In case you are a fintech founder, looking to raise funds, I might be able to help. Reach out to abhishekk.kumar@iiml.org. In case you are looking to invest in Indian Fintech, reach out. Would be happy to help.
A lot has changed in the world of finance over the last decade — the way we receive money, the way we pay, the way we borrow and the way we invest.
Such monumental changes usually begin with the implementation of public infrastructure that eventually drives innovation and democratizes access to the markets. Railroads, shipping containers and the Suez Canal revolutionized trade in goods. The internet revolutionized trade in services and reduced entry barriers to almost every industry. Similarly, the adoption of UPI, access to banking and smartphones (access to data) has created an opportunity for FinTech, and the pace of growth is poised to accelerate exponentially.
The development of the India Stack, which enables stakeholders to use an open digital infrastructure, is unique and led to the inflection point in the nation’s fast-paced FinTech evolution. The first two layers, biometric digital ID Aadhaar, and the unified payments interface (UPI), have led to rapid financial inclusion and payment digitization. We expect the next two layers, safe data-sharing account aggregators (AA) and the open credit enablement network (OCEN), to further encourage advancement by democratizing access to data for various use cases, including lending. With credit on UPI now a reality, I expect UPI to become even more encompassing with wider use cases.
So, what’s been happening till now?
India’s Fintech growth story continued to hold strong in 2021, with a 157% y-o-y growth in funding. The sector received funding worth USD 8 Billion in 2021 led by payments at ~USD 2.7 Billion closely followed by lending at ~USD 2.6 Billion. India’s digital payment success story is evidenced by the digital transaction volume of over 28 Billion and a gross value over INR 320 Tn in FY 2021.
However, last few quarters in 2022 have witnessed multiple shifts in the Indian Fintech space owing largely to macroeconomic conditions. The possibility of an impending recession and inflationary pressures across key markets have impacted the economy at large and Fintechs have been no exception. Indian Fintechs saw a drop of ~30% in funding in quarter ending June 2022 compared to quarter ending June 2021.
On the other hand, the amount of dry powder with institutional investors (PE/ VCs) has increased by USD 3.7 Billion in the last 6 months, indicating the potential flow of capital with improvement in macroeconomic fundamentals. This actually suggests that there is going to be a frenzy of investment activity sooner rather than later in the Indian ecosystem, more so in the fintech ecosystem
So, what are the top sectors for investment, in my view? Let’s dive in!
While Payments have seen a major chunk of funding in the last few years, I strongly believe lending is going to make a comeback soon. Maturing digital infrastructure, constituted by India stack, JAM trinity, UPI has been pivotal to the Fintech growth story, building a strong core for the open-API infrastructure to follow.
With Credit on UPI now becoming a reality, combined with focus on Open banking and Account aggregator architecture, I see non-financial firms such as Swiggy, Zomato and the likes becoming meaningful player in the lending ecosystem.
I am also very bullish on B2B lending firms, such as Epaylater and those attacking the credit issues from the merchant side, such as Paytail. There is a large, offline market which is yet to be tapped meaningfully by new age players and where players such as Bajaj finance has seen amazing success which will become focus areas. Loads of value to be created here.
Above will be aided by two key factors - Large addressable demand on the back of an expanding middle-class (46% of all Indian households in 2025 vs. 37% in 2018)6 and rising urbanization (~36% of the population in urban areas in 2022 vs 33% in 2017) and Unprecedented growth in data access with growing smartphone penetration (1130 Million smartphones by 2025 vs. 600 Million in 2020), rising internet penetration (900 Million internet users in 2025)7 and declining cost of data.
Another theme which I see becoming strong is - Formalization of MSME economy driven by structural reforms like Goods and Service Tax Network (GSTN) and Trade Receivables Electronic Discounting System (TReDS). Active tax base for GST has increased from ~10M in July 2017 (when reforms were introduced) to ~14M in May 2022. The consequent digitization of MSME payments has enabled sharper credit decisioning.
Above, combined with the open architecture of Account Aggregator, OCEN, ONDC is expected to lead to a dramatic explosion in machine-readable data, transform data into a utility and democratize payments, credit, commerce, and savings. As shown below, the AA framework will enable seamless and secure access to standard-format data and enable portability between service providers.
ONDC is expected to democratize commerce, reduce acquisition costs, improve competitiveness of small sellers and enhance price and merchant discovery of buyers; whereas OCEN is expected to dramatically improve credit access to MSMEs by enabling cash-flow-led underwriting for MSMEs, given data proliferation.
In its end state, digital service providers will connect to the ringfence of regulated entities and source customers for payments, credit, and savings, while leveraging the architecture across journey stages.
I actually believe, given the complexity of above, super apps such as Paytm, Neu and others, which aim to offer a suite of payments, lending, investments and insurance products under a single app via an ecosystem of partnerships with FIs and merchants will do well. Their success will be defined by their ability to engage large user base (learning from CRED?) and well, an effective lending business backed by a robust underwriting engine.
Another key area to look forward is wealth and investments space
I know, this is an area where new age business have failed to make an impact in terms of revenue generation (apart from brokers, which have flourished with work from home and too much time to trade).
Players like Fello, Jar (their recent fund raise issue notwithstanding), Mutlipl, Multpie and others, which offer sachet investments can do well if they are able to 1) Get to large scale with real, monetizable base, 2) Credit understanding to manage losses and 3) ability to offer products in local languages. The last one will be super differentiator and will take a large chunk of initial users.
Credit card will move from an affluent product to an utility product
The low credit card penetration in India is a well-known but puzzling truth. The credit card has long been seen as a status product, yet the borrowers on the credit card subsidize the affinity seekers. RBI’s recent announcement of enabling RuPay credit cards on UPI might just be the impetus that the sector needed to break out of the low penetration ranges. Of course, with limitations out on PPI backed credit cards, the path to larger penetration is set to be-routed through banks.
Credit card penetration remains low, with spending at just 4% of the GDP (as of FY20) compared to other countries at 10%-35%. Even on a spends-to-PFCE (private final consumption expenditure) basis, penetration remains low in India at just 6% compared to other countries at 10%-45%. Even compared to penetration of credit and bureau records, credit card penetration at just 2.9% of unique population is an aberration. See the below (Numbers in millions) -
Further, unique credit card customers are only 40 million in India, with ~3% of the population owning a credit card compared to ~75% of the American population owning at least one credit card or charge card. The US has ~340 cards per 100 people vs. 4.5 cards per 100 people in India (as of FY21).
Here are some of the reasons contributing to the limited growth of credit cards in India:
The percentage of formal, salaried jobs has been lower compared to the overall jobs
Banks are not willing to go beyond easily targetable segments of salaried and formal business set. Some fintechs, such as One Card are targeting this, but a long way to go.
Customer acquisition costs for traditional credit card firms (banks) are high and have remained high for NBFC-led card businesses as well
Well, with the RBI recent and evolving directives, the role of non-banks in driving credit card penetration remains unclear. However, what caught my eyes is the below chart –.
Before the RBI directive, Slice was issuing more synthetic credit cards than HDFC, ICICI and Axis bank combined! That’s some scale and speed.
What this definitely shows is that there is a large, untapped market which is out there for the taking when it comes to credit cards. Maybe banks, maybe fintechs along with banks, will solve for this with lower credit limit products, products for tier 2/3 cities and products for rural areas.
What also remains to be seen is the role of BNPL. Despite all the negative news around this and RBI tightening regulations, I strongly believe there are players who will help bypass the credit card journey with at the point BNPL offerings , more so in offline world than online.
Another area to look out for is the insurance one. Especially players focussed on health and life insurance.
The National Health Stack will significantly unlock value in Retail Health Insurance, with more Insurtechs plugging into this ecosystem. Health insurance will expand to include OPD (Outpatient Department), customized underwriting models will become feasible based on health data / records. It opens up a possibility for insurers to create E2E health and wellness ecosystems, embedding value added services like health advisory, monitoring etc. along with health insurance.
Insurtechs can partner with insurers to offer innovative product constructs and lend digital distribution capabilities. Insurtechs can also help drive down costs, streamline claims settlements, lower frauds and cost of operations for health insurance by virtue of their tech capabilities. Super excited by firms such as Insurejoy.
And then of course, there’s the Crypto market which is an enigma. Needs a separate post, maybe the next one.
Some recent happenings in the fintech industry
Something really interesting is happening with WazirX. No one seems to be the owner of this unicorn and no-one wants to be associated with the frim. Interesting times for sure. Read more here.
Tech driven portfolio management service and alternative investment fund (AIF) platform Dezerv has raised $20.7 million in its Series A round led by Accel Partners.
Rewards and loyalty startup Twid raises $12 million in funding led by Rakuten Capital.
CRedable, a BaaS firm, raised $9 mn from Axis Bank, Oak investments and other existing investments.
Fintech startup, Jify has raised funds approximately $10 million (about ₹79 crore) from Accel and Nexus Venture Partners. The company plans to utilise this fresh capital for strengthening its product and expanding into more cities and sectors. Jify partners with companies to enable employees to have access to their earned salary on-demand, in real-time, and at zero cost.
That’s all from my side today. Do reach out for any comments, discussions and more.