Without a doubt, 2021 has been the year of fintech in India. The rapidly growing computing power, widespread internet penetration, and increased internet speed and coverage have all been enablers for fintech solutions and startups to penetrate the Indian market deeply, widely and rapidly. The sustained pandemic, which has put paid to physical mobility, has also helped fintech companies and services to take roots firmly.
The thing about fintech is, if one can get past the technical challenges, it is more inclusive than regular financial services, and in fact more suited for rural and backward localities of the country. Beyond enabling digital payments and helping people buy, say, insurance online, the new crop of companies are creatively disrupting consumer and business finance with new and novel offerings. So much so, the Kotak Mahindra Bank MD and CEO Uday Kotak recently warned banks, "wake up or you will see large parts of traditional financial systems move out."
It is no surprise that Indian fintech companies raised a whopping $9 billion in 2021. As neobanks and digital lending look to gain traction, the coming years too can be advantageous for fintech if the winds continue to blow favourably for them.
The issues that can set them back are data security and privacy risk, and also the vagaries of governmental regulations and policies.
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Plethora of fintech unicorns
The digital India campaign is increasing the use of digital payments in brick & mortar stores including roadside vendors and small shops. All these factors are expected to drive the growth of the Indian fintech transaction market.
India fintech transactions market can be segregated into payment modes, services, applications and regions. Based on payment modes, the market can be divided into Payment Interfaces, Payment Gateways, PoS Terminals, Prepaid Payment Instruments, Remittance & Others.
Out of these, the payment interfaces segment held the largest market share of 69.99% in FY2021 as these payment models allow users to use their smartphones as a virtual debit card that has made sending and receiving of money instant. Moreover, the concept of QR codes has removed the use of digital wallets altogether.
We said fintech brands managed to raise around $9 billion in India, and in percentage terms fintech funding soared over 200% in 2021 in comparison to 2020.
The amounts were raised over 410 equity funding rounds in 2021. For the record, in 2020, around $2.83 billion was raised across 303 rounds.
Within fintech, payments continue to rule the roost. Payment companies managed to raise $4.11 billion, which is 46% of the year’s fintech funds. Companies like Pine Labs ($700 million), Razorpay ($535 million), Cred ($547 million) showed the way in this.
Among 43 startups that turned unicorns in 2021, 12 were from the fintech space. And these 12 managed to raise Funds worth $4.8 billion.
Some of the fintech companies that turned unicorns include Digit Insurance, CRED, Five Star Finance, Groww, Zeta, BharatPe, Mobikwik, Acko, Upstox, and Slice.
Funding momentum to continue in 2022
Even early stage fintech startups are creating buzz. Around 145 early-stage fintech startups raised a total of $735.3 million in funding till December 10, 2021, versus 74 startups that raised $254.9 million in the comparable period last year.
Big investors like Tiger Global Management, Ribbit Capital and Sequoia Capital, BlackRock, Mastercard and SoftBank are aggressively pumping money in the India's fintech ecosystem.
Experts opine that this funding spree and valuation high are no flash in the pan. They feel that these companies are intrinsically strong and as such the fintech sector is will aligned with the future needs, and hence would attract more funding in the future, too. "The funding spree will continue well into 2022 and towards the latter part of the year we will get to see some consolidation," said one industry analyst.
Consolidation on cards
The rising investors' interest and consumer base indicate the potential of fintech industry.
As of now, the UPI payments landscape is dominated by Google Pay and PhonePe. But the National Payments Commission of India (NPCI) 30% cap on transactions will push the two to 'moderate' new customer acquisition and reduce transaction volume to within prescribed limits by the end of 2022.
The coming year will see more action in this happening segment.
Already the Prosus-owned payment fintech PayU acquired another major payment gateway, BillDesk, for $4.7 billion. The acquisition will bring the combined entity’s Total Payment Volumes (TPV) to $147 billion.
This year also saw Paytm come up with India's largest-ever IPO worth around $2.4 billion --- but what happened after its listing is a different story. Another fintech firm Policybazaar also entered the exchanges this year. Companies like Pine Labs and Digit Insurance may go for IPOs in 2022.
Fintech startup BharatPe in collaboration with Centrum Financial Services acquired the Punjab and Maharashtra Cooperative (PMC) bank. A startup and NBFC coming together to take over a bank in emblematic of the year that fintech companies have had in India.
The rising investors' interest and consumer base indicate the potential of the fintech industry.
By the end of the next year, analysts say, the industry will see some kind of consolidation and realignment as things settle down. More collaboration between fintech companies and banks is also being predicted. As competition will intensify, acquisitions and mergers are also inevitable.
Adoption of new technology not just by building own IP, but through leveraging of partnerships with other fintech ecosystem stakeholders will become imperative for growth.
BNPL, the cynosure
BNPL apps make credit available to people when they need it, without having to spend much time on KYC authentication.
Fintech companies are also expected to fill the gaps of small-ticket credit requirements and access to online banking services in the coming months. Buy Now Pay Later (BNPL) services will be key in this regard. Credit cards can fix the ticket size issue, but they are looked sceptically at in India.
The BNPL payment ecosystem in India is valued at around $11.57 billion in India.
Apart from the host of ancillary services they offer (discounts and cashback), BNPL has been popular with consumers in India because it allows them to borrow small amounts of loans, on an as-needed basis, unlike with a personal line of credit from the bank.
BNPL apps make credit available to people when they need it, without having to spend much time on KYC authentication. Even checking out carts using BNPL is easy.
BNPL companies, with their approach, have created a better perception of loans. Little wonder we have close to 40 BNPL-focused startups in India. Many established players are also pivoting to or have started offering BNPL services on their platforms.
Companies like LazyPay, which has over 30 million users in India, Simpl, which saw a 40% spike in transactions for daily essentials, ZestMoney, ePayLater, and Capital Float are among the big players in the segment.
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Stock market services and complementary products
Another area of interest for fintech startups is the stock market services. The year saw a rise in trading strategy platforms to serve retail investor growth.
Fintechs are also likely to focus on complimentary products such as digital bookkeeping, inventory management, staff and expense management, and GST collection. Many big companies are actively starting to pay for these services, and are asking for more solutions. Startups like Khatabook, Chqbook, OkCredit, and Vyapar App are offering plenty of interesting solutions in this niche segment.
Another area of interest for fintech startups is the stock market services. The year saw a rise in trading strategy platforms to serve retail investor growth. In 2021, the number of active Demat accounts in India rose to 14.1 million --- a 4.7X jump in a span of 12 months.
WealthTech is transforming the investment landscape and bringing droves of first-time equity investors to the market. Trading strategy platforms are trying to offer a 'strategy' to sustain money-making on the bourses. It is a risky area. But platforms like Smallcase, Stratzy, WealthDesk, RAIN, Scripbox, Pickright, are at it.
Challenges for fintechs
More than 70% population of India lives in the villages, and the use of finTech platforms so far is largely concentrated in the urban segment. The thing is fintech innovation has to solve for India and have to be birthed in remote places.
User-friendly digital interfaces, hassle-free digital processes and prompt feedback systems are the keys to the success of fintechs. Many traditional financial services providers lack agility in terms of processes and technology, but fintech brands are way ahead in both these aspects. Unless the banks and other financial institutions adapt to the new normal, loss of a huge chunk of market share seems very much likely in the coming years.
More than 70% population of India lives in the villages, and the use of finTech platforms so far is largely concentrated in the urban segment. The thing is fintech innovation has to solve for India and have to be birthed in remote places.
But what fintechs also need to look out for is regulation. Digital lending and neobanks will soon be regulated, as recommended by the Reserve Bank of India (RBI) and Niti Aayog.
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