Fintech segments that are poised to prosper in 2021

Global economies have taken a beating in 2020 of once-in-a-lifetime proportions. However, a few sectors have benefitted immensely due to their ability to leverage technology to promptly replace services offered by businesses hampered by limited physical interaction during COVID-19. Edtech, pharmacy and grocery ecommerce and OTT media are clearly among the lucky few that shall look back at 2020 as the year of opportunity.

Fintech players, on the other hand, have had a mixed bag with transaction volumes dropping at the start of the pandemic but recovering ground in the latter half of 2020 due to an expanded user base. As per the ‘The Global COVID-19 Fintech Regulatory Rapid Assessment Report’ by the World Bank Group and the University of Cambridge, a survey showed that 65% of respondents from central banks and other financial regulatory authorities in emerging and developing economies reported an increase in digital payments and remittances after the onset of COVID-19.

In India specifically, as per a survey by venture capital firm Matrix Partners and consultants McKinsey & Company, 60% of digital payments firms were expecting to achieve pre-COVID volumes by September 2020.

COVID-19 has probably enabled fintech companies to acquire a key piece of the jigsaw – an enhanced user base. In India, the puzzle has been built over many years with pieces such as Aadhaar-based identity, digital payment enablers in the form of UPI and RuPay, and government actions resulting in financialisation of savings and financial inclusion. As we enter 2021, fintech companies in a few segments seem to be well positioned to ride a wave of sustained growth assuming regulatory support is forthcoming. Here are those segments.

Neobanking on the rise

Expectations are running high from the relatively new kid on the block. Firms like Jupiter, Open and Niyo have raised over USD 100 million just between themselves. Neobanks are digital banks without physical branches that utilise technology to do away with the operational inefficiencies that exist at conventional banks. As per Finnovate Research, globally customer acquisition costs for conventional banks are USD 200 compared to USD 1-38 for a neobank. Reduced operational inefficiencies result in faster turnaround times, favourable customer experience and also more attractive investment solutions for customers due to lower costs at the neobank.

The challenge lies in the non-availability of banking licences for these firms and thus the dependence on partnerships with banks and financial institutions. This poses an omnipresent risk of substitution by traditional banks themselves or innovation that supersedes the current technology. Nevertheless, the use case is too hard to ignore. MSME payments, collection and payroll management, convenient banking services for blue-collared workers and card solutions for teenagers and young adults are examples of use cases that are large enough for the next unicorns to emerge from the neobanking segment.

Digital payment surges ahead

Unlike neobanking, digital payments have been around for much of the past decade and hence the segment has already experienced the phase of the launch of numerous startups, massive funding (~USD 5 billion over the last five years), intense competition, and regulatory changes. The onus is now likely to shift to market consolidation and customer monetisation.

The pandemic has aided in accelerating consumer comfort with digital payments, but consumer stickiness in the event of monetisation is yet to be validated. It is likely that 2021 would witness digital payment companies launching new services that can contribute to revenue generation by leveraging existing database of registered users.

Wealthtech is the future

Investing and personal finance are a big facet of ever adult’s day-to-day life. In a country historically obsessed with gold and real estate as investment avenues, demonetisation and the ‘Mutual Funds Sahi Hai’ campaign paved the way for emergence of financialisation of savings. The value of assets held by individual investors in mutual funds has increased by ~20% year on year over a five-year period to reach Rs 14.3 lakh crore in August 2020.

As per a Boston Consulting Group report, the number of customers purchasing mutual funds online grew seven-fold between 2016 and 2019. Also, ~60% of urban mutual fund investors have had digital influence in their purchase of mutual funds and ~30% of them have purchased digitally.

The startup community has thus been focusing on capturing the evolving investor. However, immense competition has now precipitated an urgent need for innovation. 2021 could witness a trend wherein the evolving investor seeks advice as opposed to just ease of investment. Hybrid models could emerge that juxtapose the benefits of ease of investing through tech-enabled platforms with human acumen and insights. For the high net worth individuals segment, one-stop technology solutions for wealth management could eat into market shares of traditional wealth managers as diminishing distribution margins is putting pressure on business profitability.

By Sohrab Malik, Co-founder, Invyzr