When tech met money: what next in fintech saga

The test of a true breakthrough is how soon its cousins are born. Software saw it when SaaS accommodated almost everything under the sun and had a huge family comprising PaaS, IaaS, NaaS, and whatnot. Fintech is shaping up well for that test. Today it has even nieces and nephews blossoming in all directions – insure-tech, loan-tech, wealth tech, and so on and on.

At the moment, everyone is excited about the shoots branching out all across the tree. So it can be a little boring to check the strength of its roots. But, hey, that’s what industry-watchers do, the boring stuff. And yet, somehow, something exciting always comes out of a boring afternoon. Let’s begin.

From a new word to a big contender

The year 2021 will actually sift contenders from pretenders and maybe, bartenders. Analysts have a strong feeling that 2021 would bring opportunities and challenges, stronger than before, for the players that exist and the ones that have started emerging.

The current digital push on account of lockdowns has definitely provided a strong impetus to the fintech growth story, surmises Vivek Iyer, Partner and National Leader (Financial Services) Risk, Grant Thornton Bharat LLP. “However, what is going to be important is how they ensure that the trend is not ephemeral. The challenges for fintech continue to be the focus to run a sustainable business with a focus on bottom-line.”

Asked if the current fintech spree will actually sustain, Arun Jethmalani, founder and MD, ValueNotes, takes a moment before unraveling what the future might look like. “It has surely grown into a wide space – we have insurance, stock market, and everything else that is being disrupted in a strong way. The good part is that tax evasion will get even harder now.”

Arnav Gupta, Analyst, Digital Business Strategy, Forrester, points out that fintech will gain even more speed with the data-sharing architecture coming to life. “We will see deeper penetration, better financial flow and a stronger financial well-being.”

But the next part is going to take some brick-work from innovators and regulators alike. “As we go further, some parts will see some regulatory problems, like the lending space. This is due to issues like bad loans and rumors of Chinese manipulation going around. And regulation is going to be a big challenge. We need to catch up to a lot here. Indian regulators are cautious after watching how space panned out in markets like China. So fintech will have to qualify to the need for trust.” Jethmalani argues.

Some pockets will grow better than others, like those that can disintermediate something or those that can enable something. According to Jethmalani agency businesses will do particularly well in this landscape. “Disintermediation of existing chain will help small players whether it is insurance or stock brokerage.

Overall the sector will see good growth and levers like accelerated digital adoption and online transactions will help this growth. Players that enable payments or connect merchants and markets would get strengthened as hot segments.”

In the prognosis of a recent Nasscom-Zinnov report, space is well on the march to a trillion-dollar digital economy. It underlines how the Indian start-up ecosystem has maintained its growth even during turbulent times of COVID-19. If we look at the tech start-up ecosystem, it grew from about 10,500 start-ups to 12, 500 from 2019 to 2020. The unicorns were the best to watch for – from 26 to 38 (2019-2020).

What’s going to be important is how fintech firms ensure the trend is not ephemeral. Their challenge continues to be the focus to run a sustainable business.

— Vivek Iyer, Partner & National Leader (Financial Services) Risk,

Grant Thornton Bharat LLP

Potential unicorns have risen to 55 in 2020. However total funding changed from USD 6.6 billion to USD 3.5 billion. But the report also underscores that the potential pipeline of unicorn clubs has expanded in a significant way. There is a clear recovery evident in deal value and investor interest as well. As to corporate M&A pace and investments, they are showing a gradual recovery.

Emerging scions are also creating new contours in the fintech landscape. Consider insure-tech, for instance. India’s share in the global insurance market stands at 1.7% and is expected to grow to 2.3% by 2030, according to Swiss Regroup.

According to a Medici India InsureTech Report, India’s insurance penetration is around 3.7% to 4%. In the fiscal year ending March 2020, life insurance companies in the country showed an 11.36% growth in their collective premium income at USD 684 billion. Gross direct premiums, underwritten by non-life insurers, exhibited a growth of 11.67% in this period, according to the report.

That’s why the acceleration and penetration brought in by insure-tech players is a big help for the overall industry. The pie is attractive and huge. As per ResearchandMarkets, the global insure-tech market revenue can reach USD 1,119.8 million by 2023. Overall, the fintech industry has many such mini segments to explore and branch out into.

The big FAANG click

The recent few months have manifested a strong surge of interest and partnerships from a not-so-related quarter. Companies that had nothing to do with the BFSI industry are getting interested in a share of the market that is being redefined and catapulted due to fintech. Does this mean more competition or better collaboration?

Large banks and incumbents will look at alliances or acquisitions and continue to stay relevant. They will not be replaced. You cannot do that.

— Arun Jethmalani, Founder & MD, ValueNotes

As to the interest that tech giants like Facebook, Google, and Amazon are showing in this space, Jethmalani reckons that it will drive faster adoption. “In India, UPI is a good layer that government has cemented and whether it is Google or something else, they eventually sit on top of UPI.”

Gupta avers that the tech players have a big edge in some way. “Honestly, they are the ones that are changing the scenario. These giants bring a large user base and integration strengths here. Most of the big ones except the likes of WhatsApp are doing well. The ones who are not able to crack it yet, struggle to find use-cases beyond p2p interactions and to generate awareness.”

As per ‘The State of Fintech: Q3 2020’ report from CBInsights, the tech industry segment FAMGA (an acronym for the usual suspects: Facebook, Microsoft, Google, and Apple) was seen active in fintech this quarter with patent approvals, partnerships, and investment activity. Case in point: Apple’s acquisition of Canada-based mobile payments company Mobeewave for USD 100 million.

Anti-competition laws are going to assume a lot of focus, given the acquisitions of innovations by the FAANGs (that’s Facebook, Amazon, Apple, Netflix, and Google in short), reminds Iyer. “The FAANGs would need to look at managing stakeholder expectations in a more sensitive manner. Big Tech suffers from a trust deficit today and it is important that the group address the same.”

Stragglers or strugglers or?

Wait! What happens to the incumbents? Consolidation? Harakiri? Slow sunsets?

Gupta notes that there is tremendous improvement seen in areas like customer engagement and digital experiences in many banks now. “Especially 2016 onwards, there is a new emphasis and attention to digital experience. Indian banks have come a long way in that sense. They are innovating in areas like API stacks, adjacent services, and more.”

Jethmalani reasons that existing financial players and banks are not going to be knocked out. “They have all the capabilities to survive and adapt. They are not rolling over that soon. Ultimately everything in fintech has to go through them only in some way, whether it is a bank account or UPI, or a Demat account. But fintech has pushed them to think in the new-age language like apps, speed, and the internet.

Technology will come out strong on the back-end of payments and that’s where fintech start-ups can have an edge. Large banks and incumbents will look at alliances or acquisitions and continue to stay relevant. They will not be replaced. You cannot do that.”

Consolidation would be a key trend taking a clear shape next. Mortgage companies and brokerages seem to be popular acquisition targets. Global examples show that well, like how Mortgage analytics firm Black Knight acquired Optimal Blue for USD 1.8 billion, ICE acquired EllieMae for USD 11 billion, and United Wholesale Mortgage is set to go public in USD 16 billion SPAC deal (as cited in a CBInsights report).

So it looks like fintech will not elbow everything away or be trampled by anyone either. It will grow with all stripes of players together. Some of them may be cousins, and some may be spouses. The big family tree, meanwhile, keeps getting strong and wide.

FINTECH HOTLIST

Payments

• IndiaIdeas: Remember the pioneer electronic presentment technology and payment services company? IndiaIdeas started enabling banks, businesses, and other institutions in the field of invoices, statements, and bills and payments, and today, what we know as Billdesk has been around since 2000. It has given the average user and merchant the advantage of paying the bill at one click from anywhere. It has also forayed into the space of recurring payments now.
• Paytm: Vijay Shekhar Sharma’s Paytm is a household name in India. What started as a simple DTH and recharge platform is no more just a digital wallet company: it has already created two decacorns (companies worth more than USD 10 billion). Its user base saw a big fillip just after demonetisation. It has made forays into fixed deposits and money investment markets, even as its huge multi-source and multi-destination payment play remains its strongest part.
• Pine Labs: Then there is Pine Labs that was formed quite early (in 1998) and caters to the area of point-of-sale machines and last-mile retail solutions to merchants. It drew a lot of excitement in media speculations and buzz as the first unicorn in 2020. It has recently entered the neo-banking space and has launched an app for taking micro-merchants, home entrepreneurs, and street vendors into the NFC-enabled ambit. It has partnered with some leading card networks too.
• Razorpay: A very early innovator in the market, Razorpay has shown big growth in terms of market coverage, numbers, and partners. As a provider of payment solutions to online merchants in India, it started well before demonetisation spurred other players into the market. Today it has a lot of new financial products and a vast SME foothold. It has now moved towards automated banking and working capital areas too.

Lending & Credit

• Capital Float: This venture is from CapFloat Financial Services and specialises in empowering consumers to manage their finances, with easy access for working capital finance options for SMEs, growth potential for MSMEs, and some features of credit-worthiness assessment. It claims over 8,500 crore loans disbursed so far across 300 cities.
• CRED: This is Kunal Shah’s comeback and has a unique proposition of rewarding users who pay their credit card bills on time. It seems to command almost 20% of the credit card holder base in India already. The company has already secured investments from Sequoia Capital India, Ribbit Capital, Tiger Global, and General Catalyst, and has seen Series C funding recently.
• Groww: This stockbroking start-up was founded by a group of former Flipkart employees and is growing well in terms of funding and market expansion. It is counting strong on retail participation in wealth creation and investing to increase exponentially in 2021. The pillars it states as its differentiators are low brokerage and the DIY-ease of easy, fast, and transparent investing.
• Kissht: This was founded by some of the former McKinsey top brass and backed by Sachin Bansal’s Navi technologies. It also offers what it calls ‘easy and quick EMI at POS’, apart from hassle-free shopping experiences. Interestingly, it has partnered with a few other fintech players recently to launch the Fintech Association for Consumer Empowerment. The intent is to promote open and responsible lending practices in the digital world.

Insurance

• Acko: It claims to be India’s first digital insurer and has partnered with almost every point of customer-interaction possible, like Ola, Oyo, Red Bus, and Amazon. Numbers like 50 million unique customers in three years iterate its confidence in jazzing up and shaking up the insurance market. It has also started exploring the sachet-insurance segment with partners like Ola.
• PolicyBazaar: An insurance aggregator formed with the intent of transparent and accurate insurance information and comparison tools to consumers. It claims to be India’s largest online insurance aggregator. It says it has been growing consistently at the rate of 100% since 2008 and the platform constitutes 25% of India’s life cover with 10 million unique customers won by 2019. There is ample competition around though.

Finance Management

• Fyle: Yes, these are companies that make it easy to crunch those Excel sheets and ledgers. This Bengaluru-based expense management start-up uses AI to track expenses and create audit-ready reports. It proudly shares numbers like about two million expenses claimed so far and $6 million savings for customers. Yes, TigerGlobal is an investor here with fresh funding injected last year.
• Khatabook: There is Khatabook, for small and medium businesses. It claims to register an impressive number of merchants that are uploading data here and doing millions worth of transactions every day. As per media reports, it has on-boarded about 80 lakh SMEs in less than two years only. Names like Sequoia, YCombinator, and MS Dhoni stand out in its investor list.

Why fintech players can get an easy foot in the door

• Demonetisation and pandemic-led digital adoption
• Room to remove operational friction in legacy alternatives
• Leaner operating models
• Possibility of leveraging big data, AI, and machine learning
• Untapped market with less competitive clutter
• Potential for experimentation
• Rs 1,500 crore incentive (in the Union Budget 2021-22) to promote digital payment and create a robust and dynamic payments ecosystem

Fast and fintech

• The tech start-up base continues to expand at 8-10% YoY (2019-2020)
• 12 unicorns were added in 2020, of which 58% are B2B start-ups
• H2 2020 funding went up by 90% over

H1 2020

• Almost 35%of retail investors in India are using fintech

Source: Nasscom Tech Start-up Report