Funding Dries Up For Indian Fintech Firms Amid Global Slowdown In Deal Activity

India’s fintech firms have seen funding and merger and acquisition deals dry up in recent months, as investors questioned the sustainability of existing business models given the changing regulations and uncertainty across the financial services industry.

According to KMPG’s ‘Pulse of Fintech’ report for Jan-June 2019, total investment activity across Indian fintech firms declined by 36 percent to $281 million in the first half of 2019 from $770 million a year ago. KPMG includes venture capital, private equity deals, along with M&As, in measuring investment activity.

Investment activity in the April-June 2019 quarter was the lowest since the third quarter of 2014, data from the report showed.

The slowdown in funding for fintech firms is a reflection of the broader deal activity, globally and domestically.

Globally, in the first half of 2019, fintech investment activity fell to its lowest since 2014, the data showed. In addition, the mood around domestic financial services has also soured in recent months.

“Fintech players are inextricably linked to the overall financial services industry. So, as the wider financial services sector is going through a bearish phase, it is logical for fintech sub-sector to see some impact in terms of business outlook and valuation,” said Vivek Soni, partner and national leader-private equity services at EY India.

Changes, such as the pick-up in adoption of Unified Payment Interface or introduction of the Bharat Bill Payment System, have changed the operating environment for a number of fintech firms, said Soni. Changes in Know-Your-Customer requirements and data protection norms have also caused existing fintech firms to evolve their business models, he said.

Payment Fintechs: A Crowded Market

Payments is one of the fintech segments which has seen rapid change over the last two years, leading to slower deal activity.

“We have had a leap-frog moment in the last few years where there have been a large number of players coming into the payments space at the same time as data costs have fallen and smartphone sales have risen substantially,” said Amit Mehra, principal at Unicorn India Ventures Equity Fund. But the space is now crowded with several fintech firms replicating the same models, he said.

In payments, margins are on the decline not only because of increased competition, but also due to the government's own offerings, said Ashish Fafadia, partner at Blume Ventures India. In such an environment, it will be critical for private players to really differentiate themselves, he added.

Lending Fintech: Uncertain Environment

Fintech firms focused on lending, in segments such as peer-to-peer loans and SME credit, have also seen concerns on asset quality and funding costs emerge.

According to Fafadia, fintech firms no longer have the luxury to pitch a business model where they provide multiple types of loans—from retail to trade finance to SME loans. Investors are willing to fund sector-specific fintech firms that have a vertical specialisation and not broad-based lending models, he said.

If a fintech were to get an NBFC licence, there are questions on the sustainability of the business, given that the non-bank lenders, overall, are faced with a liquidity crunch and banks are unwilling to lend beyond established and high-quality names.

A senior financial consultant, who spoke on condition of anonymity, told BloombergQuint that investors in lending-focused fintech firms are waiting to see how delinquency rates change in the coming quarters before making any investments.

Many lending fintechs built their platforms to process applications and disburse loans quickly but did not put in the same amount of effort into loan collections and recovery practices, which has become a problem for their investors, this person said. He added that while various means of data analytics employed by these startups have provided “descriptive analytics” of customer data, they have not provided “predictive analytics”, leaving open the question of customer behaviour in difficult times.

Return to Fundamentals

With uncertainty rising, investors have turned cautious and returned to fundamentals.

“No matter what the technology platform and data analytics being offered, investors are emphasising that fintechs focus on the old school ways of building a high-quality asset book with strong margins,” said Fafadia.

Nitya Sharma, co-founder and chief executive officer of bill consolidation platform Simpl, said investors have become more discerning as returns globally have not kept pace with expectations. Investors “are definitely questioning existing business models as the narrative around big data and efficient operations that fintechs have pitched isn’t translating into value creation”, Sharma said.