India Fintech Investments Surge Despite Adverse Times

In the midst of what has been a tough period for the Indian economy, marred by a slowdown followed by a sudden stop forced by the global pandemic, India’s fintech companies have had a strong run.

Investments in India Fintech grew not just in 2019 but also in the first half of 2020, as per the MEDICI India Fintech Report, 2020 edition. Between January and June this year, Fintech investments touched $1.47 billion, a 60% increase over the corresponding period in 2019. A high number – 68 of them – were inked in the quiet months between March and June, the report released at the Global Fintech Festival in July showed.

However, many of these were likely decided prior to March. A clearer picture of the impact of Covid-19 on investments in this sector will emerge in the second half of the year.

Stage-wise Funding Breakdown

Lack of early stage funding has been the biggest growth barrier for Indian startups and it continues to be so for fintech companies as well.

The report highlights that since 2019, less than 10% of total funding went into early stage (Angel + Seed + Series A) deals. The number of deals in the seed stage was high but the average funding value was very low. The lack of adequate capital, coupled with other challenges, has prevented several companies from growing faster.

On the other hand, investors have steered clear of what some perceive to be overcrowded markets, especially in segments like payments and lending. Dwindling revenue prospects in payments has led to investments drying up and consumer price sensitivity has left several personal finance and wealthtech firms searching for revenues.

Consequently, investors have played it safe. Close to 60% of total funding went to established companies (Series G and beyond). To avoid concentration and ensure even growth of the sector, more number of companies with convincing business models need to emerge.

Segment-Wise Funding Breakdown

In the 18 months between 2019 and the first half of 2020, 263 deals were struck.

Digital lending continued to lead the funding activity by number of deals although payments attracted the most funding by value. As lending continues to attract interest, existing fintech firms from other segments, especially payments, have already shifted their focus to lending. While for some of them the move was always coming as they had built a sizeable user base, for the smaller companies falling revenues from payments accelerated the switch.

Meanwhile, falling demand from other sectors prompted several NBFCs to partner with digital lending startups to lend to consumers and businesses. With most of the underwriting cost taken away and algorithm-driven credit decisions potentially lowering risk, this model is fast becoming a revenue line for NBFCs. Startups hope that lending to credit starved segments of the population could be the path to profitability.

Neo-banking, a sunrise segment in India, witnessed significant growth in the last 18 months. There are over 15 neo-banks across consumer and business banking in India currently, some of which will launch for the public in the coming months.

The wealthtech segment has also seen increased interest in the last 18 months. Close to 183 new companies were added to the wealthtech segment from 303 companies in 2018, making it the most active segment by number of new ventures. More significantly, newer wealth advisory business models are being experimented with and true robo-advisory services might after all go mainstream. Several startups are going beyond pure fund distribution to offering digitized, long-term financial planning.

Metros: Epicentre of Innovation

At the end of June 2020, there were 2,174 fintech startups in the country. Availability of a technically skilled workforce and the presence of most parts of the financial services and technology ecosystem make Bengaluru and Mumbai the top two headquartered cities for Fintech companies.

However, a shift in working patterns, increasing efficacy of remote collaboration tools, and changing operational guidelines brought about by Covid is leading to a visible change in status quo.

A reverse drain of the workforce from metros, improving fiber and broadband connectivity, and lower costs are presenting an opportunity for several startups to operate out of smaller cities.

Covid-19 & Beyond

Although the Covid crisis adversely impacted several offline fintech businesses, the pandemic accelerated growth in many other segments. Digital payments, especially triggered by a surge in purchase of essentials online, digital bill payments, digital lending and online stock trading, are some of the areas that are seeing a spurt in growth.

Digital app-based lenders saw a huge surge in volumes, although a high number of applicants are ‘loan stackers’ or those who take loans from multiple lenders. The effects of this demand, possibly triggered by wage cuts and job losses, on the loan books of these entities will be visible only a few months down the road.

Falling equity prices, decreasing interest rates on bank deposits, and increasing awareness about savings and growing wealth, drove interest in investing. About 1.2 million new accounts were opened with the Central Depository Services (India) Ltd. in March and April 2020 alone. Discount brokerage fintechs grabbed a share of this.

More broadly, the last four years have been boom-time for fintech. Of the 2100+ fintechs in the country today, close to 1500 were born in the last four years. But there is some way to go in these companies achieving what they hoped to. For instance, the credit gap and insurance gap needles have not moved much despite the many companies targeting those segments.

As Nandan Nilekani, co-founder & non-executive chairman — Infosys, wrote in the foreword to the report: “While India has seen rampant growth across several segments, the economic upliftment from technological advancements is yet to permeate all strata of society. As we continue to work towards setting up a digital infrastructure for financial inclusion, the next step in this journey is to ensure financial access and choice to every end consumer. Recent government initiatives such as account aggregation, regulatory sandboxes, and other digitization drives also serve this purpose and are a boon for FinTech startups”.

This article was originally published on MEDICI Global and has been republished as part of an editorial partnership.

The views expressed here are those of the author and do not necessarily represent the views of BloombergQuint or its editorial team.