‘Wagons’ Of India’s Digital Banking Rush, API Developers Draw Investors
Trains sit idle at the Delhi Junction railway station during a lockdown imposed due to the coronavirus in Delhi, India. (Photographer: T. Narayan/Bloomberg)

‘Wagons’ Of India’s Digital Banking Rush, API Developers Draw Investors

Have you recently made an online payment, borrowed from a lending app, checked your credit score, invested in mutual funds online, or claimed credit card rewards?

If so, you too have consumed a service powered by an application programming interface, the coding pipes that help connect fintech platforms with legacy systems, such as banks, non-banking financial companies, card companies, credit information agencies, and asset management companies.

API development, while not new, saw a burst of action with the pick-up in unified payments interface and Aadhaar-enabled payments. The Covid-19 pandemic only amplified this.

Between July 2020 and March, investors funded at least eight startups involved in API development, looking to cash-in on a relatively low-risk, asset-light segment of the digital banking food chain.

Banking and payments-focused API startup Yap raised funds from venture capital investors earlier in March, while digital payments API-focused startup PayPhi got its seed funding from Singapore-based venture firm Beenext in January. Decentro that builds APIs for banking integrations got its seed funding from early-stage investor Upsparks in July 2020, while Setu that builds API infrastructure for fintech companies secured its Series A funding led by U.S.-based venture firms Falcon Edge and Lightspeed Venture Partners in April.

Last year, Postman, an API platform-provider founded in 2014, also raised a funding round, becoming a unicorn.

Think of APIs as the wagons that run on payment and banking rails, but your wagons are useful only if you have functional rail roads. And those roads— the Aadhaar and UPI-based payment systems —started becoming big over the last five years on growing internet access and smartphone usage in the country. Then, the pandemic kind of put the whole journey into full throttle.
Samir Ojha, Partner - Investment Banking, EY.

“It is a pick-and-shovel play,” said Sameer Brij Verma, managing director at early-stage venture capital firm Nexus Venture Partners, comparing the role of API startups to pick and shovel suppliers during the California gold rush in the 19th century.

"Those who made a real fortune during the gold rush were not selling gold but picks and shovels for mining it. Consider this a new-age gold rush, where any modern day software, including banking applications, will be built using APIs, and that is the big potential investors are looking at,” he said.

On that philosophy, in 2014, Nexus was the first venture fund to invest in Postman, which allows developers to collaborate, design, document and test APIs. In June last year, the company raised a Series C round of funding at over $2 billion valuation.

APIs: The Necessary Tools For Digital Banking

The actual process of digital banking requires communication with many nodes such as banks, card companies, fintech platforms, data aggregators and government agencies, depending on the service being provided. APIs allow two software systems to interact with each other by taking a request from one and getting a response from another.

For instance, if someone makes an online payment, the input of details such as virtual payment address is taken in by the APIs of a payments application. This then flows through the UPI rails provided by the National Payments Corporation of India and interacts with the APIs of partner banks to complete the transaction.

“Since it is an inter-connected system, the information has to be gathered from various sources to enable a seamless experience for the customer. Now, considering systems work differently and in isolation, APIs become the bridges to converge them into a seamless service for the consumers,” said Kunal Pande, partner at advisory firm KPMG.

Banks and non-bank lenders have begun transforming their core business models to make them more digital, and APIs are playing a significant role. That’s why investors are seeing API startups as key to building the tools necessary for powering digital finance in India, he said.

The business model for most of these companies is straight-forward and fee-based, with no regulatory or licencing costs. It is capital-light and asset-light, said executives who work in the sector.

Who’s On Board?

The inquiries for developing API stacks, according to Nikhil Kumar, co-founder of Setu, are flowing from everywhere from large and small banks, to NBFCs and data aggregators. Each wants to jump onto the digital train to expand their customer base and improve their reach within tier-2 to 5 and rural markets.

Through its APIs, the company, he said, covers the entire fintech infrastructure under three broad categories of service — payments, accounts infrastructure for fixed deposits and lending, and financial data infrastructure.

Another startup in the space, Yap, also provides payments, lending and banking flows to its private bank clients, along with startups such as Ola, Swiggy, BharatPe, and Razorpay.

There is heightened interest from brands of all sizes looking to embed financial products in their own applications, said Madhusudanan R, co-founder, Yap. “As API platform providers we are an important cog in the wheel to help banks become digital-by-default from their current set up of digital-by-design,” he said.

The big shift, said Verma, was also triggered by neo-banks gaining prominence in India over the last three years, as legacy financial services providers were not being able to cater to specific needs of their customers in real-time.

“Neo-banks are building APIs on top of traditional legacy systems that put the user at the center to personalise customer experiences, which most of their incumbents cannot match. That's causing a massive customer shift to some of these new-age fintech firms,” he said.

Besides, API use cases will also deepen within other tech-enabled sectors such as logistics, e-commerce, wealth management, stock trading and food delivery.

“Presently, we are at the beginning of the API-driven digital banking curve in India, and there is enough space for everyone, but as we move along, the startups in this space will need to create unique and specialised APIs that banks and businesses have not already created for themselves. So, innovation will be the key going forward,” said Ojha.

Agreed, Dirk van Quaquebeke, managing partner at Beenext. For instance, businesses will require API integrations to automate internal cash collection and salary disbursal processes. Besides, direct-to-consumer companies will also look to provide sachetized financial services products based on their customers’ profiles.

“As we move along the curve, there will be more advanced APIs on top of these standardised stacks that would need to be developed, and startups in this space will need to innovate to come up with unique use cases,” he said.

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