Financial institutions will acquire payment, lending startups: report

As the digital payments, lending, and wealth ecosystem matures and valuations become more realistic, successful startups in the space will be acquired by large financial institutions looking to bolster their own digital presence, says a new study.

Till now, financial institutions were deterred from such acquisitions owing to high valuations, says a report—Rise of Indian Fintechs - Time to go Global—by fintech consulting and advisory firm The Digital Fifth. It notes the acquisition of Freecharge by Axis Bank and Quantiguous Solutions by Deutsche Bank as key acquisitions in the space.

“Primary targets for the acquisition would be in B2B payments, fintech lenders (with books) and wealth-tech players with decent traction,” the report says.

It also says the Unified Payment Interface (UPI) will continue to scale and remain the default payment gateway for India. Meanwhile, larger players that have taken control of the market aided by the UPI will deter new companies from entering the space.

India will, however, see the emergence of a few large remittance players with a focus on high traffic corridors, as the business has remained largely untapped. The report also noted that the B2B (business-to-business) segment has done “exceedingly well” over the last few years across point of sale (POS) and payment gateway segments with companies like Pine Labs and Razorpay building scalable and profitable business models.

This segment, says the report, has primarily depended on merchant discount rate for revenues. However, things will change for the companies as the government has proposed that establishments with annual turnover more than ₹50 crore will offer low-cost digital modes of payment to customers and no charges or MDR will be imposed on customers or merchants. “This change will impact payment startups focussing on issuance side (where they share issuance fees with banks) and acquirer side. Many of these startups will start offering other financial products like lending to make their business model viable,” the report says.