At over $10 billion in 2020—according to a recent report by IVCA and Bain & Company—and a reported $4.7 billion in Q1 2021 alone, the funding of Indian startups remains buoyant despite the severe challenges brought on by the Covid-19 pandemic. The fintech sector, a leading light of the startup ecosystem over the years, has retained that position even in the year gone by. With all this funding, and the large number of startups targeting opportunities across different financial products and customer segments, is the fintech story past its prime? On the contrary, with the pandemic driving a paradigm shift towards digitisation across the value chain, we expect new models to emerge and keep investment in fintech startups buoyant.
The unaddressed opportunity remains large: While the drive to open Jan Dhan accounts made basic banking services available to a large base of the population, the extent of their engagement with the formal financial sector remains low. Some 14% of these accounts remain dormant, and penetration rates for other financial products like mutual funds (owned by less than 2% of Indians), insurance (4% of GDP) and consumer loans are way below global benchmarks. Among small businesses (MSMEs), which contribute to nearly a third of the country’s GDP, only one-sixth of the 60-odd million in existence access credit from formal sources, which alone reflects a $340-billion opportunity.
Leveraging technology is critical for access: Policymakers and regulators have consistently pushed for raising access for customers outside the top tier—those outside the major economic centres as well as those with low ticket sizes—through a mix of incentives and obligations imposed on service providers, but these have not been adequate to lead to mass adoption. As the original architects of the India Stack had highlighted, technology-driven access would be key to acquiring and delivering appropriately designed products and services to these customers at a viable cost. The positive customer response is best seen in the vast customer footprint on payment apps in just a few years, but growth rates for fintech offerings on mutual funds, pay-later loans, and insurance are equally impressive. The challenges brought on by the Covid-19 pandemic have underscored the role of digital in accessing, understanding, and engaging customers and helping financial institutions protect their balance sheets.
We have critical mass for partnership-led growth: With the high growth of the last few years, incumbents in the ecosystem now see the attraction of fintech. Many banks and financial products companies have entered into partnerships to enable new customer acquisition, better customer engagement, and add monetisation layers. A recent report by Credit Suisse highlights that such partnerships, along with proprietary digital banking platforms, are helping source 60%-70% of new retail customers, 60%-80% of retail fixed deposits, around 75% new credit card sourcing, and 50%-60% of new home/MSME loans for leading banks.
There is strong momentum in supply chain digitisation: The Covid-19 pandemic has dramatically accelerated the digitisation of MSMEs across supply chains. The shift to e-commerce was initially driven by end-customers’ concerns on safety and lockdown restrictions, which compelled merchants to enable digital access and engagement with customers, along with digital payment mechanisms. This also spurred exploration and adoption of digital tools to improve management and drive business growth, whether through record keeping and inventory management, or to connect with customers and credit providers. The ramp-up in the user base of the many startups offering products supporting MSME digitisation is a testimony to this trend.
There is increased support within the ecosystem: The regulatory sandbox framework proposed by the Reserve Bank of India in 2019 allows for faster time-to-market for new products/innovations, through early identification and addressing of risks and regulatory concerns. The Account Aggregator framework for data consent and Open Credit Enablement Network are big, ecosystem-level changes that are now seeing the big banks come on board. These will reduce friction for existing fintech models, and open up new business opportunities like alternate credit ratings or loan service providers.
The world is now paying attention: India’s success in establishing new solutions like the Unified Payments Interface (UPI) and the proposed ecosystem-level initiatives mentioned earlier have garnered interest from global markets, including those that are at a far better stage of financial inclusion. We see domestic fintech being able to leverage India’s vast and well-regarded pool of tech talent to find new growth opportunities in the build-out of digital financial services globally.
In conclusion, we believe that in the coming years, fintechs will play a greater part in the development of the financial services market in India. Strong ecosystem-level changes are opening up opportunities for new models, and augur well for the unicorns of tomorrow to emerge from truly innovative, tech-enabled startups that are being seeded today.
Views are personal. The author is managing partner, Ankur Capital.