Is fintech consolidation the key to innovation or a threat to consumer choice?

There has been a surge in the fintech space that indicates the sector’s ability to drive rapid growth and even renewed interest in financial technology solutions. For instance, Indian fintechs managed to raise $29 billion accounting for 14% of the global share in 2022.

As this industry matures, mergers and acquisitions (M&A) are becoming pivotal in scaling operations and even enhancing service offerings. But is it sustainable? Does it augur well for digital lending? What about the end consumers?

The M&A Big Promise

Any consolidation offers scalability and efficiency. Ideally, a larger and well-capitalized entity is well geared to better the rates and services rendered. Acquisition of smaller fintechs hence and ideally by established players enables for integration of innovation. This can result in streamlined operations and even improved customer experiences. And there are several nuances. ​

For instance, merged entities can leverage broader datasets for better credit scoring. The access to diverse data sources allows for accurate risk monitoring and thereby extend credit to segments that were previously underserved. Such an approach aligns not only well with the objectives of financial inclusion or SME lending but also with international trends – especially in areas where alternative credit scoring has uplifted innovation and even reduced default rates. ​

Fintech Trend-Gazing

The funding winter some quarters ago resulted in investors jostling for consolidation and capital becoming more selective. This has prompted fintechs to merge for survival and growth. There is a larger propensity for an uptick in M&A activities as larger players seek to augment their digital capabilities. ​

Add to this, there is the trend of established fintechs acquiring smaller players to gain technological advantages, licenses, or even market expansion. An example of this has been Mintoak's acquisition of Digiledge for $3.5 million which has marked India's first e-rupee-related deal.

However, lessons from the US, UK, and Southeast Asia highlight the benefits and challenges of fintech consolidation. In Southeast Asia, despite a significant decline in overall funding, the region remains a fertile ground for financial innovation, driven by unique market dynamics and digital readiness. ​

As such Regulatory scrutiny has intensified. The RBI has been prompted into implementing stricter digital lending norms. Then there has been the introduction of guidelines on First Loss Default Guarantee (FLDG) arrangements exemplifies this trend. Add to this, compliance has become critical, making scale advantageous for navigating the complex regulatory landscape. ​

Regulatory alignment becomes more attainable for consolidated fintech firms. Larger organizations are better positioned to meet evolving Reserve Bank of India (RBI) norms, ensuring compliance and fostering trust among consumers and regulators alike. This compliance is crucial, especially in light of the RBI's tightening of digital lending guidelines. ​

India's fintech sector has witnessed a wave of mergers and acquisitions. This consolidation reflects a push for scale and sustainability, aiming to enhance investor confidence and promote long-term growth in digital lending. The trend mirrors global movements where fintechs are merging to integrate complementary capabilities and expand market reach. ​

Crunching Consumer Choice?

Reduced competition due to consolidation may lead to higher interest rates and fewer borrower-friendly innovations. Fewer players in the market can diminish the competitive pressure that drives favourable consumer terms. This concern necessitates careful regulatory oversight to balance consolidation benefits with market competitiveness.​

Data and privacy concerns arise as consolidated firms handle vast amounts of financial information. The amalgamation of data increases the risk of breaches and misuse, underscoring the need for robust compliance and cybersecurity measures. Ensuring data protection is paramount to maintaining consumer trust.​

Merged entities may face challenges with technology integration. Disparate systems can lead to operational inefficiencies and affect the consumer experience. Seamless integration is essential to realize the full potential of consolidation and deliver enhanced services to consumers.​

The future of digital lending and personal finance is being reshaped by fintech M&A activities. Traditional banks may choose to collaborate with fintechs through partnerships rather than outright acquisitions, blending stability with innovation. As the landscape evolves, the critical question remains: how will these consolidations balance efficiency gains with the preservation of consumer choice and trust?​

Views are personal. The author is Partner, JSA Advocates & Solicitors