According to Bain, India’s $50 billion Fintech industry faces a difficult 2023.
According to Rakesh Pozhath, partner at consulting firm Bain & Company, India’s $50 billion fintech industry will face challenges in the form of more regulatory oversight and less liquidity, which will increase funding costs for some businesses in 2019. As global financial conditions tighten, investors tighten up. in the country’s fintech sector, which has attracted heavyweights such as Masayoshi Son’s SoftBank Group Corp. and Warren Buffett’s Berkshire Hathaway Inc. in recent years, are becoming more cautious. According to Pozhath, this has made it more difficult to raise money.
Pozhath, who has experience working with both international and Indian payment infrastructure providers, stated that investors are looking at both bottom line and top line actual revenue data rather than just growth metrics in terms of number of customers and loan amount issued. “These measurements are no longer supported by anyone.”
Smaller fintech companies looking to transition to non-bank organizations so they can continue to lend to customers could see a higher cost of capital next year, he added.
According to recent research co-authored by Pozhath, Indian fintechs, mostly in the payments and lending arena, have attracted over $35 billion in capital since 2000, with about $10 billion of that coming in 2021. The $4.2 billion in fundraising during the first half of 2022 was less than a year earlier, according to the study. Due to incidents of fraud and malpractice in the fintech lending sector this year, the Indian government increased its scrutiny to control it through a set of rules, pushing platforms to rethink their business models, according to Pozhath.
Fintechs are affected by funding in the winter.
Data from research firm Tracxn shows that from $10.3 billion in 2021 to around $5.7 billion in 2022, funding for the Indian fintech sector has almost halved. However, fintech investment in India was much larger this year than it was in 2020, when the industry received just $2.02 billion in equity funding.
According to Akshay Mehrotra, co-founder and CEO of Fibe, “during this recession, investor expectations of unit economics have switched from ARR (Average Recurring Revenue) to Profit After Tax (PAT), making many firms unlucrative since they can” t produce profitability” (formerly EarlySalary). This year, more than ever, the emphasis is on profitable expansion as PE firms have written two significant checks in quick succession in the digital lending sector.
As values have softened in the gloomy market, private equity giants have continued to write growth checks this year. Early values have also been hit, according to Srinivasa, and are down “almost 25% to 35% or more” from years of high growth. Few digital lending companies this year, notably Fibe and KreditBee, have attracted expansion rounds from well-known private equity firms including TPG, Norwest Venture Partners, Premji Invest and Motilal Oswal Alternates.
In addition, in March of this year, Yubi (formerly CredAvenue) secured $137 million from investors such as Insight Partners, B Capital Group and Dragoneer. MoneyView, a personal loan provider, is also nearing completion of its $150 million equity investment round from Apis Partners into a unicorn.
“Whether the business strategy is sound and up-to-date is the essential factor for investment at the moment (in fintech).” Anyone who can show their business plan will be able to rise. The second consideration is whether they create a successful business or not. In 2022, conventional company methods will not be able to raise money. One fintech entrepreneur trying to raise funding at the beginning of the year predicted that “the strong will get stronger and the weak will go.”
Category leader Slice, which aimed to seek $100 million in new capital, suspended fundraising efforts after the RBI dealt a fatal blow to card-based fintechs by banning prepaid payment instruments (PPIs) from being loaded with lines of credit. In June, it received $50 million from Tiger Global, an ongoing investment. Instead, the company has concentrated on digital payments, entering the UPI market and applying for a PPI license. RBI’s circular has also had an impact on Uni, a rival company looking for a new business strategy.
Ongoing consolidation
Indian fintechs have also found it harder to attract funding this year as global macroeconomic headwinds caused by rising inflation and interest rates continue to force a fall in public and private market capitalizations for key global fintech companies such as Stripe, Klarna, Zip and others. On November 25, it was revealed that digital payments giant PhonePe was close to acquiring BNPL upstart ZestMoney, indicating the possibility of a consolidation wave in 2023.
“Several procedures, such as the FLDG, are no longer available to fintechs due to the regulatory environment. A decrease in funding is estimated to occur in the coming year as a result of this and the global funding winter that has followed. Investors should exercise greater caution. Market consolidation, an increase in collaborative models with regulated companies, and the exit of businesses with weaker foundations are all to be expected, according to Kunal Pande, partner at KPMG in India.
Following the latest regulatory reforms, Pande continued, “Investors are expected to continue to adopt a wait-and-see attitude over the next 6-12 months” because things are still changing on the ground. While this is happening, significant fintech companies such as Cred and Razorpay, which raised significant rounds through 2022, are trying to outgrow their valuations.
It is not surprising that a number of new banks and payment companies with wide distribution have sought to enter the lending market due to the margins the segment offers, even though online credit is still subject to regulatory scrutiny.
“We expect consolidation in the more established categories, such as alternative financing. Financial services is never a product play; therefore, strong organizations with solid balance sheets will need to expand their product line… It will not get easier in 2023 to embrace a lending-first strategy, whether you are a start-up bank or a payments firm, Srinivasa said.
The Reserve Bank of India (RBI) has been strict in granting NBFC licenses to fintech companies, which has made things more difficult, according to some business owners. The macroeconomic uncertainty has forced the larger fintech companies into capital preservation mode as new fundraising takes longer to conclude.
Edited by Prakriti Arora
