Fintech profitability doubtful for the next 2-3 years: report

More than 70% of respondents believe that most fintech companies may not be profitable in the next 2-3 years, due to an increased focus on scale as opposed to profitability and compliance, a report published by Matrix Partners with Boston Consulting Group (BCG) said.

However, 30% of respondents believe that fintech will be profitable in the next 2-3 years. For 32%, payment technology had a positive outlook, while 82% believed that product expansion was the highest priority among fintech companies.

On the contrary, internal control, cost reduction and fundraising remained the bottom three priorities.

The report further said that fintech companies needed to pay more attention to governance. Once scale is achieved, fintech companies can outgrow advisors and over a period of time it may be wise to have independent directors on the board.

Fintech companies need to proactively report their governance practices and initiatives to break the myth and perception of poor governance, and garner trust, both from customers as well as regulators.

“Once the scale is achieved, fintech companies should outgrow advisors and get an NBFC license,” said one survey respondent.

Equity funding to Indian fintech companies has grown at a CAGR (compound annual growth rate) of 26% over the past 4 years, but faster from 2020 onwards, driven by the post-pandemic effect of high growth via increased use of digital services . The growing number of late-stage funding rounds is another indicator of the increased maturity of Indian fintech companies.

The report includes results from a survey of over 125 founders and senior management at Indian fintech firms.

Many major fintech platforms had started operations in 2008, with neobanks being the recent entrants. While the number of fintechs scaled up between 2014 and 2021, funding was low until 2015, after which the sector received a rapid funding boost.

The pandemic increased the payment area further, leading to a 210% increase in funding between the current year 2020 and 2021.

Yashraj Erande, Managing Director and Partner at BCG said: “36% of fintech customers are new to credit, compared to 22% for banks. The ‘Fin’ in FinTech is getting a bigger font. This means a greater focus on profitability and governance. Relentless focus on innovation and customers made fintechs successful. This should continue. Nevertheless, new muscles must be added for newer priorities. “Growing together in partnership with established operators and private innovation on public services will be important moats.”

Respondents said that cards and unsecured lending are the top choices as areas to be disrupted. Over 50% of respondents identified asset quality, CAC (customer acquisition cost) and regulations as the biggest challenges to sustainability, with meaningful scale as a barrier to building a profitable lending business.

The report noted that 14% of companies improved growth and margin during downturns, while 44% declined in both. With 150 deals/quarter and $9.8 billion in funding by 2021, momentum has remained strong. However, recent quarters have seen several changes, mainly due to macroeconomic conditions, mainly from the impending possibility of a recession and high inflation globally.