Why M2P Fintech went on a startup shopping spree
Embedded Finance is not a new concept. But the ascension in India has only happened in the last couple of years with “anyone who wants to be fintech”.
This brought with it a number of “middlemen” in the space who joined the strings between banks and platforms to help the latter “embed” financial products on their websites and apps, alongside the core product.
The largest player in the sector by valuation, M2P Fintech Solutions actually got its first mover advantage when it started as a payment stack provider in 2014, a period when the term ’embedded finance’ was not so prevalent in the Indian fintech lexicon.
It began by tying up with banks and NBFCs to help them launch their own digital payment models for businesses looking to offer digital payment packages on their platforms. A simple example—Zomato offers multiple payment options at checkout.
By 2017, the API infrastructure provider had managed to add all values to its payments stack, including debt, credit, prepaid, travel cards, QR codes, UPI, AadhaarPay and NETC toll payments, besides introducing a lending stack (BNPL) and core banking infrastructure suite for traditional banks.
The client list includes some of the biggest names in fintech, private and public banks and technology players.
Among the many startups that entered the space, M2P today has a valuation of more than 600 million dollars, with over 30 banks and 600 fintech clients globally, Rs 40.58 crore revenues (FY21) spread across 15 countries, and a $70 million funding war chest from investors such as Tiger Global, Beenext, DMI Group, Better Capital, Insight Partners and MUFG Innovation partners.
It has acquired a significantly large part of the growing embedded financial pie.
But after the pandemic, the race to become an API infrastructure provider has become aggressive, as has the company’s strategy to grow and maintain its market share.
During all these years, M2P has been comfortably placed in the middle of banks and corporate/fintech. However, it hit a pause button, reassessing its growth strategy and putting the spotlight on traditional banks and “fulfilling their ambition” first.
While the partnership between traditional banks and fintech is obvious, the latter is betting on neobanks (in collaboration with the banks themselves), which offers almost everything that a traditional bank does and perhaps more.
Traditional banks have caught up FOLO (fear of being left out).
Chief Executive Officer (CEO) and co-founder, Madhusudanan Ramakrishnan, puts things into perspective.
“The board discussion about a bank now involves questions like: ‘If a fintech does something or disrupts a new space, is there value for us to do this ourselves?’ The banks have an ambition, whether it is a new bank or BNPL, or some of the products fintechs offer, he says.
This has given rise to the idea of “digital banks”.
Digital banks are an extension of traditional banks themselves (eg Kotak Mahindra Bank’s ‘Kotak 811 digital bank’), while neobanks are exclusively online and have no physical branch.
This new “ambition” to become a digital bank has created a huge head start for M2P, providing a stronger than ever focus on strengthening its core banking infrastructure stack for banks, so they can launch their digital banks on par with fintechs, together with the already generated lead-in payment and lending stack for all other stakeholders.
“We found that we’re interestingly able to take all of our learning from a product that some other fintechs offer and meaningfully offer it to banks to launch their own products. And that’s what we’ve been going through over the last couple of years, he adds.
This brings us to acquisition game of M2P in the last 10 months. All five strategic agreements serve the aforementioned purpose, in addition to some new product features such as collections and engagement tools for banks, which not only adds value to them but also diversifies M2P’s revenue streams.
Great focus on core bank stack
First, let’s understand where banks buy technology. This is divided into three parts – System of Execution, which includes a bank’s Core Banking System (CBS) or a Loan Management System (LMF); System of Exploration (the business payment stack) and System of Engagement (products on top of core banking services like cards).
Since its inception, M2P’s major offer to banks has been in exploration, i.e. given the payment stack. The majority of revenue comes from the same, followed by core banking infrastructure and lending stack. The company declined to comment on the respective revenue share.
It’s no secret that the back-end system or CBS has been long overdue for an upgrade, including the shift to the cloud.
Going deeper into this offering, M2P BSG acquired ITSoft and Finflux. While BSG strengthens M2P’s core banking infrastructure, Finflux, which provides the LMF platform, is the next step in creating a more compatible and stronger digital lending stack for banks (including BNPL), along with tapping into new areas such as mortgages.
Out of 10 private banks, eight are already launching their own variant of a BNPL product on the M2P platform.
Furthermore, BSG primarily focused on cooperative banks, a larger segment for M2P to tap into when a new set of customers is added to its roster. In addition to being an integrated CBS and payment stack, it will also help M2P expand its capabilities in new blockchain and trade finance use cases, accelerating their adoption into mainstream banking.
Interestingly, the firm has kept a pulse on RBI’s digital lending norms and the Account Aggregator (AA) facility.
Finflux, which already comes with an AA license, is adding the feature for M2P, which is “working closely with the startup to figure out how it can leverage the AA license from an embedded finance perspective, specifically lending”.
“In our existing business, we never used to deal with Housing Finance Corporations (HFCs) as we did not have a greater understanding. It is a completely different asset class, but the LMS platform (part of the core banking stack) that we offer today addresses also to HFC now because of Finflux. So if my learning platform starts to be used in HFC, can I leverage the account aggregator to sign more effectively?” Madhu explains.
He continues, “And we can actually use that learning to go back to the banks and say, can we build better products around mortgages?”
The third acquisition of Wizi, a credit card-focused startup, falls under the banks exploration category. The agreement strengthens M2P’s BNPL stack for banks, which will be able to acquire new customers.
In fact, Wizi was actually a consumer-facing B2C platform that M2P managed to “convert” into a B2B banking-facing business.
“Most of our BNPL stacks from a digital source point of view. Wizi is the platform that is starting to be used there. The strategy is kind of working well,” he says.
The additions
The acquisition of Originala SaaS platform for loan recovery, and The synthesis, which offers electronic customer onboarding solutions, can be termed as “add-ons” offered by M2P to banks. The former offers better insurance options, while the latter removes the hassle of customer onboarding for banks.
In a sense, M2P wants to be a bank’s one-stop shop.
“There are parts that go together and make the whole system efficient. These agreements were made while we were executing other components and they were in harmony with each other,” says Madhu.
All five agreements were one mix of cash and inventory.
M2P had erected two new ones financing rounds since 2021 (the most prominent being the $56 million Series C from Tiger Global to fund the deals.
“A large portion of the deals were funded through fundraising that we did over the last 12-18 months. When Tiger came in, that’s when we started the whole journey of going out and acquiring businesses. We’ve been aggressively pursuing opportunities and are now looking at opportunities outside India to accelerate our market entry,” he says.
Fintech to SaaS play
The larger goal of M2P is to build a “plug-and-play” SaaS product for banks to go digital in a maximum of 90 days, compared to a typical cycle of 12 months.
“Instead of going to 10 different technology vendors to build multiple products, can we bring everything into a single platform like a bank-in-a-box? There’s a lot of work to be done on that front, and we’re identifying areas where we should build or look at acquisitions, says the entrepreneur.
Tap other embedded segments
Other opportunities in the built-in finance area as embedded insurance and investment is under investigation, and is being closely monitored by the M2P team.
The company has taken “first partner, then acquisition” approach to evaluate whether the segments offer any value to the existing business.
Monetary value of agreements, future acquisitions
Currently, the M2P fintech claims to be one of the largest API infrastructure providers in India. It is close to 100 million dollars in revenue, of which 20% will come from the acquired companies.
About 15% of the income comes from international markets, including the United Arab Emirates, Bahrain, Egypt, Qatar, Oman, Australia, New Zealand, Nepal, Sri Lanka, Singapore, Vietnam, Indonesia and the Philippines, and the share will go up in the next two to three years, says Madhu.
The founders, who hold around 75% equity, claim to have a profitable India operation and have no IPO plans as of now. It is revenues jumped from Rs 22.48 crore in FY20 to Rs 40.48 crore in FY21. The expenditure, specifically around employee benefits and co-branding costs, brought together in a similar suite.
While it clocked profits in the last two financial years, it took a significant hit loss to the tune of NOK 5.99 million in FY21. The company declined to comment on the decline. Additionally, the firm invested around Rs 3.67 crore in the UAE subsidiary as well.
The accounts for FY22 have not yet been submitted.
Going forward, M2P is betting high on its plug-and-play model for digital banking. Its latest deal is included IndusInd Bank, which will utilize M2P’s technology to deliver offers across payments, lending and asset management to the bank’s customers.
“The program (digital banking) will compete with the best fintechs have to offer,” says Madhu.
M2P may have hit the pause button on acquisitions to integrate its new businesses and teams, it keeps its “antennas up” for valuable deals.
Given the big game of M2P fintech and its sheer scale, would it be tougher for smaller or new companies to compete? The company competes with the likes of Rupifi, Niro, Setu, Decentro, in the API infrastructure industry. After M2P, Tiger supported globally Rupifi and Sit down (acquired by Pine Labs) are the most well-funded startups.
Madhu is full of confidence as he signs off.
“My job is to make sure we keep moving the goalposts. Even if there is a new player coming in, it will be very difficult for them to catch up with the execution we have. It’s already a tough sector because of banks and regulation. That way, if someone starts today, even with a lot of capital, it will take at least a couple of years for them to catch up to anything close to what we are doing now.”
