Digital Lending Or Insurance Tech: Which Will Be The Most Favoured Fintech Subsector In India?

The growing number of internet subscribers and smartphone users across the country and the Indian government’s proactive digital drive to ensure financial inclusion have seen the market for fintech solutions grow at a fast clip. Although mobile recharge and digital wallets laid the foundation of India’s fintech revolution, digital lending in the consumer space has now turned out to be the most lucrative opportunity.

Thanks to the growing urbanisation and a rise in formal employment across Indian cities, the addressable market for consumer credit is poised to increase. But that does not mean that the sector is without its challenges. However, formal employment (as indicated by the number of EPFO accounts) surged nearly 4x from 44 Mn in FY15 to 161 Mn in FY21 (up to Q3). And lending tech startups are making the most of this opportunity with niche solutions such as sachet loans, advance salary and BNPL (buy now pay later) products.

The fact that lending tech startups accounted for 44% of the total venture capital investment in Indian fintech startups in 2020, a surge from a meagre 9.6% in 2015, indicates a rise in investor confidence in this subsector.

Unsurprisingly, fintech was the top startup sector in terms of funding amount ($2.1 Bn) and deal count (131) in 2020, putting it among the top startup sectors which hugely benefited from the Covid-19 outbreak in India. Other sectors, which benefited the most, can be found in our latest release — The Annual Indian Tech Startup Funding Report 2020.

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Lending Tech Investors’ Favourite Fintech Subsector In 2020

Fintech startups saw a compound annual growth rate (CAGR) of 10% (9.6% precisely) in deal count between 2015 and 2020 and a CAGR of 6.1% in terms of total venture capital inflow.

Among the four main fintech subsectors — payments, lending tech, insurance tech and investment tech — insurance tech (58%), investment tech (53%) and lending tech (44%) recorded the highest CAGR in 2015-2020 in terms of total funding. In contrast, digital payments recorded a negative growth rate (-32%), indicating diminishing investor confidence towards this subsector due to market saturation caused by established players.

In terms of deal count, lending tech startups had the highest share for four consecutive years, from 2017 to 2020. The average annual contribution of lending tech during this period was 50%.

Today consumer lending is seen as one of the most lucrative segments for new venture opportunities. This can be attributed to the fact that in recent times, the Indian market has witnessed an exponential surge in demand for short-term loans related to purchases and spending. It can be further ascertained from the fact that on average, 5.6 Mn credit cards are annually issued in India. The number of credit cards in India grew at a CAGR of 24% (2013-2019) as credit-based purchases became more common even in semi-urban areas.

Fintech In 2021: Funding And Deal Count Prediction

This year (2021), the fintech funding space will be primarily dominated by consumer lending, B2B lending, fintech SaaS and insurance tech. As the Covid-19 pandemic has forced both consumers and enterprises to adopt digital payment solutions, the rise in demand will create new opportunities for entrepreneurs in the sectors mentioned above.

 

Given the current rise in digital lending fraud across the country, the government is likely to bring in more regulations in this fintech subsector. But if these policies turn out to be unfavourable, investor confidence in lending tech startups is bound to decrease significantly.

If policy changes hinder the lending tech ecosystem in India, insurance tech is likely to replace digital lending as investors’ favourite as the CAGR of capital inflow in 2015-2020 across insurance tech startups is relatively higher (58%) than that of lending tech companies (44% during the same time frame).

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Note: Years mentioned are calendar years unless mentioned otherwise.