November 2016 is widely considered to be the month when fintech in India got its first big boost. This is when the government announced that large denomination notes would be illegal tender, an exercise commonly remembered as ‘demonetization’.
The transition from the old notes to new currency notes and the ensuing difficulties in cash transactions saw a huge immediate rise in digital payments and a corresponding interest in financial technology firms. While fintech companies had been around long before 2016, ‘demonetization’ helped bring fintech into the public mainstream.
The rise of fintech in India since then has also attracted the attention of many small and large players. Till a few years ago, the Indian fintech ecosystem was dominated by homegrown start-ups such as Paytm, along with backend vendors that catered to banking and financial service institutions. But strong growth prospects have seen the entry of global players like Amazon and Google into this space, along with fresh businesses catering to a variety of requirements.
A NASSCOM report on Indian startups identified the fintech space as one of the top high potential sectors in the ecosystem. Financial inclusion, lending, wealth management, banking, and insurance are the key segment driving the growth of the Indian fintech industry. With the entry of foreign players, and with foreign investors lining up, the sector seems set for healthy growth.
However, 2019 seemed to be a year of rationalization for fintech investments. A KPMG report, along with the Findexable report, the world’s first global index of fintech cities, showed that the value of fintech deals in India in the first half of 2019 stood at $300-350 Mn, a steep fall from the year before. The KPMG report, however, added that the decline was not unique to India and was reflected across the world.
Despite the shortfall, the Indian government seems bullish on fintech. At an event organized by Indian trade body Associated Chambers of Commerce and Industry (ASSOCHAM) in New Delhi last year, Amitabh Kant, CEO of policy think-tank Niti Aayog, told reporters that the fintech market in India “is likely to expand to US$31 billion in 2020”. In fact, one of the biggest deals in Asia last year was Visa pumping $85 Mn into Billdesk, a Mumbai-based payment gateway.
Investments by entities such as Visa are indicative of the rising global interest in Indian fintech. Market sentiment indicates that future investments will likely focus on specific areas like payment gateways, peer-to-peer lending, payment banks (KPMG calls this ‘bank in a box’), blockchain, robo-advisory, and security.
Of these, blockchain and artificial intelligence-driven fintech start-ups are likely to elicit the greatest interest from investors. The Reserve Bank of India (RBI) has also begun testing blockchain-based applications—technology that is steadily gaining acceptance from banks and financial institutions in India.
In a press statement accompanying its report on fintech adoption rates released in mid-2019, global consultant EY said: “The fintech industry in India is rapidly expanding, and the adoption rate is growing faster than anticipated. One of the reasons for strong growth is that traditional financial services companies have entered the fray in a big way.”
The fintech adoption rate in India is above 80%, way higher than 70% in Europe. All these factors combine to portray an optimistic future for the fintech ecosystem in India.
The Government Support
The financial technology sector has been a focus area for the government for some years now. The push to a digital economy has seen the rise of fintech start-ups as well as the entry of global fintech firms into India. In fact, while presenting the recent union budget, Finance Minister Nirmala Sitharaman also underlined the importance of a digital economy.
Among other steps, the Finance Minister announced that the government would set up an app-based invoice financing loans platform for MSMEs. While the chief beneficiaries are undoubtedly MSME companies, it is also very promising for fintech companies. The push to widen the government’s e-marketplace or GeM also promises an opportunity for fintech.
When the government is bullish on fintech, it’s a promising sign. This is one of the main reasons global fintech players have entered India.
What Lies Ahead For The Sector
Given these positives, why has global investment in fintech fallen? Industry insiders seem to believe there is a mismatch in expectations when it comes to valuations. Also, it appears that investors prefer well-established start-ups over early-stage investments.
Regardless, there is still a lot of investor excitement in this space, apart from investments by the likes of Visa and international banks in their domestic fintech arms. Top investors in Indian fintech include SoftBank’s Vision Fund, Temasek, Tiger Global, Tencent, Sequoia Capital, Blume Ventures, and Nexus Partners.
The advantage of such investors focusing on India is that fintech start-ups here will find it easier to access later-stage credit. It will also fund fintech R&D, something India has not seen in a big way. With global fintech competition making their presence felt in India, domestic companies will be forced to innovate and offer investors better products and therefore better returns.
So far, most domestic retail fintech offerings have been variants of global products; with increased investments and global attention, fintech R&D could take off soon, leading to more customized solutions homegrown specifically to the requirements of the Indian ecosystem.
Of course, with bigger money comes bigger risks. Investors who are not accustomed to the Indian market and unsure about fintech adoption may want to exit sooner than anticipated, leaving the funded company stranded. However, this seems a remote possibility, given the shape of the market at present.
So, what does the future portend for the Indian fintech ecosystem? The Findexable report sums up the sector’s future best:
“Progressive, digital-first financial services are the key to power the global economy’s transition to the Fourth Industrial Revolution and, as we enter a new decade, offer the best chance to drive global trade, improve access to financial services, and open opportunities – for marginalized citizens, poorer communities and small businesses and entrepreneurs alike.”