Fintech ?? Food - India and the Bull Case for Fintech
Hey everyone???, thanks for coming back to Brainfood, where I take the week's biggest events and try to get under the skin of what's happening in Fintech. If you're reading this and haven't signed up, join the 25,988 others by clicking below, and to the regular readers, thank you.???
Hey Fintech Nerds ??
What a week. More layoffs at Coinbase and Blockchain.com, JP Morgan is suing Frank for Fraud (A Fintech company), and Starling Bank says it will 4x its profits.?
Starling claims to have a 9% market share of SMB banking in the UK, suggesting it's a great time to be a chartered bank hitting your stride. I didn't cover the Frank / JP Morgan news because?this thread?did a fantastic job (check it out).
However, I did go deeper into the Coinbase news because its share price popped on the layoff news. And that feels important; perhaps we're finding where the real business and volume is for Crypto, even in the depths of winter (read more below).
Here's this week's Brainfood in summary
???Rant: India is a bull case for Fintech (and humanity).?India has 600m people under the age of 28, universities producing top tech talent, the second largest internet user base in the world, and a growing middle class. In the 20th century, the western powers created bridges, ports, and roads to help them grow. India is speedrunning its growth by creating digital infrastructure. Its identity and payments infrastructure are the envy of the world and create unique opportunities and challenges. Payments are almost zero-profit; the market is lending starved and struggles with cross-border trade. India might just be the world's brightest Fintech opportunity.
?? 4 Fintech Companies:
?? Things to Know:
?? Good Read:
Weekly Rant ??
India as the bull case for Fintech and humanity
India has 600m people under the age of 28, universities producing top tech talent, the second largest internet user base in the world, and a growing middle class.?
It is, on many levels, a bull case for humanity.
While markets like China, Europe, and the US face population decline and high inflation India has a real shot at becoming a global superpower. From a Fintech perspective, India also has novel infrastructure like Aadhaar (for identity) and UPI (for payments), giving it opportunities other markets don't have.?
Yet India still has massive social challenges and faces an increasingly uncertain world. Its Fintech infrastructure is aggressively domestic and often struggles to be effective cross-border. So is India building an insular Fintech utopia or the blueprint for the Fintech future?
I find India fascinating. I'm embarrassed to say I've never visited. I work for an all-Indian founding team at Sardine and have opinions on the market as an observer. But for this Brainfood, I wanted to collaborate to sense-check the shit I write.
Because frankly, the last thing India and Indians need is another British guy telling them what’s up (unless it's in cricket, of course??)
So for this Rant, I collaborated with the amazing Tigerfeathers team, Rahul and Aaryaman, and Osborne, Principal at Emphasis Ventures, an early-stage fintech-focused fund. ??
Today we'll cover
The history of financial services in India ??
Banking was a sleepy commodity until the last decade. State-backed insurance and finance companies dominated; by 1990, government-controlled banks accounted for?90% of the banking sector.?
The banking sector was stable, and bureaucratic but not innovative.
In 1991 everything changed.
India Pre-1991 and post-1991 are very different countries. The?economic liberalization?reduced import tariffs and taxes and deregulated key sectors like finance leading to an increase in privatization and foreign investment. India's GDP grew from ~$266bn in 1991 to $2.3trn in 2018 and is now the world's fifth-largest economy (and 3rd on a purchasing power parity basis).
The private sector banks had much more scope to grow in this new economy, but most Indians saw little benefit. By 2007, of the ~500,000 villages across the country,?only 32,000?were served by a formal bank.?
The reality is that today India has a massive credit gap, and?traditional credit models and banking are not solving that gap. Micro SMEs (MSME) credit gap of $330bn, with 89% of MSMEs without access to formal credit.
Imagine if 90% of small businesses had no access to lending. Let that marinate for just a second.
India may be the world's largest Fintech opportunity.
But to understand that, first we have to grok the India Stack and how it makes India unique.
The India Stack ??
The "India Stack" refers to APIs and digital public goods for identity, data, and payments. Where in the 20th century, countries in the west built physical infrastructure like roads, rail, and bridges, India is focussing on digital infrastructure investment.
India is speedrunning digital payments, identity, and potential lending.
Aadhaar is India's national identity program.?1.31?billion?people have an Aadhaar number allowing them to open accounts, sign documents and manage lifetime records such as university diplomas or life insurance. Aadhaar uses fingerprint biometrics as its unique identifier and can authenticate users for logins.
With a single central system for identifying people, the Government can send social welfare directly to a recipient's bank account. The inverse is also true; with a single central identity system, citizens can sign up for almost any service with the same secure Government login.?
UPI is India's real-time mobile payment system.?UPI is a 3 layer cake, with the base being a messaging network operated by the non-profit National Payments Corporation. The second layer is the banks that hold user funds and update account balances, and finally, the Fintech layer is the 3rd layer for payment apps and services.
Visa, AliPay, WeChatPay, and Mastercard are still larger by volume of payments, but UPI has grown massively since its launch in 2016.?NCPI data?showed $157bn of monthly transactions over nearly 8 billion in payments in December 2022. For context, ACH in the USA did ~$6trn per month in 2021 but isn't growing nearly as fast.
Various Fintech apps, services, and banks use UPI as a single payment network. As a shorthand, WeChatPay is closer to Venmo and more closed loop, vs. companies like Amazon and Meta that use UPI, and the payments are cross-network compatible.
Open Credit (OCEN) could be a game changer.?OCEN is the Open Credit Enablement Network allowing any app or marketplace to "plugin" lending to their current operation. Think of "embedded lending" as a standard publicly available APIs.
As the Tigerfeathers describe in?their blog?on the subject:
The network is 'open' because all of the rules that govern the functions of the network are out in the open. OCEN specifies a set of public APIs (programming rules), and any company is free to adopt these APIs to begin participating in the network as a lender or LSP. The way the system is designed, any lender can work with any LSP as long as both parties use the standard rules prescribed by OCEN.
The reality for OCEN is it is still very early and yet to gain traction, but given the relative success seen by UPI and Aadhaar, it could be foundational in 5 years or so.
Open Data (Think GDPR + Open Banking) is also coming.?India intends to create a consumer "data empowerment" framework that enshrines citizen rights for their data, "electronic consent," a standard way to capture consumer consent or opt-ins, and "consent managers."?
The consent managers are "traffic cops for the data value chain," acting as mediators between corporations and citizens and ensuring consent is well managed. The pilot will work with the financial services industry and has not yet launched.?
India is piloting a central bank digital currency (CBDC), and unlike China, Nigeria, and even the Fed, it is perhaps the country with the highest potential of executing digital cash. The e-RUPI could leverage UPI, and Aadhaar and help the Indian government achieve its goal of removing cash (although that is easier said than done!)
Away from the India Stack, India has 600m smartphone users and 1.1 billion mobile subscribers. For many Indians, the mobile phone is the primary internet device, gateway to content and their financial lives. Micro businesses are heavy users of chat apps, but the market is still fragmented. There is no clear dominant winner.
At least not yet.
Where is big tech vs. Fintech vs. Tradfi? ??
For BigTech, payments are the battleground.?India is not a market social media can monetize via advertising; payments are the core revenue driver.?
Digital payments are typically for low-value products and from small retailers. The pioneer was PayTm, moved from a prepaid phone recharging service to a digital wallet in 2014. By 2016 when the Government removed nearly 90% of cash from circulation, PayTm quickly hit 185m users.?
But 2016 also saw UPI's introduction, which leveled the playing field and paved the way for international players to enter. Google Pay, Whatsapp Pay, and Amazon Pay came to market, and Walmart acquired PhonePe (via acquiring Flipkart, the e-commerce company). Today PhonePe has a 46% market share, Google Pay has 34%, and PayTm 11.6%.?
UPI is, however, a double-edged sword.
To promote adoption, the central bank capped the fee service providers can charge merchants for payments at 0, limiting revenue growth potential for banks and Big Tech players.?
Understandably there's now a race to lend via credit, BNPL, and small business credit. But much like CashApp in the USA, winning permission to lend to low-income consumers comes from first winning payments as the wedge.?
There's a future emerging where Big Tech apps are financial services ecosystems for micro SMBs (just as Ant Financial demonstrated in China).?
But today, being able to lend means having a banking license or partnering with a traditional bank. PayTM has a license as a homegrown company, but Amazon has partnered with ICICI. It's too early to say which model wins, but the nature of the India Stack continues to make traditional banks relevant.
Traditional banks are sitting pretty.?The commercial banking sector boomed after the liberalization of the 90s, but it initially replicated traditional western banking models. It adopted branch networks, conventional financial products, and, most importantly, traditional banking infrastructure and software.?
This approach worked well for decades in addressing India's large corporations and wealthy populations, but it left most Indian businesses and consumers unbanked.?
Short term, this isn't a problem for large banks. They're guaranteed a role in the future. The India Stack and regulation enforces a role for the banks in the Fintech industry. They're the base of the pyramid for UPI and credit but are often held back by legacy systems and mindsets.
Digital banking portals and apps from the largest banks have incredibly poor UX, and the largest banks are just beginning to offer developer portals. But there are now Fintech-friendly banks like RBL, SBM, and Equitas.
The stage is set for a Neobanking and Embedded Finance boom, which has been in motion since ~2018.?
India has no shortage of Neobanks.?Jupiter, Epifi, Niyo, FamPay, WalrusPay, Junio, and Basis target mass-market or specific verticals like women, teenagers, cross-border transactions, micro SMBs and more.
However, as we saw in the US and Europe, these companies will struggle to bootstrap revenues from debit card interchange. Debit card interchange averages 0.5% (although it's 1.7% for credit cards). No Durbin debit here.
Like in the west, they're all finding their path to profitability without a license.
There is no path to becoming a bank, and profitability requires lending.
And lending points to banks.
Kirana (shop) tech for MSMBs is a critical sector to understand.?MSMBs contributed up to 38% of GDP in 2018 to the tune of $1.1 Tn. They represent 45% of all exports and employ 124m people.
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KirarnaTech creates tools for micro SMBs to invoice, bookkeep, and manage payroll and inventory have raised massive funding rounds. The data collected by these businesses can create alternative underwriting models (e.g., revenue-based financing, cashflow-based underwriting). But these models haven't been tested over an economic cycle.?
Banking-as-a-Service and embedded finance are showing promise.?M2P and Zeta offer a range of financial services via APIs. Both offer prepaid, debit, and credit cards and have extended into a range of credit products like BNPL and toll cards.?
By partnering with banks, they can reduce the time to market for burgeoning Fintech companies and non-banks. Interestingly M2P, in particular, has grown significantly from M&A, and both companies are looking to expand internationally.?
Everything else.?Payment Gateways have done well in the past decade.?Razorpay is arguably the "Stripe for India," building billing, subscriptions, card issuing, and credit around the core payment acceptance product. India has unique payment types that Razorpay (and others) help to manage, like the QR code standard (BharatQR) and FASTtag for toll payments or parking.
Zerodha is?not?the Robinhood for India, but it has revolutionized stock broking. Today its 10m users represent 15% of retail trading volume in India and have built significant trust with users. It helps users avoid losses with features like nudging a user if a stock looks weak or double-checking a sell order if it seems strong. As a bootstrapped business with a vocal founder, they're arguably a darling of the Indian Fintech scene.?
Opportunities ??
India's potential is ridiculous.?
For Fintech, demographics, talent, and sheer?scale?make India exciting, and some clear opportunity themes are emerging.
As India goes digital, its Government brings the informal economy into view. Businesses and consumers become visible to the Government, and in turn, the Government continues to build infrastructure to solve social challenges.
Challenges
My takeaways.
The India stack presents homegrown solutions to problems at home. India doesn't have to copy + paste innovation from the rest of the world; increasingly, the opposite is true. The world is taking its lead from the India Stack.
Public sector innovations like Aadhaar and UPI have been a catalyst to innovation that the private sector alone would struggle to match. India is now speedrunning digital development largely thanks to this, but also the talent pool that had historically been the world's off-shore tech HQ.
The local infrastructure gives the Government a sense of control and limits the power of big tech or Fintech firms. India's Government has successfully captured the Fintech and financial services sector with regulation?and?technology.?
This is a strength and a weakness.
The level of control allows it to direct traffic, but it also potentially misses out on things that appear unhelpful that are net positives.?
For example, China was extremely effective at preventing COVID-19 initially through lockdowns. Still, today its zero-COVID policy has wreaked havoc on the economy as the local population has very little immunity. Could India's highly effective public infrastructure?prevent?progress and make it incompatible with many parts of the world? And does it care?
As a western company, operating at scale inside the border means using the local infrastructure. But it also makes India's default less compatible with the rest of the world.?
Inward and outward investment opportunities rely on understanding what's unique about India.
I sense that Indian entrepreneurs can and will overcome any barrier and that the 21st century is the Indian century.?
As India rises, it can do things on its terms.
And so it should.
ST.
4 Fintech Companies ??
1.?OneMoneyWay?- SMB Checking for Scandinavia?
OneMoneyWay offers rapid account opening, simple online banking, dedicated IBANs, and payments via SWIFT and SEPA.?They'll soon provide physical and virtual cards to customers in Norway, Sweden, and Denmark. The company also boasts dedicated customer support, which is crucial for SMEs, often treated like consumer accounts by larger banks.
???Scandinavia can be tough to crack because each market has a relatively small population, its own currency (except Finland, which uses Euro), and local payment methods.?While regional banks are often highly innovative compared to global peers, SMBs often lose out on customer support. Scandinavia is also rich in natural resources, talent, and cross-border trade. OneMoneyWay could be well positioned to be a scaled niche player, but I wonder if they can sustain a high-touch customer support model as they rise.?
2.?Lynk?- The Starbucks App as a Service
Lynk enables brands to create an in-app payment ecosystem and customer loyalty solutions.?Lynk sells itself on having much lower payment processing fees than the card networks (~1% vs. ~2%) and grants more access to customer data than is available through card payments.?
???Lynk is aimed at smaller businesses, marketplaces, and gig economy platforms, and the proposition is free to use the payments infrastructure.?For additional support (like adding cards and checking accounts, they add a flat monthly fee of $5k). The whole thing seems both narrow and confusing to me. The idea is so strong I almost want it to be more broadly applicable and API-first. Like here's one API, dashboard, contract for points building, cashback, closed loop, and open loop payments. Maybe it?is that, but it's unclear from the website.?
3.?Date IO?- Card Linked Offers for CEE
Date IO targets merchants and partners with banks to create loyalty programs and offers served inside the bank's digital experience.?Customers access a campaign from their banking app and can get cashback, points, or discounts at participating merchants instantly. Date IO drives engagement and potentially more interchange revenue (swipe fees) for banks.?
???This kind of marketing has been around for a while, and my concern has always been that the mobile banking app isn't the natural home of shopping.?Unlike BNPL, who have successfully created shopping destination apps for their customers, the banks don't quite hit the same. That said, the central European markets are often harder for global Fintech companies to penetrate, so a solution like this has room to run. I think it would do better as a pure-play API like FIDEL rather than a Cardlytics clone because there's space for customers to do more with the data and build unanticipated use cases.
4.?Tandym?- BNPL button as a Service
Tandym allows businesses to create a "digital storecard" that customers can apply for at e-commerce checkout. Brands can integrate with existing solutions like Shopify or WooCommerce, and the new payment button sits alongside existing offerings.?
???The digital storecard positioning is smart because those things have existed?forever?and come bundled with discounts and offers. But to me, this looks just like BNPL, except it only applies to that one specific merchant.?The upside is getting all of the benefits of credit to increase conversion and retention. The downside is the lack of the data and shopping flywheel that makes BNPL so much more than credit at the point of sale.?
Things to know ??
In a blog post to staff, Coinbase CEO Brian Armstrong announced they are laying off 20% of their global workforce. The 950 staff laid off follows 1,100 staff let go in June of last year, and Coinbase is culling projects. Coinbase shares have traded down 83% over the past year but increased 12% since the announcement.?
???Coinbase was doing?all the things?in the bull market, but now it is forced to focus on what it is great at.?Coinbase is arguably the most legitimate brand in Crypto, with the best UX, and they've made meaningful inroads to becoming an institutional business. But they also shipped many products nobody used, like the NFT marketplace.?
???That market reaction of 12% is interesting, especially if it is sustained.?Is it a signal investors believe Coinbase can become sustainable? Crypto volumes are down, but the big competitors are also vanishing. FTX has gone under, and Binance looks very wobbly.?
???Coinbase could emerge as the winner in the US.?Coinbase, as a publicly traded company, has already been forced to accommodate regulators in the US. Famously, Coinbase was prevented from launching an "earn" DeFi yield product by the SEC. Given the companies we've seen fail that?did?have "earn" and yield products, perhaps the SEC preventing Coinbase from competing was the best thing that ever happened to them.
TikTok users spent $3.4bn in 2022 buying virtual gifts (like diamonds and roses) to send to creators, who can convert these gifts into cash. According to a case study on the JPM website, the bank has built a real-time payments infrastructure for ByteDance allowing creators to get paid directly into a bank account 24/7.?
According to a recent job posting, TikTok is building a Global Payments team to "provide cross-border payment solutions for all ByteDance's products and services." Several former key JPM execs now work at ByteDance on this team.?
???This is a dream client for a bank like JP Morgan.?Giant growing companies are massive enterprise deals driving significant revenue to banks. Banks historically do well in the traditional sectors (e.g., Retail or Energy), but winning a growth client is where they can see new revenue.?(Although having half your former leadership at the client certainly helps win the deal!)
???TikTok now has embedded direct creator payouts in the US.?Meta already allows its creators in the US to withdraw to a bank account or PayPal, but this move makes TikTok more competitive.?
???Partnering with JP Morgan may ease US fears that China could abuse ByteDance's influence.?Whoever controls payments has leverage in an economy.?The US Government does not want to see payment platforms like Ali or Tencent gain popularity because they may lose their ability to restrict payments for sanctions, or data may be leaked to the Chinese Government. As such, ByteDance comes under significant scrutiny, but a large US bank could be a good backstop.
According to a screenshot shared by two app researchers, Twitter could be working on an in-app currency called "coins" designed to help creators earn from the platform. Coins are a tipping feature for content, and awards are in-app gifts like "mind blown" award or the "Gold" award.?
???It sounds like copy+paste TikTok, but Twitter has a different audience.?Twitter is the comment section for the internet (as is Reddit). But today, those creators monetize elsewhere (e.g., Youtube, podcasts, blogs) that don't get as high-quality fan feedback. As a space to reward great conversation, Twitter could carve a solid niche.?
???This looks like a work in progress, and there's no confirmation if or when the feature will launch. Reddit is one example of a community that has baked in awards and a feedback loop; it even recently launched avatars. Reddit and Twitter reward high-effort content feedback (e.g., comments). When you consider that creators can make a living from other platforms, but there's so little commerce happening on Twitter it makes sense for them to explore this space.
???Despite the word "coins," there's no suggestion this has any Crypto lens.?That's probably sensible in the short and medium term, given what competitors in social media offer.
Good Reads ??
Alex argues banks are deluding themselves into believing that P2P payments will drive customer retention. While it's true consumers and businesses love and demand instant P2P payments, they already have many opportunities to get that from competitors. Zelle has been tremendously successful as a network, but it costs banks $0.90 per transaction and is almost universal, not a competitive advantage. Banks are getting?hammered?by fraudsters because faster payments = faster fraud.
Structurally the US has no single P2P rail like Pix in Brazil or UPI in India, which Alex demonstrates with this fantastic graphic.
???Faster payments mean faster fraud.?The best thing about a 2-day delay in payments is?time to figure out if the payment is for real. Fraudster loves money that moves instantly because once they have it, they can move it to a second, third, and fourth account to make it impossible to retrieve. With a 2-day delay or with cards,?the money hasn't moved yet, so the sending back can always pull it back if something looks wrong.?
(Although, there is the other issue of a customer agreeing to pay for something today and then conveniently "not having funds" two days?later)
???Payments are multi-rail, which creates a visibility gap. Fraudsters will use the instant payment type first but then might move the money over to Crypto, which is irreversible.?Then from somewhere else, back into the banking system. Wallets, FI's, and consumers have no way to see all these networks at once today (unless they call my employer Sardine of course* ??)
???The fraud problem exists in other markets too.?The US is a unique beast, but its fraud problem is not unique. PIX succeeded partly because it allowed grey market activity to displace cash and cards as a payments rail at the outset. Faster payments in the UK have a massive push payment fraud problem.?
???The banks and Fintech companies could be on the hook to make customers whole, even if they sent the money to a fraudster. Zelle is rumored to make this a network rule, and the UK regulator may make it a mandate. What will that do to the already loss-making faster payments business case? Faster payments are inevitable because the market demands them, but fraud and lousy business cases are not inevitable. We can do better.
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Disclosures: (1) All content and views expressed here are the authors' personal opinions and do not reflect the views of any of their employers or employees. (2) All companies or assets mentioned by the author in which the author has a personal and/or financial interest are denoted with a?*?(3) Any companies mentioned in Rants are top of mind and used for illustrative purposes only.
Am in India on hols and have had an amazing experience with the payments options available literally in the middle of nowhere ! I went to the Himalayas for a trip and even the smallest of vendor and shops accepted payments by gpay or similar payment apps. I think this country has adopted technology especially in payments like no other. I felt completely backward with just my Apple pay on hand ??
StartupCouncil.org CEO, Ecosystem Builder, Speaker, Fundraising Mentor & Advisor to Early Stage Ventures, 3x Best-selling Entrepreneurship Author, Ang*l Inv*stor, Serial Entrepreneur
1 年Loved this edition of your newsletter Simon Taylor including the focus on the huge potential in #India.
CEO and Co-founder @ Brico | FinTech nerd | Product and operations leader
1 年Love reading your newsletter every week! Having previously worked on UPI and india stack related FinTech projects, I was so happy to see this deep dive this week . However, I would add 2 additional challenges in the list of challenges in your piece. There are pyscho-social reasons why consumer adoption of lending and insurance is low in India. First, credit is not seen as aspirational. It is considered a “bad thing” to live beyond your means and majority of middle and upper middle class people also don’t have credit cards. The only 2 credit product that’s considered “neutral” are housing loan and education loan. Unlike in the US, there is a strong social conditioning against taking a loan or having multiple lines of credit until you absolutely need it and are not able to cover that expense via savings or existing assets. This is however changing a bit with urban youth living more independently than their family and also following the general #yolo?lifestyle? second, insurance has had a lower adoption for a few reasons 1) family used to be the “ life “ insurance. It is still a basic expectation that if the primary earner of the family passes away then kids, brothers of the earner will take care of the rest of the family. 2) maintaining appliances, homes, cars are cheap because labor and services are inexpensive. Paying monthly for insurance doesn’t make sense when your 1 time cost (1-2 times a year) is less than a few months of your insurance premium 3) health insurance coverage is only prevalent in urban India and tier 2 and tier 3 cities have very few hospitals that accept insurance. Additionally, cost of healthcare is actually affordable for middle class and again family is the insurance here too. Kids usually take care of parent’s healthcosts. And there is free healthcare and govt sponsored insurance for lower income population. but 100% agree that India is frog-leaping into an era of massive FinTech innovation.
Product @ Solaris SE | Fintech, Embedded Finance, API Banking, Data Products | Product Management
1 年Simon Taylor - well captured! Good overview of the Indian fintech landscape, its challenges, and opportunities.
Thanks for the mention! Simon Taylor!