Will India’s Fintech growth story continue to hold true in the future?: BCG Report

India’s Fintech growth story continued to hold strong in 2021, with a 157%y-o-y growth in funding.?

The sector received funding worth USD 8 Billion in 2021 led by payments at ~USD 2.7 Billion?closely followed by lending at ~USD 2.6 Billion.

India’s digital payment success story is evidenced by the digital transaction volume of over 28 Billion?and a gross value over INR 320 Tn in FY 20212. Going forward, lending is likely to become even more valued given?the democratization of data, and the valuation profile of Indian Fintechs is expected to shift from payments tolending.

However, last few quarters in 2022 have witnessed?multiple shifts in the Indian Fintech space owing?largely to macroeconomic conditions.?The possibility of?an impending recession and inflationary pressures across?key markets have impacted the economy at large and Fintechs have been no exception. Indian Fintechs saw a drop of ~30% in funding in quarter ending June 2022 compared to quarter ending June 2021.

On the other hand, the amount of dry powder with institutional investors (PE/ VCs) has increased by USD 3.2 Billion?in the last 6 months,?indicating the potential flow of capital with improvement in?macroeconomic fundamentals. This balanced indicators suggests, the future of Fintech will continue to be shaped by three kinds of themes:

• Existing secular themes that will continue to propel the Fintech growth story
• Emerging secular themes that will shape the future landscape of Fintechs
• Vertical-specific themes that will shape?business models and operating models

Payments:

• Credit Card on UPI rails will further turbocharge digital payments penetration
• While overall credit card penetration will increase, the role of non-banks is unclear; to be shaped by regulation
• Increase in merchant base will drive P2M payments and expand credit access and sharper credit decisioning
• RBI's Payments Vision 2025 to drive innovation and growth, although with expanded regulatory responsibilities for Fintechs

Lending:

• While embedded finance / BNPL will further?drive digital payments and credit penetration,?achieving profitability at scale remains elusive
• Fintechs continue to strive to improve credit?quality; consent-based data, robust risk models,?and bespoke credit policies could be important unlocks
• Securitization and tapping into the debt market?could help alleviate pressure on Fintechs' cost-of-funds and therefore yields
• RBI's focus on upholding regulatory standards and consumer protection could invite greater scrutiny on Fintechs' lending models (e.g., FLDG) and ultra-high yields

Wealth:

• India's wealth will continue to be?financialized; underpenetrated equity and?MF market will present an opportunity for Wealthtechs
• Wealthtechs are activating the?mass/affluents through thematic?innovation. However, the path to long-term?viability will require Fintechs to chargecustomers for services
• Technological solutioning and investor education will be more important growth drivers for mass segments versus pure product engineering
• The Wealthtech investment thesis will be?indexed towards user acquisition vs. monetization/profitability, given the?underpenetration of Indian market; however, CAC has started becoming a key?differentiator to improve unit economics

Insurance:

• IRDAI seeks to usher in a new regime of insurance regulations, which could unlock newer operating models, partnerships between nsurTechs and incumbents
• The AA framework and India Stack will?enable end-to-end journey digitization?of insurance, leading to greater?operating efficiency, sharper pricingnewer partnership models between insurers and InsurTechs
• The National Health Stack will?significantly unlock value in Retail?Health Insurance, with more InsurTechs plugging into this ecosystem

Crypto, DeFi:

• The recent crypto market erosion has tempered stakeholder expectations; capital will continue to be constrained whereas talent pool remains resilient
• On-chain asset?tokenization is expected?to gain prominence across key markets. Its evolution will be shaped by regulations, standard tech protocols and the adoption by TradFis
• Large crypto Fintechs will continue to operate with caution in an evolving regulatory landscape

Indian Fintechs have been the posterchild of India’s digital growth story, with their growth propelled by a surplus of capital, maturing infrastructure and favorable underlying customer demographics.

The good news for Fintechs is that India’s digital infrastructure is only expected to further mature and the underlying demand growth is expected to stay strong. However the Fintechs will also have to operate in an environment with?regulator(s)

• that are increasingly nationalistic, pro-consumer, and vigilant; licensed incumbents who are strengthening their digital capabilities;
• increasingly affluent and digitally-savvy customers who are hungry for their financial needs to be met digitally;?
• and most importantly, a large base of mass customers waiting to be digitally educated?and serviced.

Achieving sustainable and profitable growth in this environment will be?test of which Fintechs can grapple and balance these multiple stakeholders and place their customer at the centre of it all.

Ultimately, Customer is king.

( Excerpts from a latest BCG Report, "Themes shaping the future of Fintechs in India")