Aadhaar, eKYC, UPI to fuel innovation in fintech, says report
New Delhi: Financial technology built around India Stack, (a set of tools to build software) Aadhaar, electronic know your customer (eKYC) process and Unified Payments Interface (UPI) will fuel innovation that can help 400 million more Indians access credit, insurance and investment opportunities, a report said.
“A billion people in India today have an identity (Aadhaar card), technology infrastructure (India Stack) that promises to reduce cost of transaction and (customer) on-boarding by 50-80%. We view the best fintech investment opportunities to be around innovation that leverages this inflection point and delivers financial products and services to the next 400 million consumers,” said Bala Srinivasa, partner, Kalaari Capital, who co-authored the report.
Fintech has the potential to reach people who have been financially excluded so far, the report said.
Early-stage technology-focused venture capital firm Kalaari Capital was set up in 2006 and has $650 million assets under management. Along with its recently launched accelerator programme Kstart in February, the firm has made five investments in fintech in the last 18 months, including Rubique, Instamojo and CreditVidya.
Over 800 fintech start-ups have emerged in the last three years, according to Tracxn, a start-up data tracker. In terms of investor interest, these start-ups have raised over $1.9 billion across more than 135 deals since 2013.
The Kalaari Capital survey, conducted in July, aimed to understand the founding teams, areas of focus and challenges, usage of Aadhaar and eKYC. The company received responses from over 350 fintech companies.
According to the survey, almost 50% of the founders have less than two years of experience in financial services, prior to starting up. Srinivasa does not see this as a limitation, since great businesses are often built by those without prior backgrounds. However, for a fintech start-up to be successful, founders eventually need to build a team that understands both technology and financial services.
While payments and lending have together received more than 33% of the total funding, personal finance that includes wealth management, expense tracking and tax management have witnessed 20% of the total funding so far.
“There is a case to be made that India fintech trends—Jan Dhan Yojana accounts, Aadhaar, eKYC and smartphone penetration—do create a new environment compared with prior efforts in this area (personal finance)”, the report said.
Raising capital, customer acquisition and monetization emerged as the biggest hurdles for these fintech companies.
Srinivasa said there is always going to be a lot of companies competing for scarce capital. For venture funding, the ones with truly innovative solutions in large segments, inspiring entrepreneurs, and scalable go-to-market approaches have an advantage.
He pointed out that the success of fintech start-ups in India is going to be tied to three key factors - ability to re-imagine a product or service such as lending, insurance, payments in a way that it can be used by hundreds of millions of Indians; ability to aggregate demand and drive volume in terms of transactions or customers; new thinking around monetization. That is why lending still remains an under-penetrated market, besides having raised 18% of total fintech funding.
The survey points out that more than two-thirds of fintech start-ups have taken a hybrid “online and offline” strategy for customer acquisition and about 12% of them are marketing only through third-party channels like banks and non-banking financial companies (NBFCs).
According to the report, Aadhaar is rapidly catching up on becoming the sole identity proof document—43% of startups use Aadhaar for customer identification. Kalaari Capital expects the share of fintech companies using Aadhaar to double in the next one year. In addition, eKYC was listed by 39% as the top India Stack component critical to fintech start-ups.