The customer-facing end of the payments engine in India will be owned by large and deep-pocketed entities such as Reliance Jio Infocomm Ltd, Paytm (One97 Communications Ltd) and even WhatsApp Inc., along with Facebook Inc. and, maybe, Google Inc. might also play in this space, says Suramya Gupta, manager of the SBI-FMO Emerging Asia Fund and head of India business, SBI Holdings Japan.
The SBI-FMO Fund, which has made several fintech investments in India, including leading a recent Rs120-crore round in Innoviti Payment Solutions, prefers companies that are building unique solutions that are relevant in the Indian context, Gupta explained.
You recently led a Rs120-crore funding round in India’s Innoviti Payment Solutions, a payments company backed by Infosys Ltd co-founder N.R. Narayana Murthy’s Catamaran. What got you interested in this company and, overall, how big an opportunity is the digital payments space in India?
We are happy to have invested in Innoviti earlier this year. Let me start with the bigger picture first before I explain some of our thoughts about Innoviti. We believe that in India digitization of payments, what you called the digital payments space, is an irreversible trend and also a huge opportunity for Investors like us.
If you only look at the two niches that Innoviti plays in—retail payments in India is a roughly $500 billion per annum industry and SME (small and medium enterprise) lending shortfall is again around $200-300 billion per annum. Combined, this is an almost $1 trillion market. This combined market is growing at 15-20% per annum, driven by India’s GDP (gross domestic product) growth.
It’s highly fragmented with no dominant leaders. And the government and regulators like RBI (Reserve Bank of India), NPCI (National Payments Corporation of India) are extremely supportive; in fact, are pushing digitization. After demonetisation, Jan Dhan, BHIM (Bharat Interface for Money), UPI (Unified Payments Interface) etc., there should be very little doubt regarding Indian government support.
So we like investing in these kinds of industries where the macro-trends and broader ecosystem are all supportive. Now coming to the first part of your question, in the start-up space and specifically in the fintech space in India, we prefer companies that are building unique solutions that are relevant to the Indian context.
Innoviti is an interesting company that has repeatedly created new solutions across industries—and I am talking about a patentable IP (intellectual property) here. They have an interesting payments platform which processes over $3 billion in retail payments with high processing reliability and low processing time. Innoviti’s SME lending business is again a unique platform model that has disbursed over $500 million of loans.
Large clients like Reliance Retail, Wal-Mart, Titan use Innoviti’s services. So it’s a business with R&D (research and development) and innovation in its DNA, solving problems in a large growing sector, and with very strong reference clients. Another point of comfort to me is the quality of Innoviti’s early investors. You mentioned (Infosys Ltd founder N.R. Narayana) Murthy’s investment vehicle Catamaran. Another investor is Anne Glover, who is the founder of Amadeus Capital in UK. And of course in this round we have invested along with Bessemer, another strong fund.
SBI-FMO has said it sees opportunities in taking Indian fintech start-ups to other emerging geographies—in theory, the offerings of Indian fintech start-ups should find ready markets in the Philippines, Indonesia, Thailand and Malaysia—but, why have we not seen Indian fintech companies expand to these geographies? When it comes to scaling across the region, a lot of VCs (venture capital firms) have been talking about SEA (South-East Asia) start-ups expanding to India, and India-based start-ups looking at this regions (SEA) as their first port of call—how feasible is this in reality?
Entrepreneurs like to focus on their home market—be it India or Indonesia. And we fully understand that, given how large a market India offers, it doesn’t always make sense for early-stage companies to invest their management bandwidth in international expansion.
On the flip side, however, India is also a hyper-competitive low-margin market where early-stage companies often struggle to get commercially remunerative customers. The time of scaling is a decision for each company to make on its own—and it depends on multiple factors—what is the nature of your product, stage of growth, etc. But we do advise our founders to try and not put all their eggs in one basket.
As a fund we invest across Asia. And through our partners SBI Holdings (Japan) and FMO (Netherlands), we have access to a pretty deep global ecosystem. This enables us to help our investee companies in scaling up and building linkages where sensible.
Let me give you a few examples. Take Bank-Genie—it’s an Indian fintech company with Indian founders. The development centres are in Mysore (Mysuru) and Bangalore (Bengaluru)—so all product development happens in India at the moment. But for their branchless banking product, which is focused on smaller banks and FIs (financial institutions), we felt that it would make a lot more sense to start outside India.
The first few clients they had were in Africa and over the past six months, we have been able to get them some large banking clients in countries like the Philippines, Cambodia, Sri Lanka and Nepal.
I want to highlight that these are banking sector clients. Usually sales cycles for ‘core-banking’ IT (information technology) products to banks are quite long, but we have already been able to help Bank-Genie sign clients across four-to-five countries in Asia because the product-market fit was much better. This then creates a virtuous loop—because it makes pitching to new clients easier, both in India and outside.
Or take InstaRem, a fintech platform set up by an Indian founder in Singapore. Their initial business was largely focused on Indian in-bound remittance corridors. Along with our co-investors, we are helping InstaRem build a regional and global platform.
We are connecting them to Japan, our co-investor GSR Ventures is helping in China—and we are also working with InstaRem for both US and Europe licences. As the scale of the platform improves, this will create a network effect which again makes it easier for new clients to join the InstaRem platform.
So we do think this idea of regional expansion has some legs, but probably not for every start-up.
The payments segment in India is already witnessing steep competition, and in this context, what do you make of WhatsApp’s plans to enter into this (payments) space.
I have absolutely no doubt in my mind that the front-end or the customer-facing end of the payments engine in India will be owned by very large, very deep-pocketed players.
You are, of course, aware of the massive investments that Reliance Jio is making to rollout its network. Their focus is on capturing the entire digital spend of the consumer, and this will also include the consumers’ payments.
You have a bunch of large payments banks in India. Paytm now has SoftBank (Group Corp.) and Alibaba (Holdings Ltd) standing behind it. Amazon Pay has made some moves. And then you have WhatsApp, which, along with Facebook and maybe Google, might also play in this space.
We have been very clear in our minds about this evolution, and the fact that as a fund we are not best placed to directly compete with these players. As a fund, we are answerable to our investors who need clarity on our investment strategy and exit timelines.
So any space where the expectation is for companies to burn a billion dollars just to gain market share—is not for us to play in. We are happier to collaborate and add value through technological innovation. So, say with so many payments front-ends available now, if you are a merchant, how do you ensure that your customers can pay by card, mobile wallet, Whatsapp, Apple Pay, Samsung Pay, BHIM, QR Code etc?. That’s where a company like Innoviti comes in. Innoviti’s products sit 1-2 layers behind the front-end—and the differentiator will be technological innovation. If Innoviti can continue to build strong payments-processing products, then it will have earned the right to participate in the payments ecosystem in India.
As another example, at some stage, Reliance Jio or WhatsApp might want to go beyond domestic payments and also help their customers send money overseas or receive money remitted by a family-member outside India. We would then position InstaRem as the back-end remittance platform that integrates with any front-end and enables cross-border digital payments at a fraction of the cost that the usual SWIFT-based remittance would cost.
What are the challenges that fintech firms in India and SEA will now face as the industry matures and the initial excitement over the disruption wanes?
The hype about small fintech start-ups replacing the centuries-old banking industry is giving way to some maturity.
Of course, better technology and data will lead to compression of banking margins in some services. But banks are here to stay. Banks will compete and evolve. It is up to fintech firms to prove their relevance by creating products that can improve existing processes either for the consumer or for banks/FIs.
We have seen some curious developments even in developed markets like Singapore, where it seems almost anyone can create a robo-advisory firm.
I do understand the view that automated rules-based investing engines will lower the fixed cost of investments for some investors. So robo-advisory as an industry will probably grow rapidly.
But what I struggle to understand is why a Fidelity or say a Citibank will need a small start-up to help build their robo-advisor.
Fidelity has the resources to hire the best data scientists and AI (artificial intelligence) engineers in the world to build their own. Of course, a few early robo-advisors have been acquired; but as this product becomes more mainstream, consumers will likely prefer the safety of the robo-advisor from a large, regulated bank or asset manager rather than a start-up.
What I am trying to highlight is that a fintech start-up should think very deeply about what is the value proposition that it is offering to consumers or to intermediaries like banks. You have to be able to offer something unique, otherwise a bank can also replicate your product.