VCs scramble to cash in on fin-tech boom

Mumbai: Venture capital (VC) investments in fin-tech, or start-ups in the financial technology area, have seen a threefold increase over the last year as investors seek to cash in on potentially disruptive technologies shaping a cashless economy.

Globally and in India, the financial services sector is rapidly moving towards digital payments and transactions, creating an opportunity for those who offer services such as mobile wallets, online lending platforms and alternative credit rating techniques, among others.

Earlier this year, the Reserve Bank of India issued 11 payments bank licences to telcos, payment services (electronic wallet) companies and others. According to an August report by the Boston Consulting Group (BCG), 13% of India’s total banked population is now using digital banking. This number is growing at 20-25% per annum, estimates BCG.

Online retail sales could touch anywhere between $48 billion and $60 billion by 2020 from $4.47 billion last year, according to a report by UBS Group AG in April this year. Customers are increasingly using electronic wallets to pay for their online purchases. And they are increasingly making their purchases through apps on their smartphones (and paying for them through other apps on their smartphones).

Investors are trying to capitalize on these trends.

Till 30 September, investors had pumped $153 million into 20 deals in the fin-tech space (roughly the same they have in food-tech, the other flavour of the month), according to data from Venture Intelligence, a research service focused on private company financials. Last year, they invested $42 million across 15 deals. The amount invested in this sector this year is also the highest in the last five years for which the data is available.

The data includes investments in fin-tech involved in SME (small and medium enterprises) lending, mobile value-added services and payment processing firms. It excludes online marketplaces for financial products and services. The final tally for 2015 will be higher.

Earlier this week, Citrus Payment Solutions Pvt. Ltd, a mobile payment start-up, raised $25 million from new and existing investors, including Sequoia Capital.

Chillr, a mobile app that allows users to send money from their bank account to anyone in their phone book, also raised $8 million from Sequoia and other investors earlier this month.

Inclusion and more

In some ways, investors are following the lead of the government, which sees what it terms J-A-M as a way to increase the reach of financial services. J-A-M stands for the Jan Dhan Yojana, the Prime Minister’s ambitious inclusion scheme that involves opening no-frills bank accounts for millions of unbanked Indians, Aadhaar, the unique identification number, and Mobile phones.

“Fin-tech is the only way in which the financial needs of hundreds of millions of Indians can be serviced efficiently. There is an expectation that as comfort with undertaking transactions related to goods from mobiles becomes pervasive amongst Indian consumers, there would be a large population who would be ideal candidates for transaction for financial needs,” said Rahul Chandra, managing director at Helion Venture Partners.

Telcos have a total subscriber base of around 900 million and over 40% of these connections are in rural areas where banks have a limited network, according to a November 2014 report by rating agency Crisil Ltd. Many believe that this telecom network and services built atop this will be crucial in reducing financial exclusion in the economy.

While the initial round of investments in fin-tech came into firms offering mobile wallet services, investors are also looking at lending platforms.

“An online SME (small and medium enterprises) lending platform such as Lendingkart disburses loans within four hours of an application on the back of deep analytics that helps it assess and manage risk. These models have created large valuable companies globally. India is not likely to be any different,” said Aashish Bhinde, executive director, digital and technology, at Avendus Capital Pvt. Ltd.

Firms focusing on enabling near-field communication (NFC) transactions are also drawing attention. NFC is a kind of technology which allows electronic devices to exchange data when in close proximity.

Both Citrus Payments and Chillr, which raised funds this month, are looking to expand into this segment.

“From the current fund raise, we will spend on expanding the product and engineering teams, launching newer products in areas of personal finance, providing credit based on consumer transaction history, driving superior experience in retail payments such as NFC,” said Jitendra Gupta, co-founder, Citrus Payments, adding that not much work has been done yet in India on NFC, through which one can tap your phone and pay at the counter.

Gupta added that the mobile wallets business also continues to grow.

Indeed, according to the BCG report quoted above, the total number of transactions on digital wallets (promoted by non-banks) surpassed the total number of mobile banking transactions in 2013-14. These transactions are growing at a rate of 180% per annum, against 80% in mobile banking transactions, said BCG.

India’s dislike of plastic is a huge advantage for fin-tech companies.

“In India, less than 3.5% of all transaction values come through card payments, which gives us a lot of scope,” said Sony Joy, founder at Chillr.

Chillr which specializes in person-to-person payments through tie-ups with banks, is now expanding to merchant payments in both proximity scenarios as well as for online and mobile apps.

Investors and bankers say that the size and scope of investments in the fin-tech segment will only increase.

“We are seeing significant interest from global financial and domestic investors in this space. We expect the sector to out-perform some of the other more talked-about verticals over the next two years,” said Bhinde.

There will be challenges they face, though.

“Though there has been a manifold increase in users transacting through mobile apps some of the key challenges faced by these fin-tech firms include regulatory approvals when direct lending is concerned and building trust with users,” said Vikram Vaidyanathan, managing director at Matrix Partners.