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A lot of capital is coming in but it is concentrated towards winners, say sector analysts
A lot of capital is coming in but it is concentrated towards winners, say sector analysts

Beyond funding boom, Fintechs brace for tough 2020

  • Stage set for consolidation in financial technology space, say analysts
  • 2019 saw new verticals emerge and a jump in digital payments funding and usage

Indian fintech startups are bracing for a relatively tough 2020, underlined by competition and consolidation, despite a funding boom that indicates surging interest in the space.

Fintech startups raised a record $1.47 billion in venture capital in 2019 across 118 deals, compared with $826 million across 106 deals in 2018, according to Venture Intelligence, a data tracker. Here, startups are firms less than 10 years old.

Graphic: Sarvesh Kumar Sharma/Mint
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Graphic: Sarvesh Kumar Sharma/Mint

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2019 saw new verticals emerge, such as neo-banking, enterprise accounting for small businesses, and a jump in digital payments funding and usage. However, many lending startups struggled under a liquidity crisis with non-banking financial companies (NBFCs) not disbursing funds, and large-scale defaults with certain lenders.

“A lot of capital is coming in but it is concentrated towards winners. Lending firms are struggling to grow because there is an overhang of the liquidity crisis, but also too many companies have copycat models. Too many companies got funded and now consolidation will have to happen," said Ganesh Rengaswamy, founding partner, Quona Capital, a financial services-focused venture capital fund. “Generally we do expect the market to be tougher on the whole."

Beyond lending, startups in payments, insurance and wealth management saw rapid growth and user adoption, while areas such as neo-banking looked promising but untested.

Neo-banks refer to a kind of digital-only banks looking to provide a full-stack solution for businesses or consumers, such as payments processing, lending and accounting, all under one roof. Open, NiYo, Jupiter.money are among the dozen firms that have cropped up this year and raised over $150 million collectively.

“Neo-banking emerged as a big trend this year. Startups don’t want to limit themselves to only lending or only payments. They want to own the customer relationship end-to-end," said Harshil Mathur, co-founder and CEO of payments firm Razorpay. “But it is early days and not proven, so next year we’ll get early feedback on whether so many companies can succeed with this model." Razorpay’s own neo-bank platform, Razorpay X, offers current account, credit card and compliance services for small and medium firms.

Data also shows that deal values have grown far quicker than volumes, indicating huge investor appetite, but for only breakout winners.

“On the consumer side, if you are not able to differentiate from the giants significantly, it is very difficult to build a business. Copycat models don’t work in Indian fintech, and a wave of consolidation will continue. There will be more concentrated and bigger bets. Already there were fewer individual deals this year," Mathur added.

"Regulatory uncertainty does worry the industry as a whole. Sometimes business models are revamped overnight, although overall regulations have been good in spirit this year, Mathur said.

For example, Finance Minister Nirmala Sitharaman said on 28 December that businesses with annual turnover of more than 50 crore will have to offer low cost digital payment options to customers and Merchant Discount Rate (MDR) will not be levied on either customers or merchants for UPI transactions and RuPay cards from 1 January. MDR is the cost paid by a merchant to a bank for accepting payment from their customers via digital means.

But the announcement “doesn't breakdown how it will be implemented across stakeholders and how it will affect for example issuing bank, acquiring bank etc. If enough time is given before implementing such changes those details can be sorted out," Mathur added.

Despite the cynicism on the overall macro environment for fintech, firms and investors believe that insurance will see strong growth and investment dollars in 2020.

“We think 2020 could be a breakthrough year for insurance. Getting an insurance licence is quite tough, but we are seeing newer models and, for the first time, willingness of mainstream insurers to work with startups, using data and analytics to drive penetration," said Rengaswamy of Quona.

Besides consolidation, with more liquidity seeping in, fintechs are also hoping for greater regulatory clarity on payments, with WhatsApp Pay’s Indian entry uncertain for a year now.

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