Early-stage fintech investors in India are shifting away from consumer-facing models that are heavily regulated and pivoting to software and infrastructure businesses that promise steady growth with minimal policy risk.
Funds are increasingly backing software, infrastructure and B2B fintech models with AI that are less exposed to regulatory shocks, experts said.
The shift follows a reset between 2021 and 2025, when tighter rules on digital lending, first-loss default guarantees and data governance curbed growth and raised compliance costs, pushing investors to favour B2B models over balance-sheet lenders.
Data from Tracxn over the last 24 months showed that investors are becoming more selective within fintech, with capital moving toward software and infrastructure layers rather than large consumer-facing models.
Funding trends
Funding picked up in areas such as payments infrastructure, which more than doubled, wealth-tech management platforms, which rose sharply by up to four times, and software tools for fund managers, where investments increased nearly eight-fold.
In contrast, investor interest cooled in consumer payments, which fell about 60%, online lending, down roughly 16%, and online trading platforms, where funding more than halved over the same period.
“Consumer fintech is crowded and heavily regulated and as a fund we don’t see too many white spaces,” said Sahil Anand, founder and managing partner at Cedar Hill Capital, a new fintech fund.
While private equity and venture capital investors are not abandoning lending or regulated fintech in the growth to late stages, those bets have become selective, favouring scaled, profitable firms.
Investors have become selective towards firms that have adapted well to regulatory changes, and they are the ones attracting “patient capital” today, said Sagar Agarwal, founder and managing partner at Beams Fintech Fund, a growth stage financial services investor.
“A balance-sheet-led model requires continuous equity infusion to grow the loan book. It’s capital-intensive by design. A software or infrastructure business, on the other hand, scales with relatively lower incremental capital once the product is built,” said Agarwal.
Slower funding at the mid-stage and delayed exits in some cases have made early investors centred on less capital-intensive and recurring-revenue software businesses selling to banks, non-banking finance companies (NBFCs) and insurers. “For investors who operate within a fund life and need visibility on exits, it becomes difficult to invest in spaces where capital can remain stuck for long periods,” Cedar's Anand added.
Cedar, which has invested in firms like data-centric AI platform Cogniquest, lendingtech WonderLend Hubs and fraud prevention platform Sign3 over the past two years, is prioritising enterprise technology businesses serving financial institutions. “Companies that generate recurring revenue and have limited direct regulatory exposure are important aspects of our investment thesis,” Anand said.
AI push
According to an April report by neobank Jupiter-backer QED Investors and consulting firm McKinsey, investors globally are either favouring select scaled profitable fintechs or early-stage startups with differentiated AI-led narratives, while mid-stage firms face a funding squeeze.
The report added that horizontal fintechs (software firms) that are helping incumbents digitise operations now account for 13% of global fintech revenues. Such horizontal fintechs have grown 25% faster than those directly competing with financial-services players over the past four years, it added.
Banks are actively working on upgrading their outdated technology stacks. “The entire enterprise technology stack is upgrading within financial services organisations,” Anand said. Coupled with tighter regulation, this has created fresh demand for compliance, risk-management and infrastructure software for financial institutions.
“With the onset of AI and as BFSI players continue to digitise their operations, strengthen their risk frameworks, and keep pace with RBI's evolving regulatory expectations, the pull for B2B solutions will remain high,” said Beams' Agarwal.
Peak XV Partners, which has backed regulated lenders, payments and insurance firms across stages, said it remains active in all areas of fintech. “There is more activity in infra and banking SaaS more broadly. Within software, with bolt-on agentic products, it’s more interesting now than in the past,” said Navendu Sharma, principal at Peak XV Partners.
He added that the firm has recently made bets in capital markets infrastructure, building compliance solutions for BFSI and account aggregator platforms using AI agents.
Peak XV’s latest Surge cohort's fintech picks—Vault Wealth, Cybrilla, AIR Treasury and Insureki—are focused on wealth-tech, treasury software, investment rails and insurtech, rather than direct lending or payments.
Even within software, investors are cautious about indirect regulatory exposure. Cedar Hill caps concentration risk and avoids startups overly dependent on a one regulated customer segment. “ You can’t have 100% of the business getting affected by some new regulation coming in,” Anand said.