India’s fintech segment is set to create several multi-million dollar ventures over the next three to five years on the back of ongoing innovations and investors’ interest.
However, unlike e-commerce, fintech is not a “winners take all" segment. Companies in the software, payments and data assessment verticals will see a lot more traction in the future, noted prominent venture capital investors during a panel discussion at the Mint Fintech Summit 2019 held in Bengaluru last month.
The panellists were Anup Jain, managing partner, Orios Venture Partners; Abishek Surendran, partner, Pi Ventures; Rajesh Sehgal, managing partner, Equanimity Investments; Ritesh Banglani, partner and co-founder, Stellaris Venture Partners; and Sanjay Swamy, managing partner and co-founder, Prime Venture Partners. The discussion was moderated by Deepti Chaudhary, national editor (startups), Mint. Edited excerpts from the discussions:
Need a good biz model
Investment interest in fintech startups has shot up since 2014 and will go up more as more innovative startups come into being, executives of venture capital funds agreed. “There is a lot of money chasing some of these companies and it is because we realize that if one can get the model working, these can be very attractive businesses. These are very high-margin businesses and tend to be highly sticky. And these are spaces, barring payments, which are not winners-take-all, and could be large niches, with 30-40-50 million users as a target base. So, one can build a very nice $100 million revenue company in India just for doing one thing. That’s the big change that’s happened over the last three years," said Swamy.
The hot segments
Fintech startups can broadly be segmented into payments, insurance, lending, savings, wealth, and insurance, software and compliance related products. When it comes to picking the right one to write a cheque, investors have three asks—a large market opportunity, a wide base of customers and a strong management team to execute on the business model.
“We would look at sectors with a little less regulatory exposure. In fintech, we have seen certain such risks. We would look at segments where the incumbents cannot necessarily crush the startup by outpacing them. So, we would look at relative white spaces," said Banglani.
In India, a few startups such as One97 Communications, which owns Paytm, have managed to create brands that customers can relate to deeply.
Investors believe that creation of brands with strong recall value will become even more important in future. “Brands, in any space, inspire trust. Taj inspires trust, when it comes to hospitality. In the financial services sector earlier, consumers used to view banks as brands. Today, the whole construct has changed. Consumers want solutions. And solutions have to be delivered by fintech companies which will become brands that stand for solutions in that space," said Jain.
Beyond just payments
In the meantime, software solutions that go beyond payments and extend into managing data around collections are expected to be in demand in a big way. A large chunk of the innovation so far has been on the lending side particularly in the context of the credit profiling of a borrower. “There are some innovative startups coming up in the data collection space. Now, you have algorithms that are helping to recover loans. We are quite excited with the process automation piece. As a fund, we’re looking mostly into process automation. We feel that in the near term, that’s a good investment opportunity," said Surendran.
When it comes to fintech, the question of how banks and other financial institutions are dealing with innovation is inevitable.
Sehgal believes the financial and banking sectors have always been the first to adopt technology. He added.
“In China, the lending book that fintech companies run is 3% to 4% of the overall lending that happens in the country. So India is far, far behind. The opportunity for innovative fintech companies to really come and build these businesses is high. But I would still go with the view that banks have a fair chance at doing the work well."
User consent is key: Kosturi Ghosh, partner, Trilegal
Even if financial technology (fintech) firms don’t come under the direct purview of the privacy bill as an industry, the privacy and data aspects of the space should be strictly regulated, said Kosturi Ghosh, partner, Trilegal, at the Mint Fintech Summit 2019 held in Bengaluru last month.
“What firms in India need to understand is that data localization, by and large, is here to stay. If there are several fintechs and banks that are centering their business models around personal data, then naturally, privacy has to be a part of their business strategy also. So, the right strategy ahead (for financial technology companies) is to get on board as soon as possible within the lines of sights of upcoming regulations," she added.
Ghosh said fintechs will have to classify user-consent and dictate clearly where the data is going to be shared and stored, since the upcoming privacy bill addresses this in a larger context. When it comes to fintechs collaborating with banks and other fintechs, user-consent should be clearly classified for each use case, she concluded.
Regulation is needed: Saranya Gopinath, co-founder, Digital India Collective for Empowerment
Fintech is a broadly used term across a variety of entities, some of which are already regulated and some that are seeking regulation. But, by and large, the area in itself stands sparsely regulated. Several entities are regulated for some of the services they offer, not all.
But, why do most people think that regulation is not a good idea?
There is an overwhelming sense that regulation and innovation do not overlap, and the best innovation happens at the edge of regulation. With a wide gamut of players set to enter the market, guidelines and regulations are imminent. We can start anticipating regulatory concerns.
We should move to an ecosystem approach rather than pursuing individual agenda. For the regulator and the regulated, the only prudent step forward is to lay down the interest of both parties on the table.
First, collective horsepower is the only way to have a conversation with the regulator. Second, it would help in co-creating tech-related regulations. Finally, it will assist in creating India-first solutions. team mint