Evolution and Role of Fintechs – Research & Ranking

As we draw closer to the end of this series (which we hope you must have thoroughly enjoyed reading), we want to enlighten you about a very interesting segment of startups. These are called ‘FinTechs’. These companies have generated immense interest among investors. They have begun to disrupt the way the entire financial system in India works. In today’s story, let us take a look at what exactly are FinTechs, the size of the market in India, and which sub-segments they cater to. What are FinTechs? The word ‘FinTech’ is a combination of the words ‘finance’ and ‘technology’. FinTech simply means the use of technology to enhance financial services and make them seamless. FinTechs tend to select a particular need or niche within the entire financial system and go deeper to serve that need. Source: Qoin A brief history The FinTech revolution started gradually and subtly, without us noticing it. Right from the 1980s, Credit Cards, ATMs, electronic stocks trading, and bank mainframes were the early elements of the FinTech revolution. FinTech space received attention and funding in the West, post the Global Financial Crisis of 2008. As investors and Venture Capital (VC) firms realized that existing financial systems were fraught with fragility, they started investing in new platforms that served differentiated needs. Having a more secured, safe, and fast layer over and above traditional banking became a necessity, giving rise to new Fin-Techs. In India, the demonetization drive of 2016 was a watershed moment. With the government clearly moving in the direction of a \"less-cash\" economy, (if not a \"cashless\" economy immediately), the FinTech eco-system received a boost. People shifted to online payments and digital transactions in the wake of demonetization and COVID. The FinTech market in India According to a joint study by BCG and FICCI, there are over 2,100 FinTechs in India and the total FinTech market in India is worth $50-60bn. These have grown fast and big in a short span of time. 67% of India’s FinTech’s started not more than 5 years ago. A look at the FinTech eco-system in India Source: BCG-FICCI Report March, 2021 By definition, Term Valuation Decacorn >$10bn Unicorn >$1bn Soonicorns $0.5bn - $1bn Century Club $100mn - $500mn Minicorns $1mn - $100mn Early Stage FinTechs <$1mn This market is expected to grow to a size of $150-160bn by 2025, 3xs growth in 5 years, implying CAGR of 20-25%. A combination of India’s growing demand from 1bn plus consumers, enabling Government regulations and strong technology adoption is expected to bring about this growth. A $100bn opportunity over next five years Source: BCG-FICCI Report March, 2021 The majority of FinTech start-ups are focused on Payments, Lending, and Wealth Tech due to the large opportunities in these segments. Mumbai and Bengaluru are the major incubation and growth centers for most of India’s FinTechs. FinTech Start-ups by segment Source: RBSA Advisors. Note: Other segments include Blockchain, Cryptocurrency, AI/Machine Learning, Loyalty/Rewards/Coupons, B2B FinTech, Banking tech, BigData Analytics, Crowdfunding, Digital Cards, Neobanks, Remittances, Capital Market Tech and Trade Finance. How are we stacked up against the world? India has one of the largest numbers of FinTechs in the world. While FinTech investments nose-dived in 2020 due to COVID, India still ranks among the top 5 nations globally in terms of investments received. Some sub-segments such as lending may see a slowdown in 2021 due to COVID impact; however, payment-related FinTechs will continue to see investor interest. Earlier demonetization and now COVID have accelerated the pace of digitization in India\'s financial eco-system. Also, India’s FinTech adoption rate is the highest in the world, along with China. Approximate number of FinTechs by country Source: RBSA Advisors Comparison of FinTech investments across geographies Source: BCG-FICCI Report dated March 2021 India’s FinTech adoption rate is the highest in the world (2019) Source: RBSA Advisors What makes FinTech space so successful in India? Within a short span of less than a decade, FinTechs have come to occupy an important position in India’s financial eco-system. Reasons for the same are as follows: India offers a diversified base of consumers across age, income, and demographic profiles, who have specific needs waiting to be fulfilled. Hence, there is scope for several FinTechs to grow and flourish. VCs have also shown tremendous confidence in the Indian growth story and provided crucial capital to FinTech start-ups. India’s internet penetration has grown at a scorching pace, from 95mn users in 2016 to 694mn users in 2020, CAGR of 64%. Also, smartphone users have grown to 550-600mn users, 60% higher than in 2016. Indian HNIs have emerged as a new breed of angel investors who have funded growth for several FinTechs. FinTechs have extremely cost-efficient structures right from inception, which reduces cash burn and allows faster turnaround. They source talent locally, often from prestigious B-Schools, which are still cheaper than professionals from developed countries. Rather than becoming “everything to everyone”, FinTechs attach a high degree of importance to their “core”, stay committed to their core, and create differentiation around it. After mastering their game in India, several Fin-Techs have gone global – Ola, Oyo, Zomato, and InMobi have expanded across many geographies. This requires a deep understanding of those markets and is challenging, but the rewards are also high. While being challengers to banks and financial institutions in some aspects, Fin-Techs also collaborate with BFSIs. This combines the scale and customer reach of BFSI and technology and agility of Fin-Techs, resulting in a mutually beneficial partnership. Issues and Risks While the future looks bright for FinTechs in India, there nevertheless remain some headwinds and risks to their growth. Funding is extremely crucial for FinTechs, given that their business model is characterized by high upfront costs. FinTechs have to constantly adapt to and adopt new technologies. In fact, sometimes technology is the biggest differentiator for these companies. Given that many FinTechs work a layer above banks, they have to constantly find untapped regions to serve, which can be a challenge if the sector gets crowded. To remain relevant to customers, FinTechs have to cater to customer needs such as security of the transaction, speed, compatibility with existing technology, 24x7 availability, paperless transactions, and ease of setting up, configuring, and operations. Owing to their cost arbitrage vis-à-vis banks, FinTechs have to steadily strive to keep their cost of operations low, despite offering superior products and experiences. Some sub-segments such as Payments, Leading and Wealth Tech, being very lucrative, are very crowded. This could make creating brand recall difficult. Data leaks, platform downtime, and information theft have become quite rampant in the FinTech space. The way ahead FinTechs are already big business in India, with India featuring among the Top 5 countries globally in terms of the number of FinTech start-ups. Given the huge addressable population and untapped market, India presents exciting opportunities for FinTechs to address the specific needs of consumers. The government is doing its part by providing an enabling environment through initiatives such as Jan Dhan Aadhar Demonetization Start-up India License for payments banks Digital India Recognition of P2P lenders as NBFCs Regulatory sandbox by RBI for FinTech India Stack FinTechs and traditional financial institutions will have to collaborate with each other for mutual growth and benefit of each other. The collaboration could be for developing a new product or distributing it. Given their larger size and deeper pockets, financial institutions could acquire a stake in FinTechs, providing them with funding and management bandwidth. Several financial institutions have started incubation units for this purpose. FinTechs are set to add another $100bn in market valuation over the next five years. This means several new companies coming into existence, current companies growing much beyond their present size. More importantly, this also means more employment generation and a domino effect on the economy. For the country and economy, it will take India’s journey forward towards financial maturity. For stock market participants, this opens up exciting opportunities for wealth creation. I hope you enjoyed reading this story. But our story on FinTech does not end here. In the concluding part of this series, we will look at examples of FinTechs in India. Let us look at what unique feature each of these FinTechs has to offer. For expert help in creating a multibagger portfolio click here. Read more: About Research and Ranking.

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Evolution and Role of Fintechs – Research & Ranking