Startup Mahakumbh: Fintechs must abide by regulations, say investors

The advice comes at a time when the Reserve Bank of India has cracked its whip to get erring fintech's to comply to the existing rules

Fintechs must work within the regulations while addressing consumer needs in order to be successful, said investors and entrepreneurs at the biggest showcase of the Indian startup ecosystem, Startup Mahakumbh.

The advice comes at a time when the Reserve Bank of India (RBI) cracked the whip on erring fintechs, making them comply with the rules.

“In India, banks have created technology for the regulator and not the consumer. It is the fintechs that have built customer serving technology…The best fintech entrepreneurs and companies are the ones that have acknowledged regulation, while simultaneously catering to consumer needs,” said Siddharth Pai, partner, 3one4 Capital, in a fireside chat with Zerodha’s Dinesh Pai.

This comes at a time when one of India’s biggest fintech startups is facing regulatory challenges. Last month, the RBI brought the hammer down on payments major Paytm’s Payment Bank. It restricted Paytm’s credit and debit transactions due to lapses in due diligence.

“There is a strong need for the financial system to be resilient…Don’t look at the regulator as someone to fight with. He is not your enemy,” Pai said.

Harsh Jain, co-founder, Groww, said if companies are in line with the regulators and the government, they will be able to innovate. And, this innovation can reach the customers in a much more sustainable manner. “It’s not about achieving a product-market fit. It’s about creating a change in the industry. That will take decades,” he added.

Besides regulatory hurdles, fintech startups are also navigating a challenging funding environment.

The fintech sector has seen its fundraise falling in 2023.

Though it remained among the top-three funded sectors, it raised a total of $2.1 billion in 2023 compared to $5.8 billion in 2022, according to data from Tracxn – a market intelligence platform.

Indian startup funding has fallen to a seven-year low in 2023. Investments among fledgling firms fell 72 per cent year-on-year (Y-o-Y) to $7 billion this year compared to $25 billion, according to data from Tracxn.

“In fintech, there are a lot of companies that are overvalued. Many unicorns have to justify their valuations. It will take a few years before they can grow into those valuations. So, this funding winter will help them get into discipline and profitability,” said TCM Sundaram, founding partner, Chiratae Ventures.

Regardless, startups exhibiting strong fundamentals and profitability will be able to raise funds, despite the funding slowdown.

“There is around $60 billion sitting on the sidelines right now, waiting to be invested in India, not just in venture capital, but across several asset classes…There is a large amount of investor appetite that exists, but they are searching for quality assets,” said Pai.

Sundaram added that profitable fintech startups will be able to raise funds at their preferred valuations.

“There are others (companies) who can become profitable in the next 6-12 months. They can get money but not at the valuations they want. For those who need money beyond 12 months, particularly series C and beyond, there is no money,” he added.

Investors maintained that fintech startups being unprofitable is a cause for concern. 

They added that fintech founders need to have an adequate business model and a proper go-to-market strategy.