Regulatory uncertainty central theme for investments towards fintech firms

Investment dips as sector grapples with new rules and market dynamics

Funding to fintech companies has continued to remain in the slow lane on a year-on-year basis due to regulatory uncertainties as the first quarter of calendar year 2024 (Q1CY24) drew to a close.

In Q1CY24, fintech companies in India cornered $550.8 million, down 58 per cent from $1,300 million raised by firms in the same period of the previous year, according to data from market intelligence platform Tracxn. Along similar lines, deal activity also scaled back to 33 from 56 during the same time.

However, on a sequential basis, the funding landscape in the fintech sector has shown some progress. Funding among fintech startups surged 59 per cent on a quarter-on-quarter basis last quarter, up from $346 million raised in Q4CY23.

Venture capital (VC) firms are eager to write more cheques to Indian fintech firms as they take a closer view of the regulatory landscape in the country.

“We are fintech-focused, and hence eager to write more and more cheques to companies. One of the core aspects that one looks at while investing in fintechs today is the regulatory arena, and that is an area we specialise in,” said Vikram Chachra, founding partner at 8i Ventures, an early-stage venture capital firm.

Investors and VCs have routinely considered regulatory certainty as a factor in their investment strategy, but in recent times, it has become a central focus for them.

This comes as the fintech sector heats up amid regulatory developments. This includes a crackdown on Paytm Payments Bank, the Reserve Bank of India’s (RBI) suspension of unauthorised payments through business cards involving an arrangement called Business Payment Solution Providers (BPSPs), among others.

Fintech executives Business Standard spoke to said the extent of funding to fintechs is expected to rise with the conclusion of the election season in the country.

“The equation about political certainty goes up after the elections. That is a time when investments may also start picking up. The initial public offering (IPO) markets start to show some outcomes. Funding to companies happens in cycles,” said a president of a fintech company on the condition of anonymity.

Meanwhile, Chachra from 8i Ventures added the nuance that investors are looking at when it comes to late-stage and early-stage companies.

“For the later stage companies, one will want to see a licensed entity before they invest. For the early-stage ones, investors will focus on areas where the regulatory risk is low. As a result, you will see that in the early stages, more technology service providers (TSPs) or infrastructure companies get funded,” he said.

He explained that regulatory assurance for late-stage and the scope of opportunity for early-stage companies would be the criteria for investment moving forward.

“For firms that are non-banking financial companies (NBFCs), or payment gateways, among others, there is a set minimum net worth requirement in place by the regulator. If a company is going to apply for a licence and doesn’t get it, an investor faces the challenge of taking the money back,” he added.

In Q1CY24, companies such as Credit Saison, Avanse, Perfios, Vivifi India Finance, and IDfy were the top five funded companies.

These five companies raised around $446 million in the quarter. This included a $144 million Series D funding round raised by Bengaluru-based Credit Saison, $120 million raised by education-focused NBFC Avanse, and an $80 million Series D funding round raised by Perfios.

Vivifi India Finance, a fintech NBFC, and identity verification company IDfy raised a Series B $75 million and a Series E $27 million round respectively.

College education loans, financial institutions offering know your customer (KYC) services, lending as a service, and customer identity and access management (IAM) were the top funded business models.