Why can fintech sector ecosystem in India survive funding winter

The fintech space has witnessed a 60 per cent year-to-date slump in funding

The story of the Indian fintech sector, when it comes to raising funds and surviving the funding winter, is not much different from other sectors. However, the sector is expected to perform better due to some inherent foundational pieces, shared by fintech experts.

The ongoing funding winter has witnessed a 60 per cent slump in year-to-date (YTD) funding, from $3.7 billion in 2022 to $1.3 billion in the ongoing year. 

“Jan Dhan accounts, Aadhaar, the number of smartphones that people have today, and the access to data have propagated the India story in terms of the public digital infrastructure. The fundamentals around the fintech ecosystem in India are strong because of the push on digital infrastructure,” said Anurag Jain,  Executive Committee member at Digital Lenders Association of India (DLAI) and founder of KredX, a financial services platform.

According to a BCG report published in May this year, there are a few characteristics that make some fintech firms ‘winter immune’ over others. These traits include a time-bound road to profitability, agility in business models for a market fit, financial prudence, and avoiding bloated valuations, among others.

Investors in the fintech funding landscape prefer to bet on mature companies that can harness growth over the next few years and are cautious about experimenting with newer players in the fintech space. 

One of the reasons for the industry to be in a much better position is the regulatory framework. India’s central bank, the Reserve Bank of India, has tightened the regulatory framework for fintech. This also made the fintech sector rework its strategies.

The fact that the path to profitability is much clearer in the case of fintechs is also evident from some of the results that have been filed.

Take the case of Oxyzo Financial Services. According to media reports, the company’s profit after tax nearly tripled to Rs 197 crore for FY23. Revenue at Rs 562 crore was up 79.5 per cent on a year-on-year basis. According to a CNBCTV18 report, Oxyzo nearly doubled its loan book, with total assets under management (AUM) jumping to Rs 5,578 crore in the previous fiscal year. In FY24, the company expects to take its AUM to Rs 8,500 crore.  

“The important thing (to understand) is how do we control our borrowing cost, how do we control our operating cost? And that has fundamentally been very key to where we are today,” said Ruchi Kalra, CEO at Oxyzo, a tech-enabled NBFC that posted Rs 198 crore in profits for FY 23. 

There is also a need to segregate fintechs on the basis of their models and the markets that they operate in such as payments and lending. “(Payments) will need a lot of investments and hence the expense is high. It is very difficult to make profits upfront. But once you build that network, you become profitable and hence that line of sight is important. However, lending as a core philosophy, needs to be profitable as a business,” Kalra added. 

The other fintech player which seems to be nearing breakeven is PayU. Prosus in its FY23 annual report stated that the business generated $399m of revenue, which grew 31 per cent (42 per cent), fuelled by continued growth in enterprise and small and medium-sized businesses, as well as diversification into newer segments including government merchants, omnichannel and other non-MDR (merchant discount rate) products. Revenue growth and cost-saving initiatives led to an improvement in trading profit margin to 3 per cent.

Moreover, Prosus expects that the business will soon achieve breakeven. PayU’s Indian credit business continued to scale, issuing $742 million in loans, which grew 47 per cent and led to a loan book of US$256 million on 31 March 2023. The core credit business grew revenue three times (three times) to US$83m, driven largely by growth in personal loans. The trading loss of US$10 million represents a 63 percentage point improvement in the margin to -12 per cent, reflecting an improved loss rate of 2.5 per cent from 3 per cent in FY22. As a result of its closure, the India credit metrics exclude LazyCard.

And as for funding the sector has many aberrations to the funding winter. For instance, PhonePe is on track to raise $1 billion. So far it has raised $850 million, of which $100 million was raised in May this year from PE player General Atlantic.

Players like PhonePe which started as payment platforms using UPI have diversified into other financial services. Sameer Nigam, CEO, PhonePe in a recent interaction with Business Standard said, “We recently launched the Rupay credit card on Unified Payments Interface. I think that is a big market. We continue to expand our offering on insurance. You will see us entering health insurance soon.”

He further said, “We are launching a couple more apps this year. We also got into account the aggregator licence. We have introduced piloted merchant lending. We continue to expand in our five data centres and digital footprint there.”

Many also believe that the funding winter is good to have with founders now more focused on running the business than just raising funds. “There is a shift in the mindset of the founders that liquidity is not endless and (that) they have to get used to the fact that they have to do more with less. Traditionally, that is how businesses have worked. They have put the money to the best use and get the best return on investment (ROI) on top of it,” Jain said. 

Nisha Bachani, partner at Boston Consulting Group agrees. “In 2021, many fintechs gained heavy valuations but did not have the necessary fundamentals to support valuations. The theme has now really shifted towards building profitable unit economics and not just customer acquisition at unsustainable CACs,” said Bachani.

India’s fintech space is extremely crucial among the startup segment. With over 9,000 fintech firms in the country, India ranks third behind the US and UK. It has the potential to serve and reach the unbanked segments economically. It also allows innovation to thrive and more importantly, has the foundational element of regulations in place.

The fintech space scooped over $10 billion in funding spanning over 595 rounds, registering a significant spike in funding activity over the past three years. CY 2020 cashed in $1.8 billion in 371 rounds, whereas CY 2022 recorded $5.8 billion spread over 450 rounds in funding for the fintech space, according to data from market intelligence platform Tracxn. 

However, the fintech landscape has also registered a significant decline of 78 per cent in funding rounds, with 54 rounds recorded until May this year while the corresponding period last year catalogued 249 funding rounds.