A fine balance for fintech as investors put compliance ahead of valuation

Industry that was touted to overtake legacy banks and financial institutions gets wake-up call

Last week, Reserve Bank of India (RBI) Governor Sanjay Malhotra held forth on the importance of the Unified Lending Interface (ULI) — the rebranded public tech platform for frictionless credit. “ULI is a landmark step in data aggregation, which the RBI is building because credit is the lifeblood of inclusive growth…there is still a huge unmet demand, and ULI can certainly be a bridge in meeting this need,” he said at the Global Fintech Fest in Mumbai. Developed by the RBI Innovation Hub, ULI will enable a seamless flow of digital information. It is designed to knit data from central and state governments, account aggregators, banks, credit information companies, and digital identity authorities. This will help in frictionless and timely credit delivery through a plug-and-play model.

 

It also tells you how far we have come in the fintech journey.

 

The payments ecosystem has experienced significant growth, with transaction volume increasing by 37 per cent to 206 billion and value by 30 per cent to ~299.9 trillion year-on-year during FY24-FY25. Growth is expected to continue with new technologies, expanded use cases within existing payment modes, supportive regulations, rising smartphone and internet usage, and expansion beyond the metros and urban India. PwC’s ‘The Indian Payments Handbook 2025-2030’ has it that over FY25-FY30, digital payment volumes and values will touch 617.3 billion and ~907.3 trillion.

 

But what is fintech? Given that there’s no universally acceptable definition of the term ‘digital lending’, the Financial Stability Board (FSB) fleshes it out as “technologically enabled innovation in financial services that could result in new business models, applications, processes or products with an associated material effect on financial markets and institutions and the provision of financial services”. The FSB is a global body set up in 2009 to promote financial stability by coordinating national financial authorities and international standard-setting organisations.

 

But fintechs are at an inflexion point. Malhotra believes that fintechs should prioritise trust and compliance even as he highlighted that India has more than 10,000 fintechs, which have got more than $40 billion of investments over the last decade. “Prioritise trust and compliance. Embed strong data protection, transparency, and safeguards for consumers into every product and service… think global while you anchor local,” he said. Both are inter-connected aspects. Fintechs raised $889 million in the first half of FY25 — a 26 per cent fall from $1.2 billion in second half of FY24 (and a 5 per cent drop from $936 million in first half of FY24), according to Tracxn, which tracks such data.

 

That is far away from November 2023 when the Centre for Advanced Financial Research and Learning in its first ‘India Finance Report had called attention to the immense potential of fintech. The independent body set up by the RBI noted that of the 14,000 startups born between FY16 and FY21, almost half were fintechs. It is projected that lending by these entities will exceed that of banks by FY30.

 

The Fintech Association for Consumer Empowerment (FACE) — the first self-regulatory organisation for fintechs — has put in place a mechanism to support members. Sugandh Saxena, chief executive officer of FACE, says this is to help with “compliance, utilising expanded oversight that draws intelligence from multiple sources, including member feedback, customer complaints, enforcement actions by regulatory and government authorities, social media, and data. This helps us to respond to risks at the company and industry levels”.

 

A report by Coatue (run by hedge fund and portfolio manager Philippe Laffont) on ‘Fintech and the pursuit of prize: who stands to win over the decade (October 2022)’ was categorical that “the next generation of enduring fintech requires a focus on owning the balance sheet, maniacal re-bundling, a business-to-business leaning, and building high-margin sub-verticals.” While it’s too early to hazard a guess as to how revenue models will be tweaked, what is certain is that some of them — already caught in a twister — will now have to bite the bullet, one way or the other. For the much-hyped valuation game is over; it’s all about the bottom line here on.  

 

As Neha Singh, co-founder of Tracxn, sees it, the latest funding trends point to a noticeable shift in investor priorities. The period around 2021 was marked by a surplus of capital and the focus was largely on backing high-growth stories. However, the challenging market conditions have given way to a more disciplined and sustainable approach. “Investors have become risk-averse with their capital, focusing more on startups with a stronger bottom line rather than chasing rapid growth and high valuations. There is a growing emphasis on profitability, efficient capital use, and clear revenue visibility,” she says. Startups that can adapt to the recalibration of investor expectations and navigate a dynamic regulatory environment are better positioned to raise capital in the current environment. “Although the current market landscape remains challenging for startups, this recalibration of investor priorities can potentially lead to a more sustainable and value-driven startup ecosystem in the long run,” she notes.

 

As for valuations, they peaked around 2022 and then corrected. “While investors are convinced of the scale fintechs can achieve, and can cater to large number of customers concurrently, they are now focusing on how this scale will be monetised into sustainable revenue models by fintechs,” says Rohan Lakhaiyar, partner (financial services-risk advisory), Grant Thornton Bharat. Another factor is the regulatory landscape is still evolving and it means business models have to be tweaked. “Consequently, investors are currently evaluating how things will play out in the medium to long term, and hence the wait and watch approach,” he adds.

 

Come to think of it. Shaktikanta Das, when he was the RBI governor, had issued an early warning at the Global Fintech Festival in Mumbai. “The fintech road ahead will witness ever growing traffic in addition to the large number of existing players who are already there. It is, therefore, imperative that every player on this road follows the traffic rules for his/her own safety and the safety of others,” Das said on September 20, 2022. It was a wake-up call for an industry high on adrenaline, where evangelists saw legacy banks and financial institutions way back in their rear-view mirrors — not nimble enough to rework business models in step with the changes foisted by technology.

 

What matters is that all concerned keep their eyes on the road.