And the wait continues: Fintech funding revival still out of reach

“If we look at funding trends, given the current stage and maturity of the fintech ecosystem, and macroeconomic developments, the curve is upwards,” says Sugandh Saxena, chief executive officer (CEO) of the Fintech Asso­ci­ation for Consumer Empo­wer­ment. Hopeful as the boss of the first central bank-recognised self-regulatory organisation (SRO) in this space maybe, the latest numbers released by the data intelligence platform Traxcn show funding fell by 35 per cent to $366 million in Q1 2025 year-on-year; it is flat on a quarterly basis. March though was the most-funded month in this period: $187 million was raised, accounting for 51 per cent. But Neha Singh, cofounder of Tracxn, feels “the funding slowdown is expected to extend into 2025, influenced in part by trade tensions. A re­co­very may be seen as global market conditions begin to stabilise.” And that’s a guess.

 

Change in focus

 

What is playing out is on the lines of the plot outlined in an October 2022 white paper by Coatue, a US-based technology-focused investment manager. It held that over the coming decade, fintech needs to focus “on owning the balance sheet, and maniacal rebundling…”

 

Not many will put it as bluntly as Rohan Lakhaiyar, partner at Grant Thornton Bharat. Fintechs have demonstrated strong scale in terms of number of customers served and diversification of products achieved, “but the challenge is on realising sustainable positive unit economics, which remains elusive for most”. This is sinking in slowly even in the wider startup world. “More and more businesses are becoming razor-sharp focused on cash-flows and have given up vanity metrics completely,” says Ankur Bansal, managing director, BlackSoil (an alternative debt provider). 

 

Recall former Reserve Bank of India (RBI) Governor Shaktikanta Das’s forewarning in September 20, 2022: The fintech road ahead will witness ever-growing traffic, in addition to the large number of existing players, “it is, therefore, imperative that every player on this road follows the traffic rules for his/her own safety and the safety of others.”

 

According to Atul Gupta, managing partner at Trident Growth Partners, firms focused on secured lending financing, and those operating well within regulatory frameworks, present a strong investment opportunity, especially at the more rational valuations seen today. “It’s a period of consolidation and course correction, but also one where high-quality, compliant businesses will stand out and attract long-term capital,” he says.

 

What’s also sinking in is that fortunes here on will hinge on how SRO-FT(s) imagine their relationship with the RBI, and the business moves on from its long-held peeve that the regulator acts unilaterally. The times when all manner of data and observations — bad loans, un-banked hinterland, the inability to leverage technology — were bandied about to press home the case that legacy financial units will have to cede space to fintech is over. The writing on the wall was clear on November 18, 2021, when Mint Road released its Working Group’s report on ‘Digital lending through online platforms and mobile apps’. Its executive summary said: “The pandemic-led growth of digital lending had led to the unbridled extension of financial services to retail individuals is susceptible to a host of conduct and governance issues.” 

 

Interestingly, a paper by the International Monetary Fund, ‘The Impact of Fintech on Central Bank Governance: Key Legal Issues’, suggested in 2021 that the authorities could decide to appoint a deputy governor specifically to oversee fintechs. Will we see the emergence of a standalone fintech regulator at some point in time? Unlikely, given the nature of Mint Road’s remit as a full-services entity: from banks’ and non-banking financial companies’ (NBFCs) regulator and supervisor, currency printing and coinage to managing the public debt office.

 

‘Defining moment’

 

Sectoral regulators have signalled that they expect fintechs to focus strongly on governance, risk, compliance, and conduct aspects. Going forward, the SRO-FT will play a key role in shaping the fintech ecosystem and enhance its reputation amongst the regulators. “Given the acknowledgement and sensitivity demonstrated by the fintech community, the next 9-12 months would be the defining moment for them by when they should be able to overcome the current challenges, and the funding tap may open up meaningfully for them again,” notes Lakhaiyar. He doesn’t see this as a time for consolidation, “rather it’s time for fintechs to double down on their businesses to identify sustainable revenue opportunities.”

 

What also needs to be looked out for is how recent central bank capacity-building initiatives come through. Like a fintech repository: both regulated and unregulated entities are to contribute to it. Alongside is an emtech repository for only RBI-regulated entities (banks and NBFCs) on their adoption of emerging technologies (like artificial intelligence and machine learning). Both repositories are web-based applications and are managed by the RBI Innovation Hub, a wholly owned subsidiary of the central bank. These repositories would enable availability of aggregate sectoral-level data, trends and analytics that would be useful for both policymakers and participating industry members.

 

The funding game is getting to be more interesting.