Funding to payments fintechs in India down 99% in two years: Report

Funding to fintechs operating in the payments space has gone through a squeeze with overall fundraising to the sector declining about 99 per cent between 2021 and 2023, according to a report.

Funding to payments fintechs has declined from $2.3 billion to $85 million over the time period, according to a PwC analysis.

The decline in funding comes on the back of reasons such as companies shifting their business models to lending and other sectors due to lower sustainability of the payments business.

Similarly, with lower monetisation options in the payments domain and high cost of operations, the valuation of payments startups has dipped, leading to investor concerns.

The decline in funding also comes amid concerns about the zero merchant discount rate (MDR) on digital transactions such as Unified Payments Interface (UPI) payments.

Last year, the National Payments Corporation of India (NPCI) introduced an interchange fee on prepaid payment instruments (PPI)-based merchant transactions through UPI, where the PPI issuer has to be paid the interchange fee of up to 1.1 per cent if the transaction value is over Rs 2,000, depending on the type of merchant.

NPCI, the body that runs the UPI ecosystem in India, clarified that the fee was only pertaining to PPI-based merchant transactions on UPI and the basic UPI transactions remain completely free. At present, the majority of UPI transactions continue to be free for merchants and users.

Earlier this year, the NPCI chief Dilip Asbe had indicated that large merchants may incur a ‘reasonable’ fee on related transactions in the next three years.

Meanwhile, within the payments space, emerging business segments include cross-border payments and central bank digital currency (CBDC), among others.

“Several initiatives are taken to enable the integration of UPI with payment systems of different countries. UPI can be further used to make payments after its integration with the payment systems of six other countries – Sri Lanka, Mauritius, France, the UAE, Bhutan, and Nepal,” the report said.

Meanwhile, the segment continues to face some challenges, the report said.

This includes an increase in the number of frauds, limited customer awareness, and increased regulatory compliance.

The number of frauds in the banking sector increased over four times in the past five years to 36,075, but the amount involved has come down significantly to about Rs 14,000 crore in FY24 from over Rs 1.85 trillion in FY20, according to data from the Reserve Bank of India.

In terms of the number of frauds, those have predominantly been witnessed through digital payments (card or internet). The number rose to 29,082 in FY24 as compared to 2,677 in FY20.

In terms of value, frauds have been reported primarily in the loan portfolio, which has witnessed a gradual decline to Rs 11,772 crore in FY24 from Rs 1.81 trillion in FY20.