China’s transformation from a financial-technology backwater into a $46 trillion-a-year global leader in digital payments left most international investors watching in awe from the sidelines. Now India is undergoing its own fintech revolution, and the race is on to grab a piece of the action.
As online payments and digital loans in the second-most populous country soar at some of the fastest rates worldwide, money is pouring into India’s financial technology sector at an unprecedented pace. The sector’s sharp ascent will be on show this month as Indian payments firm Paytm — backed by foreign heavyweights including Warren Buffett’s Berkshire Hathaway Inc., China’s Alibaba Group Holding Ltd. and Masayoshi Son's SoftBank Group Corp. — seeks a valuation of about $20 billion in what would be India’s largest ever initial public offering.
Some foreign players in India are poised to see payoffs. Berkshire Hathaway, which invested $300 million in Paytm in 2018 for a nearly 3% holding could see the value of its stake rise about 70% at a $20 billion valuation, while Paytm’s other international backers would also profit. Investment banks including Goldman Sachs Group Inc. -- which is working on Paytm’s IPO -- have been bolstering their teams in the country and are benefiting from the spate of deals and the flurry of fund raising.
The investor fervor is being fueled by millions of Indian consumers like Nitu Gore, a maid in Mumbai who earns about $2,700 a year and hadn’t used her bank account in a decade. She embraced Google Pay and Paytm during the pandemic and now relies on the apps for almost all of her purchases, a dramatic shift in an economy that’s dominated by cash.
Digital retail payments on India’s Unified Payments Interface -- the much-lauded national fintech system that connects more than 230 banks and 20 third-party apps -- have risen nearly fivefold over the last two years to 41 trillion rupees ($546 billion). Meanwhile, China's ongoing fintech crackdown is only adding to India's appeal. Venture capital and private equity firms have invested $6.4 billion so far this year in Indian fintech companies, triple the amount their Chinese counterparts drew, according to researcher Tracxn.
Local fintechs like Paytm — set up by the small-town entrepreneur Vijay Shekhar Sharma who taught himself English listening to rock music — are joining Google Pay, Amazon Pay and Walmart Inc. owned PhonePe in going beyond digital payments and challenging traditional banks by venturing into the lucrative business of offering loans, mutual funds and even collecting deposits. The fintech firms have some restrictions: Local firms require them to tie-up with a lender or a regulated entity. However, armed with sophisticated cloud technology and customer data to assess risk profiles, fintechs are becoming the increasingly dominant partners of lenders in this nation of 1.4 billion, helping them reach newer customers at an extremely low cost.
“What the government has done with the common fintech network in the form of the UPI is phenomenal,” Raghav Maliah, vice chairman of global investment banking at Goldman Sachs said in an interview. “It’s the equivalent of the creation of the National Highway System in the U.S. and leads us to be very bullish on possible opportunities in India.”
The outsized growth of fintech in India has some concerned that consumers who aren’t financially savvy could borrow too much, driving calls for more oversight. There are also rising instances of online payments fraud that authorities are neither able to investigate or curb as there are far too many victims among first-time users.
Yet optimists say India’s fintech industry offers better prospects for foreign players than China ever did. That’s thanks in large part to the UPI, which was set up by an umbrella of private banks in 2016 with the support of India’s central bank and is now helping to spur more competition because a variety of financial institutions can tap into it.
Compared with China, which is overhauling nearly every aspect of its fintech industry as it cracks down on companies like Jack Ma’s Ant Group Co., regulations in India have so far been transparent and predictable.
Indian fintech companies are likely to attract an additional $3 billion to $4 billion of investment over the next 18 months due to the tighter Chinese regulations, according to Anuj Kapoor, managing director for investment banking in UBS Group AG’s India business.
“Overnight Chinese regulations on digital companies have dented the confidence of investors primarily in the digital technology sector,” Kapoor said. “Clearly it has already started shifting investment sentiment positively towards India. More and more investors will look to India.”
India’s digital transactions are expected by PricewaterhouseCoopers to touch $3 trillion by March 2025 from more than $1.3 trillion now. At the heart of the meteoric rise of the Indian industry is the chutzpah of entrepreneurs like Paytm’s Sharma, who’ve had to navigate the challenges of a vast country with millions of local stores, most of whom are new to accepting digital payments.
“You have to be far more Zen to survive in this country,” Sharma said in a 2019 interview with Bloomberg Markets magazine. “If you build in India, you can go build anywhere in the world. What do you think is the first thing an Indian kid learns? That the bus stop is not where the bus will stop.”
Investors like Ant and Softbank have said they will sell shares in the Paytm IPO. Buffett’s assistant didn’t respond to a message seeking comment.
Even with funding from a mammoth IPO, which seeks to raise as much as $2.4 billion rupees, Sharma faces hefty competition from global rivals like Google and Walmart. GooglePay and PhonePe control more than 85% of the retail transactions on the UPI platform, helped partly by ease of use and cash-back offers to users. Even so, Paytm has the largest share of India’s merchant payments market and unlike its rivals Google Pay, Amazon Pay and Phonepe, Paytm has the advantage of expanding its payments business into financial services through its payments bank where it can hold customer cash balances. That ties well with its e-wallet, allowing it to offer loans and insurance while being a marketplace for flight tickets or electronics. In the fiscal year ended March 2021, Paytm had revenue of 28 billion rupees and its losses narrowed to 17 billion rupees from 29.4 billion rupees the previous year.
The Paytm IPO will open for subscription on Nov. 8 and the stock is expected to start trading later in the month.
India has about 825 million people online via their smartphones, with hundreds of millions new to the Internet. The biggest players in digital payments want to expand into banking services that have the potential to get them bigger profits.
Facebook is offering loans of as tiny as $6,720 to small businesses through its network. Google Pay customers can now directly open a deposit with the local Equitas Small Finance Bank. Google is collaborating with fintech startup Setu to allow users to open single-click fixed deposits at an interest rate that betters those offered by large banks. Amazon has signaled its entry into the wealth management segment by investing in fintech startup Smallcase Technologies Pvt., and has also backed insurance and lending startups.
“The success of UPI and digital payments has opened many new opportunities for the financial services industry to partner deeply with fintech players,” Sajith Sivanandan, Asia Pacific head of payments at Google, wrote in a recent blog.
Meanwhile, a host of smaller local fintech startups have sprouted up, some like StuCred that offer student loans that are as small as $11 and others offering 2-rupee insurance cover for cab rides. New Delhi-based fintech startup BharatPe has developed a universal QR code system which allows merchants to accept digital payments from customers through a payment app of their choice. The changes are upending the traditional banking sector. Commercial banks can win more customers quickly, while saving on the costs of field agents and branches. But they are growing more dependent on fintech firms for acquiring customers.
India’s central bank already requires that all kinds of lending be linked to a licensed regulated entity, which means that digital lenders need to tie up with a bank or a non-banking financier.
Still, digital lending in India is expected to rise to $350 billion by 2023, contributing about half of total retail loans, as estimated by Boston Consulting Group. That’s increasing the risk of cyber fraud and coercive collection practices as some smaller fintechs target financially weak customers who can’t borrow from banks. Other downsides include over-borrowing by less-financially-savvy customers.
“The highways have made the access easier but the lenders have been kept at the center of custodians of risk. That allows greater scrutiny over loans,” said Vivek Belgavi, leader of the fintech practice at PwC India. But to keep up with the lightning speed of digital innovation, regulatory supervision needs to be strengthened even further, he said.
Despite the risks, digital lending is a necessity in a country of 1.3 billion where the World Bank estimates that only about 10% of adults have access to formal loans. India’s fintech boom is filling those and other gaps.
“I prefer getting my money in Google Pay and Paytm as I can also buy my groceries, vegetables using the QR codes at shops,” said Gore, the Mumbai maid. “No one uses cash anymore.”