Why fintech, acceptance of digital firms in markets were 2021's high points

The year 2021 was an inflection point for the Digital India story. Thanks to the pandemic, the country grasped what it really means to be on a digital roadmap.

Since the 2020, the Indian startup ecosystem has received investments of over $100 billion, the unicorn list has crossed the golden figure of 50, and Indian bourses saw some successful startups raising over Rs 42,800 crore.

India’s fintech sector also touched new highs. There has been rising internet mobile penetration, a large engineering talent pool, a collaborative India stack and an encompassing regulatory environment. The Unified Payments Interface (UPI) now comprises 60 per cent of total payments by volume, with digital payments touching $300 billion in FY21 — from a mere $16 billion in FY16, according to a CLSA report. The report further says that digital payments are expected to reach $0.9-1 trillion by FY26, or 30 per cent of Indian consumption.

The significance of the fintech revolution is evident from the fact that India has 14 fintech unicorns, and six of the top eight are payment companies. That’s not all. According to a report by Jefferies, an investment bank and financial services company, every aspect of finance is getting a tech impetus.

The gross merchandise value (GMV) of segments like lending, online buy-now-pay-later (BNPL), are projected to grow 14-16x by 2025, the insuretech market is expected to rise by 12x and the wealthtech market by three times by 2025.

A RedSeer report earlier this year said that the digital economy is expected to touch $800 billion by 2030, a 10-fold growth from a value of $85-90 billion in 2020.

Niren Shah, managing director and head of Norwest Ventures Partners India, which recently closed a $3 billion global fund, believes 2021 will turn out to be a very special year for India. “According to our estimates, organised offline retail in India went from 9 per cent in 2017 to 12 per cent in 2021, whereas in the same period, online penetration went from 3 per cent in 2017 to 7 per cent in 2021, which shows that online is growing much faster than the organised retail sector.”

He further added that the leapfrog in digital adoption is not just restricted to the startups, but is equally widespread among the enterprises. “We have reached a tipping point where everybody realises the need to invest in digital. This is a massive mega trend that will change India in the next 10-15 years. We are at the point where China was before they produced outsized returns. In the next 10 years you will see some significant companies built out of India,” says Shah.

The top defining moments of the Indian tech and startup ecosystem this year includes the acceptance of digital companies in public markets. Says Ankur Pahwa, partner and national leader, e-commerce and consumer internet, at EY India, "I think a defining moment from an acceptance perspective has been the digital business models and digital companies in the public market ecosystem,” he says.

“The second defining moment this year is the fact that we are now close to $30 billion of capital going into startups. That is more than what companies have raised in the public markets in India and in the financial year and calendar year of 2021. About $15 billion of capital was raised in the public markets in India this year. That again tells you that just from a private market perspective, the Indian startup ecosystem is getting deeply embedded into the global markets and is reaching an escape velocity,” Pahwa adds.

In 2021, about 42 startups in India became unicorns, or companies with valuations of over $1 billion after raising a funding round. This is expected to hit 50 by the end of this financial year.

Industry experts are also seeing aggressive consolidation in mergers and acquisitions in the digital ecosystem as compared to last year. For instance, Tata Digital, a wholly-owned subsidiary of the Tata Group, acquired a majority stake in e-pharmacy 1mg as well as e-grocer BigBasket.

Pahwa says that the dynamics of the Indian markets is changing, thanks to new and distributed investors as well as global investors putting their monies here. He says that companies are now building for scale and are more aligned with unit economics and greater innovation and expansion.

Crystal Gazing into 2022

With 2021 turning out to be a stellar year for digital India, investor interest has been renewed. According to Preqin, an investment data company, around 135 private equity (PE) funds with geography focus on India, are in the midst of raising $20.64 billion. PEs and VCs are also sitting on over $80 billion of dry powder—PEs have dry powder worth $56.9 billion and VCs have $26.7 billion of raised funds.

In 2022, experts foresee a huge disruption in financial technology, especially in embedded finance, and areas of lending and BNPL. Despite regulatory challenges for cryptocurrency, there could be interesting innovations in the backend of crypto, that is, in blockchain and crypto mining.

Also, direct-to-consumer (DTC) — from the delivery of meat to cosmetics — is expected to undergo a huge expansion. Social commerce, along with video commerce, will also play a huge role in terms of how India shops.

“We will continue to see greater evolution of software-as-service businesses and its impressive growth as digital adoption is driving software adoption in a big way,” says Pahwa. “You will see a lot of companies building global businesses at scale out of India.”

Shah of Norwest believes that India will see an increased level of allocation out of the current $3 billion fund that the firm has raised. For Norwest, 2021 was a strong year in terms of investments as well as exits. Shah says that going ahead, Norwest is broadening its investment from late and growth stage equity investment to early and mid-stage investment.

“Approximately, $75 billion of exits got created and computed as market capitalisation of companies which went public and we are expecting another $150 billion of similar liquidity getting created in the next two years. Further, there is significant appetite from global players as India produced more unicorns than China, which was driven due to the current challenges in the China market. My expectation is that the IPO-driven exit cycle will continue in the long run despite potential short-term challenges as interest rates increase to combat inflation,” adds Shah. More than five companies from Norwest’s India portfolio will go public in the next 2-3 years.

However, 2022 has its concerns too. Sangeeta Gupta, vice-president and chief strategy officer, Nasscom, says that although the current year saw phenomenal growth, the uncertainty due to Covid remains. “Other than that, I think we are in a multi-year tech growth cycle. The opportunities are very large and hopefully, we will see another stellar year for tech-focused firms,” she says.

Gupta also points out that from a regulatory standpoint, 2022 will be a crucial year. “Given how technology is becoming the fabric of our life, the regulatory framework that we had 4-5 years back will not cater to the tech landscape we are in. Our focus is to have a continuous dialogue with the government,” said Gupta.