Fintech’s path to thaw in funding winter

While we struggle through the (in)famous Indian summer, fintechs are battling with a stubborn 'funding winter' since mid-2022 that is likely to persist in this financial year. The Covid-19 pandemic-induced lockdown and social-distancing norms in 2020 were key enablers of the digital journey, and fintech firms were able to capitalise on the opportunity to scale rapidly by acquiring customers in large numbers. By 2021, listed fintechs in other markets had hit their lifetime highs (say PayPal, Square, and Tencent). These resulted in exuberance among the venture capital (VC) firms in India, leading to frothy valuations and a race to cut cheques.

Reversion to a normal state of funding was due to happen sooner or later, and so it did in HIFY22. Coincidentally by then, even the share price of PayPal, Square and Tencent had crashed to their five-year lows and are yet to recover. While VCs out here are sitting on enough dry powder, the deployment of this risk capital shall be on fintechs demonstrating meaningful scale with emphasis on revenues, governance, and compliance.

A few things will likely happen as fintechs navigate the current environment.

• Licence to win: Fintechs partner with 'manufacturers' of financial services (incumbent regulated entities or REs) to help onboard new customers and distribute financial services digitally. This partnership limits fintechs' ability to extract value for themselves as customer relationships and financial products and services reside with the REs. There will be a strategic shift among fintechs to become manufacturers of financial services and they shall increasingly look to obtain licences from respective sectoral regulators.
• Finding niches: While fintechs have managed to onboard customers rapidly through the digital journey they offer, monetisation opportunities shall remain limited if the customer segments targeted and acquired are the ones that are already being well served. By targeting underserved segments through hyper-personalised services, fintechs shall extract higher value.
• Sachetisation: It follows that we will increasingly see financial products broken into bite-size affordable packs by fintechs to be delivered digitally to the underserved. They could extract value from these relationships. Being digital-first, fintechs are uniquely placed to dominate this niche that the incumbents have generally ignored.
• Micro-credit, micro-insurance, no-frills small deposit accounts, and micro-SIP in mutual funds, among others, are some of the existing products fintechs deliver. To further this initiative, regulatory support from the Securities and Exchange Board of India on the operationalisation of fractional ownership of various asset classes will make the world of investment more accessible to small investors.
• Trust is the secret sauce: Fintechs will focus on building trust among customers, regulators, investors, government and other stakeholders through transparency, integrity, and by 'doing the right thing, every time. Entities with a strong focus on governance and compliance shall have access to funding and attract a premium over others.
• Guardians of financial services: The increasing outsourcing arrangements between fintechs and REs, the rapid scale of these partnerships, and the conduct of a few rogue fintechs caused discomfort amongst the regulators, resulting in regulatory intervention. It led to disruption of business for some; and for most others, necessitated course correction. It is critical for the development of the ecosystem that fintechs act responsibly and operate within the defined regulatory perimeter. To do so, fintechs will come together to form sectoral self-regulatory organisations (SROs) to drive policy advocacy and regulate the business conduct of its members.

Regulators officially recognising the proposed SROs early will provide strong support to the ecosystem. The government and regulators have recognised the potential fintechs hold for our country and have taken steps to encourage their orderly development.

It is now upon fintechs to take the mantle forward with responsibility and build value for their shareholders, employees, customers, and the country.

This article first appeared in Business World on 16 July 2023.