While the preceding year in the fintech landscape proved to be challenging, marked by the introduction of new regulations and industry players adjusting their business models, the current year has witnessed a more subdued atmosphere, with funding experiencing a noticeable decline of nearly 68% YoY. The aftermath of these shifts has led to a measured and recalibrated approach within the fintech sector.
Amidst this cautious landscape, specific segments have garnered attention for their resilience and adaptability. However, it's crucial to acknowledge the broader sense of restraint prevailing in the industry. As we navigate through these transitional phases, it's prudent to remain observant of the nuanced developments shaping the fintech ecosystem.
Revolutionising Transactions: The Unstoppable Reign of Digital Payments and UPI Supremacy
UPI transactions hit a new record of Rs 17.4 lakh crore in November 2023, a 54% YoY increase in terms of the number of transactions and a 46% YoY increase in terms of value. The emergence of digital lending on UPI mirrors the functionalities of a credit card, introducing an intriguing dynamic to the financial landscape. The coming years are set to witness a redefined lending experience as UPI-driven digital lending takes centre stage, offering a glimpse into the future of inclusive and accessible financial solutions.
Banking Tech: API – Play the future and common thread
The sub-sectors within banking tech that have seen significant traction so far are embedded finance, BaaS, and open banking.
Collaborations between fintech companies and non-financial entities are anticipated to rise. This trend could involve partnerships between fintechs and e-commerce platforms, healthcare providers, travel agencies, and more, with the goal of embedding financial services seamlessly into everyday transactions. Additionally, going forward, niche services such as treasury operations, escrow services, and credit card as a service will lead to increased financial inclusion and a more diverse range of banking services for consumers.
Banking tech received funding of $282 million in Q3 2023, which is a growth of 396% compared to the $57.2 million funding in Q2 2023.
Eco-Friendly FinTech and Green Investments:Navigating the Future Sustainably
With a growing global emphasis on sustainability, the fintech sector in India is set to witness a surge in green finance initiatives and sustainable investments. Investors are showing a keen interest in sustainable finance, and fintech platforms are expected to respond with innovative solutions that cater to this demand. Governments and regulatory bodies in India are likely to introduce and strengthen policies that promote green finance.
Research and analytics firm, Benori Knowledge, predicts that by 2026, Indian PE/VC firms will have invested $125 billion in sustainable projects, representing nearly 40% of their total assets under management.
Navigating the Compliance Frontier: The Cutting-Edge World of RegTech for Unparalleled Security
RegTech will be a key focus in 2024. As regulatory requirements continue to evolve, SaaS solutions will offer comprehensive tools to assist financial institutions in staying compliant. This includes solutions for KYC (know your customer), AML (anti-money laundering), and other compliance-related processes. RegTech received a funding of $229 million in Q3 2023, which is a growth of 100% compared to the previous quarter.
Empowering Growth: The SME Fintech Revolution Unleashed
There are over 64 million MSMEs in India, and only 11% of micro-enterprises have access to formal credit. Platforms offering supply chain financing, invoice discounting, and trade finance tailored for small businesses will continue to evolve to meet unique financial needs. Artificial intelligence (AI) will play a significant role in providing SMEs with predictive analytics, expense categorisation, and personalised financial advice to help SMEs make informed decisions about their finances.
The SME lending sector saw funding of nearly $2 billion in FY 2023.
Bridging Borders: The Fintech Symphony of Cross-Border Collaborations
Traditional banks are increasingly partnering with fintech companies specialising in cross-border payments. These collaborations enable banks to leverage the innovative capabilities of fintech partners, offering customers faster and more cost-effective international money transfers. Expansion of real-time payment networks, integration of AI/ML, and digital identity verification for compliance are a few trends representing potential directions for the evolution of cross-border payments in 2024.
The recent guidelines introduced by the Reserve Bank of India (RBI) have placed cross-border payments squarely within their regulatory scope. While these guidelines are expected to increase compliance costs for fintech companies operating in this sector, the clarity about the business and regulatory framework will attract more venture funding.
“Buy Now, Pay Later”: Alternative lending tech reshaping shopping experience
The BNPL market is relatively new but is growing significantly in India. The 18–30 yrs age group of young Indians is the driving force behind the BNPL growth. BNPL has found an instant connection with this age group, because of limited credit access (not covered by credit cards), the need for affordability, and the convenience of BNPL on the go. In India, BNPL's user base is already at 28 million (2022) and is bound to grow to 100 million over the next 4–5 years.
Additionally, overall consumer credit offtake has been unbelievable over the last 2 years (post-COVID effect), which is visible from India’s lowest savings rate in the last 40-year period. But regulators are keeping a close watch on consumer credit and recently cautioned banks and large NBFCs to increase the risk weightage on consumer credit exposure. While these regulations will have an impact on consumer lending, including BNPL models, we strongly believe that BNPL will become more popular and will remain a preferred payment option for the large 200 Mn credit underserved base in India. Moreover, we will see more evolved models for B2C – merchant-led closed loop BNPL – and for B2B – BNPL models focused on mid to large enterprise spends (non-BS plays) – gaining more momentum and getting more attention from the investors.
Companies with stronger core products/offerings and a larger user base will continue to see more interest. Apart from the trends discussed above, merchant-led consumer lending models, B2B BNPL SaaS (enterprise-focused solutions), insurance distribution, broking-led models, and models built around UPI can get more interest. As more pressure gets built in the fintech ecosystem, we can see M&A transactions across SME lending & SaaS plays but with relatively lower valuations. 2024 will be approached with caution.
(The author Parinishtha Sharma, is an Investment Banker at Merisis Advisors. With inputs from Ajay Kiraan, Anuj Mehta, and Fazal Ahad from the Fintech Practice at Merisis Advisors.This article first appeared in Economic Times.)