Why Bessemer is not so keen on fintech loans and payment businesses

Global venture capital firm Bessemer Venture Partners believes fintech lending is no longer attractive and the payments business has low monetization potential, as the backer of fintech companies such as Lentra and Rupifi outlined a roadmap for investing in the fast-growing segment.

Bessemer’s early investments in India included retail brokerage firm Motilal Oswal, non-bank retail lender Shriram City Union Finance, (now Shriram Finance), mortgage lender Home First Finance Company. Since then, it has evolved its investment strategy for the sector, moving away from legacy financial services providers.

The VC, with an intention to emphasize its dislike of lending businesses, pointed out four principles in the report.

It states that lending is not attractive as a venture-financed business. “We concluded that we were making money investing in lending companies, but later realized that they mix businesses with capital as raw material.”

The second principle stated that payments have a low earning potential. According to the report, due to government-led UPI and regulation, exchange rates are non-existent. To take money from payments, software needs an additional value addition. A BNPL product can be considered as an example of the same.

One of the reasons for this shift was that existing traditional players in the industry gain a long-term advantage over new technology-enabled startups in terms of capital costs, brand and distribution.

Furthermore, margins on the distribution side are low and are continuously compressed due to regulatory pressure. Moreover, the market included several players that existed without any winner-take-all dynamics.

The third principle emphasized that infrastructure-led “pick and shovel” businesses will be long-term.

“We realized that the cost of capital will ultimately favor large banks, NBFCs and insurance companies. Software companies need to have an ability to play across banks, non-banks, new age lenders and insurance companies via a move and spade game and a strong win-win – everything dynamic, which can lead to major outcomes.

Since 2017, the VC firm has backed companies such as Perfios, Lentra, Zopper, Rupifi, which are more focused on software opportunities in the sector.

The fourth principle states that transaction prices will win. “The fintech products best poised for success will have inherent upsell triggers and pricing based on granular and measured metrics.”

Going forward, Bessemer will focus more on such companies helping with the infrastructure of the financial industry.

Overall, Bessemer is betting that the industry is dependent on cloud and software to drive growth.