How will fintech appear in 2023?

The year 2022 plagued the Indian fintech space with a rockfall of setbacks that crashed valuations, the cold harsh winds of funding winter, funding free-falling to worse than pre-Covid-19 levels, and young businesses collapsing at a catastrophic rate.

Data from research firm Tracxn shows that funding in the Indian fintech ecosystem nearly halved to about $5.7 billion in 2022 from $10.3 billion in 2021.

And then there were regulatory requirements for tougher policing to better protect users. The Reserve Bank of India (RBI) banning non-bank fintech companies from loading prepaid instruments using lines of credit affected the business model of fintech startups Slice and Uni. Also, the significant asset price declines of the crypto industry have contributed to the sector’s woes.

Despite the challenges on the horizon, fintech industry stakeholders seem to share a sense of optimism about where the fintech industry will go in 2023.

Moreover, the domestic fintech sector is poised to reach $1 trillion in AUM and $200 billion in revenue by 2030, according to an EY report.

This puts India in a unique position to lead a renewed spirit of innovation in fintech.

Prabhtej Singh Bhatia, co-founder of Falcon, an embedded finance startup, is confident that India will lead the way in developing the next generation of fintech infrastructure. “With our talented workforce, expertise and cost-effective operations, we have the potential to become a global powerhouse in this industry,” he says.

India has also been a success story in terms of fintech adoption and use. “With adoption rates close to 90% compared to 60% globally, India is way ahead. With innovation, multiple applications, government and regulatory support, coupled with 5G and maturing infrastructure, fintech in India will continue to grow,” said Vinod Keni, managing partner, Indian Angel Network, an early-stage venture capital firm.

Also, several of the fintechs that have been successful in India may find their models replicated in other emerging markets. “With higher adoption rates and newer B2B fintech startups scaling up, revenues and business models will demonstrate growth and maturity,” he adds.

Experts share that payments could remain the most funded sector in fintech, especially startups focused on B2B payments. While emerging markets present another growth opportunity for fintech startups, as there are many underserved communities across the country when it comes to access to even the most basic financial products. They also expect consolidation as funding dries up and fewer companies can scale up.

As 2022 was the year of the funding winter, which is expected to continue for another 6-12 months, what will 2023 bring? “There is definitely slow progress on the equity side, but the metrics have changed,” says Pravash Dash – Managing Director and CEO, Arthan Finance, a fintech platform focused on micro, small and medium enterprises.

Dash adds that investors are looking at differentiated, sustainable and profitable business models. “Many of the fintechs, especially those in the lending industry, have incredible growth potential and 2023 will see a lot of consolidation in the fintech space, which has already started to happen.”

And the likes of Keni believe that this is not the funding winter; this is normal as the rate of investment in the last three years was an aberration. “Good fintechs with innovative products/offerings, good unit economics, especially in segments that are under-penetrated like insurtech, regtech, assurance, accounting, B2B will continue to attract VC interest,” he says, adding that regulatory issues may make investors a bit more cautiously, but investment and interest in fintech will remain strong.

While the funding landscape may be challenging in the short term, Bhatia says this period will give rise to lasting, game-changing fintech companies. “Keep an eye out for the hidden gems that will emerge from these difficult times and pave the way for a more mature fintech ecosystem in India,” he adds.

Experts agree that fintech with proven business models, innovative products and offerings, strong teams with the ability to execute and scale will continue to attract capital, albeit at lower valuations than before.

As for investments entering risk and compliance departments due to RBI regulations, Sugandh Saxena, CEO of the Fintech Association for Consumer Empowerment (FACE) believes that regulatory developments have rightly brought risk and compliance to the fore, with fintech using greater focus and resources. “More than investment, it is a paradigm shift to weave together risk and compliance thinking and culture across functions and processes, which will benefit fintech,” she observes.

And fintechs will continue to empower consumers to better manage their finances. “Credit is an important pillar for customers to manage their finances – to take advantage of opportunities or pay for planned expenses or unexpected circumstances,” says Saxena.

Experts believe that the power to change the fintech landscape this year lies with Gen Z.

As the last couple of years have been a roller coaster ride for Gen Z, having gone through a pandemic, shutdowns, a cost of living crisis and now a looming recession, to say the least, there is a belief that they can change the scope of fintech technology.

“Innovation in technology has always been inclined to benefit the new generation presenting ways to improve their lifestyle. The same applies to fintech too – access to credit is now easier with new ways to check creditworthiness and assess risk,” says Satyam Kumar – member in FACE and CEO and co-founder at LoanTap, a digital lending platform.

A report by credit information company TransUnion CIBIL found that there has been significant improvement in credit awareness among Indian citizens, especially Gen Z consumers and those living in the non-metro areas.

It is little surprise that more Gen Zs are now coming under the umbrella of a profile that the fintech players want to serve.

“Technologies such as the Account Aggregator framework and AI are playing a major role in making credit more seamlessly accessible with higher credibility. “The tech-savvy Gen Z could prove to be the catalyst for the next wave of fintech industry growth.”