Despite rising funding and valuations, Indian Fintechs are struggling to make money

India’s fintech industry has grown at a rapid pace in recent years, and today stands as the world’s third largest fintech startup hub.

Locally, fintech companies raised a staggering $29 billion in funding in the first seven months of 2022, the fourth largest total of any country in the world. The country now has 37 fintech unicorns, ranking fourth in terms of global fintech unicorns.

Yet, despite these achievements and a strong position in the global fintech market, industry leaders are skeptical about the profitability of the sector in the coming years, a new study by Boston Consulting Group (BCG) and venture capital (VC) firm Matrix Partners, shows.

A survey of over 125 founders and senior executives at leading Indian fintech companies found that more than 70% of executives believe that most fintech companies may not be able to make a profit in the next two to three years.

This is due to a strong focus on scale and growth, with product expansion (82%), hiring (75%) and improved customer service (61%) identified as the top three priorities by respondents.

What are the top priorities for you and your business?, Source: State of the India Fintech Union in 2022, BCG; Matrix Partners, 2022

Across fintech sub-segments, respondents were the most pessimistic about insurtech and neobanking, with only 20% and 21% of respondents believing that most companies in these respective industries will achieve profitability over the next few years.

Profitability is a key challenge for neobanks, the research found, as evidenced by the industry’s high customer acquisition costs (CAC) and low average revenue per user (ARPU), the two biggest challenges identified by neobanking companies.

In insurtech, industry players cited regulations, CAC and scalability of business models as their biggest challenges.

Fintech profitability in the next two to three years, Source: State of the India Fintech Union in 2022, BCG; Matrix Partners, 2022

At the other end of the spectrum, respondents had the most positive view of payment technology (32%), a sector that has seen booming adoption facilitated by government initiatives such as Unified Payments Interface (UPI), India’s real-time payments system.

Since its launch in 2016, UPI has acted as a catalyst for digital payments, fintech adoption and financial inclusion.

Data released by the National Payments Corporation of India (NPCI) shows that UPI recorded over 6.28 billion transactions in July 2022, a new record since the service was launched six years ago. Transactions nearly doubled year-on-year (YoY), rising from 3.24 billion in July 2021 to 6.28 billion in July 2022.

Today, India leads the world in real-time digital payments by representing nearly 40% of all such transactions, Prime Minister Narendra Modi said in August, and the country has improved financial inclusion at a compound annual growth rate (CAGR) of over 5%, according to Hindu Business Line.

Evidence of the role of fintech in helping to bring financial services to the masses is further shown in the BCG/Matrix Partners report.

According to the paper, fintech companies have been much more successful in reaching the unbanked and underbanked than traditional financial services companies, and today have a market share of 93% in UPI transaction value against 7% for banks.

In wealth management and trading, digital brokers and wealthtech startups are said to have a market share of 80% in active broker customers. And in lending, 36% of fintech customers are new to credit, a share that drops to 22% for banks.

Fintech companies help improve financial inclusion, Source: State of the India Fintech Union in 2022, BCG; Matrix Partners, 2022

In 2021, fintech adoption continued to grow rapidly in India. PhonePe, the country’s largest digital payments company, saw its monthly active users jump 32% from 125 million in 2021 to 165 million in April 2022.

In terms of digital investment, market leader Groww recorded that the number of monthly active users rose 100% year-on-year in March 2022 to 9 million.

Meanwhile, in neobanking, NiyoX, an online consumer banking platform, saw its total number of customers increase from 2.5 million in August 2021 to 4 million in July 2022.

Consultancy EY expects India’s fintech market to reach US$1 trillion in throughput and US$200 billion in revenue by 2030.

Fintech customers in India, Source: State of the India Fintech Union in 2022, BCG; Matrix Partners, 2022

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