Fintech for All in India · Bessemer Venture Partners

Financial services are the largest sector in the world with around 20-25% of the world economy. India is no different, with financial services accounting for over 24% of the country’s market value. Despite the sector’s strength and scale, there remains enormous opportunity for rapid growth across all dimensions of financial services, including credit, investments and insurance, with the potential for billions of dollars in market capitalization to be created in each of these subsectors. We estimate that by 2030, domestic credit will double to become a $5.5 trillion market; mutual fund assets under management (AUM) will grow 5x from $400 billion to $2 trillion; and insurance will grow from $100 billion to $500 billion. Even then, the industry will have just scratched the surface with each of these sectors.

Although we expect the sector to grow as a whole, certain types of businesses will fare better than others. Since India’s financial ecosystem infrastructure began to digitize in 2012, we have seen how financial services organizations from fintech startups to established banks have capitalized on these changes, with incumbents gaining the upper hand. Here’s what we learned from our legacy financial services roadmap and how our investment strategy has evolved as a result.

As of March 2005, banks in India had $50 billion in total outstanding personal loans, which represented 7% of the country’s gross domestic product (GDP). By December 2022, the same figure had grown to $480 billion, or 15% of GDP. For the past two decades, corporate loans represented the majority of loans in India, peaking in 2013. Since then, lending to private customers has overtaken corporate loans. We believe personal loans will occupy 70% of India’s total bank loan market in the near future.

India has a triple engine of private credit: by increasing GDP, lending as a percentage of GDP and retail lending as a share of all lending activity in the country, India will drive its retail credit 3x over the next seven years.

Indian lenders, including banks and non-banking financial companies (NBFCs), will benefit disproportionately from these tailwinds compared to fintech lenders, given that they have the benefits of supportive regulations, stronger brands and distribution, and lower cost of capital over time. term.

Between 2006 and 2011, when we started investing in India and saw the huge market opportunity, we supported sector leaders across brokerage, lending and insurance. We were the first institutional investors in Motilal Oswal, which was then the largest brokerage house. The company went public within two years of our investment. On the lending side, we invested in two companies. The first was non-bank retail lender Shriram City Union Finance, now called Shriram Finance, where we led an investment and saw the company scale its AUM by ten times. The other was Home First Finance Company , an affordable mortgage lender that was a proprietary incubation effort with three experienced retail bankers from Citibank – the company went public in 2021 and we continue to be shareholders given the potential for mortgage compounding.

At the same time, the Indian government helped usher in a new wave of technology initiatives throughout the country’s financial services ecosystem from 2012 onwards. The first was Aadhaar, which enabled a biometric, social security number-like digital identity for each individual. With over 1 billion registered members, Aadhaar is the world’s largest biometric identification (ID) system. The unique Aadhaar formed the basis for a digitally enabled bank account, called the Jan Dhan Yojana, as well as instant mobile payments and money transfers via the Unified Payments Interface (UPI). In addition, several other enabling technologies have been created, including Aadhar-led know your customer (KYC), a DocuSign-like protocol called eSign, a Dropbox-like secure archive called DigiLocker, an Account Aggregator (AA) framework, and OCEN ( Open credit activation network). All these initiatives have led to the creation of uniform, standardized digital rails for financial services in India.

Although we were very successful in our old financial services roadmap, we also came away with some important experiences that gave us pause in following the same strategy further. One lesson learned was that existing manufacturers in the financial services industry, i.e. banks, insurance companies and asset management companies (AMCs), have a sustainable advantage in cost of capital, brand and distribution that allows them to have a long-term advantage over new technology-enabled suppliers.

The second lesson was that on the distribution side, margins are extremely low and continually compressed due to regulatory pressure – all distributors eventually want to become manufacturers to increase margins. Moreover, in both segments, multiple players exist simultaneously without any winner-take-all dynamics. All these lessons dissuaded us from leaning further into this old road map.

We believe investing in fintech infrastructure at this moment is a once-in-a-lifetime opportunity, given a unique confluence of events: adoption of cloud; new players offering more flexible and customer-friendly products; banks unable to launch new products on the fly because legacy software impeded flexibility; and COVID-19 is accelerating the process of digital lending. The pressure from new players, the accelerated adoption of digital lending and widespread cloud adoption has led banks and non-bank lenders to embrace cloud-based SaaS platforms across various use cases: underwriting, fraud, collections, KYC, wealth management, loan origination systems ( LOS), loan management systems (LMS), customer engagement, etc.

Since 2017, we have invested in the developed roadmap based on our experiences. We want to continue to find software opportunities in various parts of the banking and insurance lifecycle, including credit, underwriting, fraud, collections, KYC, wealth management, claims and right through processing (STP). We are among the few funds that have experience on both the actual lending side as well as the software enablement side and understand the nuances of both. We also benefit from our experience investing in companies such as Perfios, Lentra, Mambu, nCino, Zopa, Bankjoy, Zopper, Shyft and IHX, among others.

We want to give you a sense of how we source, evaluate and select winners using our framework. Today, the fintech companies best poised for success are those building data, cloud and software layers on top of legacy financial institutions. We believe legacy financial institutions’ enormous distribution combined with cutting-edge technology puts companies ahead of newer players in the market who need to build their reach from day one.

On customers, we like companies that build enterprise grid software for big banks, shadow banks and insurance companies, as opposed to building software just for new age fintechs. We understand that this has its own downside – a longer sales cycle – but companies that crack this code are building very large businesses around enterprise networks, integration and network effects.

On pricing, it is important to start with usage-based pricing early because it leaves room for revenue scale as customers grow. Again, while this approach to monetization is more challenging to execute early on, it allows companies to grow quickly and show significant net negative revenue churn. We believe pricing models are extremely difficult to change, unless the company focuses on this from day one.

When we updated our roadmap, we settled on four tenets to guide our fintech investment strategy. Some of these are distillations of our learnings from both the legacy roadmap and the newer software roadmap; others are our hypotheses based on trends we see in the market landscape today.

1. Lending is not attractive for venture-financed businesses. We came to this conclusion in the first phase of our roadmap – we made money investing in lending companies, but later realized that they mix businesses with capital as raw material.
2. Payments have low monetization potential. Due to government-led UPI and regulation, exchange rates are non-existent. To monetize payments, software needs an additional value addition. An example of this is a “buy now, pay later” (BNPL) product, which makes money from payments.
3. Infrastructure-led “pick and shovel” businesses will be long-term. We realized that the cost of capital and regulations would ultimately favor large banks, NBFCs and insurance companies. Software companies must have an ability to play across all banks, non-banks, new age lenders and insurers via a “pick-and-shovel game” and a strong winner-take-all dynamic, which can lead to to great results. We also expect infrastructure innovation to catalyze growth, with technology enabling every financial process. While the government led most of the current efforts for the finance stack, we envision more private sector leadership in building newer API-led infrastructure and data platforms on top of today’s rails, increasing adoption and improving usability across different segments of the financial industry.
4. Transaction pricing will win. The fintech products best poised for success will have inherent upsell triggers and pricing based on granular and measured metrics.

At Bessemer, we believe we’re still in the early days of a revolution in the fintech software ecosystem, and we’re incredibly eager to support entrepreneurs who want to change the status quo.

If you are an entrepreneur building the next big fintech software business in India, we want to hear from you. Please contact our team at [email protected].