Fintech profitability in doubt for the next 2-3 years
With the latest trends in sight, fintech has erupted all over the world – but its profitability remains questionable. According to a recent report by Matrix Partners with the Boston Consulting Group (BCG), 70% of respondents believe that most fintech companies may not be profitable in the next two to three years.
The report was based on a survey of over 125 founders and CXOs of leading Indian fintech firms, who identified expanding products, improving customer service and hiring as current top priorities.
According to Invest India’s latest reports, India is among the fastest growing fintech markets in the world – home to 6,636 Fintech startups. The industry is estimated to reach $150 billion by 2025. The payment landscape has evolved into the most advanced system in terms of digital payments by volume (CAGR 50%) and value (CAGR 6%).
There is a strong need to improve the risk management framework, along with improving competitiveness that can monitor fintech innovations without interfering with their economic potential.
State of Indian fintech landscape
A fintech or financial technology company merges the upcoming technological trends to provide better financial solutions through digital payments and transactions. This sector has seen the growth of a number of startups. The Indian fintech has a strong position in the global financial market, with a value of over $800 billion + annual payment transactions, making it one of the strongest contributors to the economy. The report is a collective segment of insights that could be crucial for the $5 trillion Indian economy, showing the need to rethink their economy for innovative investments.
Highlighting the growth of Indian fintech, Yashraj Erande, Managing Director and Partner, BCG, says, “Indian fintech is approaching scale and the industry is moving towards becoming mission-critical, thus having a national role to play in achieving India’s quest for a 5 – trillion economy. Fintechs and conventional players will co-exist as the need to collaborate becomes essential to provide a holistic experience to the customer. Having good compliance systems will smooth the collaboration process as partners’ willingness to collaborate with compliant fintechs will be higher.”
Incumbents revealed that monetization and ARPU are the top priorities and biggest challenges for the industry today.
Source: State of Fintech Union 2022 (BCG and Matrix Partners)
The pandemic further boosted payouts, leading to a 210% increase in funding between 2020 and 2021. With the increased funding, the industry has seen an upswing in attracting global valuations.
But in the last 9 months, $35.6 billion has been withdrawn by FPIs (Foreign Portfolio Investment) from Indian markets. The rupee falls to a low of INR 79/$ prompting FPIs to cash out ahead of the further devaluation.
Source: State of Fintech Union 2022 (BCG and Matrix Partners)
In line with the global slowdown, a steep 36% drop in funding was seen in Q4 in India. It indicates that a potential flow of capital can be implemented by improvements in macroeconomic fundamentals. Many business models were forced to rethink high credit risk and have human-intensive business models.
Managers who still believe in profitability
Besides a majority of the industry leaders, who had doubts about the profitability, 20% of the respondents feel positive about the sector. This positive outlook came mainly from the insurtech, paytech and new banking sectors.
Fintech is driven by the post-pandemic growth that has increased the use of digital services. It has indeed caused disruption, but also paved the way for a more efficient system. Many sectors like education and banking benefit from this technology.
“The fintech sector is mission critical for the Indian economy; 36% of fintech customers are new to credit, compared to 22% for banks. This means a greater focus on profitability and management, says Yashraj Erande, managing director and partner at BCG.
The way forward
Fintech is set to grow over the next 5 years and the report summarizes the future aspects to tackle potential challenges. Some 82% of fintech companies believed that product expansion was the highest priority in the industry, with 61% improving customer service and 75% hiring the right talent. In contrast, cost reduction, collection and internal control remained the least priority.
It further suggests that fintechs need to bring more attention to governance for companies to outgrow advisors over a period of time. This can be achieved when companies proactively report their governance practices to gain the trust of both customers and regulators.
The pandemic has transformed the world into a digital hub. Fintech is a growing industry, and the possibilities are limitless. According to Market Research Future, global blockchain in fintech market is expected to expand to USD 6700.63 million by 2023. With more streamlined algorithms to operate financial services, businesses will engage directly with customers. With better frameworks and regulations, business models can be maintained and uncertainties addressed.
“Profitability in lending is not an afterthought. The key is to get the basics right: continuously improve insurance models, leverage technology to reduce operating costs and have a clear plan to reduce the cost of funds at scale. Fintechs are battle-tested survivors of multiple debt crises and will continue to learn and emerge stronger, says Vikram Vaidyanathan, CEO, Matrix Partners.
