Micro themes within the Fintech sector that will witness investor interest

India’s Fintech sector is the cynosure of the global Fintech market with its exponential growth and innovative solutions. The JAM trinity and UPI infrastructure has enabled it to provide consumer-centric, reliable, cost-effective, faster and secure solutions. India’s Fintech market is estimated to grow to $1.3 trillion by 2025 at a CAGR of 31% between 2021 and 2025. Among all Fintech segments, lending is the driver followed by insuretech, neo-banking, wealthtech, embedded finance and regulatory technology.

Digital lending continues to take the lead

The digital lending segment of FinTech in India is one of the fastest growing segments, from $9 billion in 2012 to nearly $150 billion in 2021. And it is expected to reach more than $300 billion by 2023. The FinTech alternative lending segment aims to bridging the gap between demand and supply of credit by offering small loans to financially underserved high-growth segments digitally in a credit-poor market like India. Many Indians cannot apply for loans due to the long banking processes and the strict eligibility criteria. But since digital lending does not require a specific bank account as the requirements are minimal, it could be a solution to serve the 190 million unbanked adults in India. Therefore, digital lending Fintech platforms are growing significantly by making loans easier for the untapped market of the underserved in India by using AI-based credit models as opposed to the traditional CIBIL. The new RBI mandate on digital lending will enable this to go mainstream and do away with the fly-by-night operators.

Enter neo-banks

Banks have an overview of our entire financial behavior right from what we spend, save and borrow; for electricity bills and mortgages for our weekly consumption of fuel and coffee. But they have not been able to use these indicators to draw a lender profile. New Age lending fintech companies use some of this customer data, and financial institutions share some of this with third parties in a global movement known as “open financial data” (or “open banking”). In India, neo-banking is less than five years in the making. It undoubtedly opens a wave of digital financial innovation. Open financial data, a combination of government regulation and market forces, provides an expanding universe of actors, both financial and non-financial, that help gain access to customer accounts and data to offer new products and services. For customers, open financial data provides greater flexibility in how their money is managed, which for example provides better visibility of accounts and much better convenient access to payments. Still in its early stages, the movement has the potential to reshape everything from credit cards, bank accounts, mortgages, payments, small business loans and even insurance.

Built-in economy: Open a whole new world

Another upcoming area that investors are looking at in Fintech is the area of ​​embedded finance. It is placing a financial product in a non-financial customer experience or journey. Although this has been in vogue for decades, where non-banks have provided financial services such as private credit cards with retailers/airlines or car loans with retailers. What makes the next generation of embedded financial products powerful is the integration of financial products into digital interfaces that users interact with on a daily basis. These include customer loyalty apps, digital wallets, shopping cards, employee engagements, etc. In the US, the development of embedded finance has been enabled by a fundamental change in commerce, merchant/consumer behavior and interactions between employees and employers. In India, these are early days of embedded finance, but more and more startups are starting to focus on this.

Insuretech

COVID-19 has directly affected the country’s US$280 billion insurance sector as more and more people have come forward to buy life and health insurance. While a handful of large companies dominate the sector, technology companies are seeking to disrupt the industry by making the insurance purchase and settlement process fast and hassle-free in India’s underinsured market. Insuretech companies are overhauling the process of buying insurance and claiming settlement which was hitherto an ordeal in India. Typically, purchasing insurance here required multiple visits to the insurance provider’s office or contact with sales agents to complete lengthy paperwork and fully understand the details. The terms were cluttered with jargon which resulted in customers agreeing to buy insurance they did not need. Insuretech companies are creating transparency and disintermediating an industry that was dominated by brokers. Another interesting area is insurance premium funding which is slowly picking up with startups making insurance more affordable. IRDA is encouraging the growth of Insuretech companies to make India an insurance rich country.

Regtech

As financial services become more digital, Regtech (or regulatory technology) is a particularly fast-growing Fintech vertical for businesses. It contains solutions that automate regulatory and compliance processes. Financial institutions, which operate in the most regulated industries, spend a considerable amount of time and resources fulfilling their regulatory obligations. As a result, any mistake can lead to financially damaging fines. Regtech offers an effective means of mitigating this risk and is becoming a priority for financial operators, but it is only one of the many examples where Fintech is essentially helping financial services players streamline their processes while reducing costs and risk.

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