Sibos 2022: A Look Ahead – India’s Fintech Growth Story

For post-pandemic visitors to India, one major societal change will not go unnoticed: the country’s transition to a cashless economy.

India has proven to be a breeding ground for fintech start-ups

Those who visited before the pandemic hit will know how dependent on cash the country used to be.

The pandemic spurred this change and now, whether shopkeepers or street vendors, most Indians prefer to use their phones to make and accept payments, a majority of which are through UPI.

Short for Unified Payments Interface, UPI was developed by the National Payments Corporation of India (NPCI) and was launched in 2016 with 21 banks. That ecosystem has now grown to 358 banks as of September this year.

Transaction volumes grew at a steady rate before the pandemic as well, but saw massive growth during the pandemic, signaling that the digital transition was well under way. UPI currently handles around 6.5 billion transactions per month.

Set at $31 billion, India’s fintech market ranks third in the world, behind only the US and China, and analysts at Inc42 is betting that the market opportunity will be over $1 trillion by 2025. India’s fintech adoption rates are also some of the highest in the world, at 87% compared to the global average of 64%.

And the country lives up to the hype. In May this year, India celebrated another unicorn – Open – a Bengaluru-based, Google-backed neobank that secured fresh funding in its Series D round, taking its valuation to over $1 billion. Today, there are more than 20 fintech unicorns in the country, with many in the pipeline ready to join the growing list.

Despite this amazing growth, the year 2022 has not been kind to the global startup industry – and India has not been immune to its challenges either. Layoffs and reduced funding have affected many Indian fintech companies. According to various media reports, Indian startups have already laid off more than 10,000 employees this year, following the highs of last year, when a number of companies went on hiring sprees.

However, the market turmoil has not discouraged national or international players.

Revolut, the UK banking super app, is gearing up for its India launch after recently appointing Saleem Arshad as Chief Technology Officer (CTO) for its India operations and inaugurating its new headquarters in Bengaluru.

Another UK-based financial platform, Tide, which provides digital banking services to small businesses and entrepreneurs, also announced its intention to launch in the country and is currently allowing users to sign up for early access. It is planned to start full-scale operations in the country sometime this year.

However, domestic players will not be left behind in the race, including challenger banks Jupiter, Niyo and INDMoney.

India’s regulatory landscape is also evolving along with the fintech industry. At the recently concluded Global Fintech Fest 2022 held in Mumbai, the Ministry of Finance and the Reserve Bank of India’s (RBI) Governor made a series of speeches highlighting their intentions to further develop and support fintech’s growth in India.

The Royal Bank of India (RBI) recently organized its first global hackathon themed “smarter digital payments”, created a new fintech department to guide the sector, and is also working on creating its own central bank digital currency (CBDC).

The country’s IT minister, Ashwini Vaishnaw, also stated that one of the government’s main focus areas would be to build a “robust” digital infrastructure and regulatory framework for the fintech space, with an eye towards social inclusion.

However, a new report by Matrix Partners India and Boston Consulting Group (BCG) says that while Indian fintechs have made a “strong contribution” to the economy, reaching over $800 billion in annual payment transaction volume, they may not be raking in profits for the next two to three years.

It surveyed 125 founders and executives of fintech companies, 70% of whom believed they may not be profitable in the near future due to an increased focus on scale as opposed to profitability and compliance.

“We are on a path in India fintech history with skeptics raising a lot of questions,” says Vikram Vaidyanathan, managing director of Matrix Partners India. “Indian fintechs have undeniable scale, deliver superior value to customers and have proven resilient through a once-in-a-lifetime crisis in Covid.”

However, to continue its success, Yashraj Erande, managing director and partner, BCG, says “new muscle” will be needed for newer priorities, such as profitability and governance.

“Growing together in partnership with established companies and private innovation on public services will be important moats,” adds Erande.

In conclusion, India has proven to be a breeding ground for fintech start-ups. But is that enough to make them profitable? Only time will tell.