The fintech sector: At the tipping point?
The past few years have been nothing short of dramatic for the fintech sector in India. Growth accelerated during the pandemic, with the number crossing 7,500 fintech startups. During 2014 to mid-2022, the sector received more than $30 billion in funding.
The past few years have been nothing short of dramatic for the fintech sector in India. Growth accelerated during the pandemic, with the number crossing 7,500 fintech startups. During 2014 to mid-2022, the sector received more than $30 billion in funding.
The main forces driving the acceleration of this sector have been product innovations in customer acquisition, insurance, pricing and collections, and customer service. Technology has gone from being an enabler to a business driver for this sector.
The main forces driving the acceleration of this sector have been product innovations in customer acquisition, insurance, pricing and collections, and customer service. Technology has gone from being an enabler to a business driver for this sector.
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The rapid growth of fintech can also be attributed to favorable macroeconomic and demographic factors, including rising middle class with higher disposable income to buy, borrow, save and invest more; increasing mobile access and digital adoption; abundant financial services and technology talent in the country; availability of equity and debt capital; and above all, government initiatives and regulatory efforts to create a favorable environment.
Indian fintech is estimated to represent around $100 billion in enterprise value (EV), compared to a combined financial services (FS) EV of $1.4 trillion, by 2021. The Indian fintech sector is poised to capture nearly $350 billion dollars in EV by FY26 , contributing more than 15% of FS EV. Similar is the story of insuretechs and wealthtechs. The fintech ecosystem in India, in short, has evolved and is poised for a major leap.
But the challenges remain. That said, 2022 was not a pleasant year for the sector. It faced a series of adverse events. Central banks around the world began withdrawing liquidity freed up during the pandemic to tame inflation. This resulted in fears of a recession in developed countries, causing investors to hold off on equity investments. As a consequence, funding for the fintech sector also decreased. After a good run in the last couple of years, the fintech sector in India witnessed a 41% drop in VC funding by 2022.
Regulatory measures played their own role in slowing down the sector. The Reserve Bank of India action was not a bolt from the blue. It reiterated aspects of the 2015 main circular on outsourcing and emphasized privacy as another key concern. Since fintech had an unrestrained acceleration until 2021, the regulator put in some bumps and railings to control the speed and avoid potential mishaps. The RBI action directed innovation constructively within the current setup. Nevertheless, sudden action by the regulator came as a shock to everyone involved in the fintech sector – entrepreneurs, investors and customers alike.
Nevertheless, it is also clear that the regulator appreciates financial innovation and the efforts of the founders in the financial sector. RBI Governor Shaktikanta Das said in October last year: “The regulator will continue to adopt a participatory approach to facilitate innovation in the financial sector as fintech plays a transformative role in the financial system through digital innovations that offer better delivery of financial services.” He also said that sustainable development and ensuring a robust financial system forms the fulcrum of RBI’s policy architecture.
For the sector to achieve its promise, fintech must build bridges with the regulator. Fintechs can contribute to relevant and important areas, such as working on credit delivery in collaboration with traditional lenders, especially in rural and semi-urban areas; make credit available in a timely and cost-effective manner, particularly for agriculture and allied activities and MSMEs; by participating in regulatory initiatives such as the Regulatory Sandbox.
But most importantly, fintechs can unite by playing the game by the rules. The common intention between fintechs and the regulator – customer centricity and transparency – provides a sustainable foundation.
Furthermore, following the regulations will give implicit credibility to the sector. This in turn will give both investors and consumers confidence in innovative financial solutions.
Regulators must also adopt a more collaborative approach as this will create the necessary environment for innovation to flourish. They must balance their concern for customer protection, data security and privacy with the need to provide a large market and supportive policies for the growth of this sector.
In short, fintech as a sector is at a tipping point. It undoubtedly has a bright future, given the positive encouragement from the regulatory authorities in the past. By consulting and collaborating, the sector can easily fulfill its promise.
Sandeep Patil is Partner & Head, Asia, QED Investors, a fintech-focused global fund.
