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Investors stay bullish on fintech bandwagon

Ranju Sarkar | New Delhi Jun 29, 2017 01:05 AM IST
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Deal activity in the financial services technology (fintech) space continues to remain strong, with start-ups announcing a fund-raise every second week.

Since 2012, investors have pumped about $2.35 billion (Rs 15,000 crore) into fintech firms in 325 deals, says data platform VCCEdge.

The bulk went into payments ($875 million, 109 deals), consumer finance/lending ($875 mn, 109 deals), and other small niches. The $2.35 bn includes the financial software space - Mphasis was acquired by Blackstone for $824.6 mn in April 2016.

Even if one excludes deals in financial software, the fintech tally adds to $1.53 bn (Rs 9,800 crore) and this doesn't include SoftBank's $1.4 bn investment in Paytm.

Why so?

Why are investors bullish on fintech? That's because this is the next biggest space after e-commerce in India, says Anand Prasanna, managing partner at Iron Pillar, a venture growth investment entity. Amrish Rau, chief executive officer (CEO) at Naspers-owned PayU India, thinks investors feel bullish as there's an opportunity to create great value and earn a good return.

For instance, US payments major PayPal enjoys a market capitalisation of $63 bn. Tencent, which owns Chinese messaging service WeChat that also enables payments and e-commerce, is valued at $348 bn. Naspers' $34 mn bet on Tencent 17 years earlier was valued at $60 bn in 2015, transforming the fortunes of this South African firm.

Naspers' fintech platform' PayU' bought Citrus Pay for $130 mn, delivering an eightfold return for Citrus investor Sequoia Capital India.

Rau says fintech provides an opportunity to disrupt the way people pay, remit or store money, and assess or deliver credit. Take remittances. Existing entities charge six to eight per cent to transfer money; fintech start-up TransferWise is able to transfer money for 1.5 per cent.

Payment firms focused on the b2b (business to business) space enable digital payments in education, insurance, e-commerce, and government, and get commissions (0.25-1 per cent) from merchants. Firms like Paytm focused on the b2c (business to consumer) space have the customer base which they can monetise by launching different financial services.

Opportunities

The opportunity is huge in a market such as lending. ''A fintech opportunity has been created by the oligopoly of banks working in their comfort zone- - in some urban areas and dealing only in housing loans or large corporate loans,'' says the managing partner of a venture capital (VC) entity.

These banks focus on the top 300 cities and towns in the country, while India has around 5,000. Non-banking financial companies (NBFC) have been successful but are focused on vehicle financing or gold loans. Investors like the lending space as the opportunity is large, and the market, be that for small & medium enterprises' (SMEs') financing or consumer loans, is severely under-penetrated. There's an opportunity to create a large profitable company, fairly quickly, Gaurav Hinduja, founder and CEO, Capital Float, told Business Standard in an earlier interview.

''No lender gives loans at a negative gross margin (it's always positive). You will see lending start-ups becoming profitable very quickly, unlike start-ups in other segments,'' Hinduja had said. Investors like to invest in companies that can be large and build scale efficiently and quickly.

''There's not much burn; it's a supply-constrained industry, where you don't burn much to generate demand. The market is huge and multiple players can coexist. It's not a winners-take-all market like segments of e-commerce,'' says Harshvardhan Lunia, CEO, Lendingkart.

New-age fintech lenders are addressing a sizable credit gap in the market, especially with regards to SMEs, wherein there are several high-potential segments that were previously under-served by traditional financiers.

''With the advent of new infrastructures such as eKYC, eSign and UPI, small-ticket loans have become a reality for technologically advanced lenders,'' says Hinduja. ''Many of these data points can be used to underwrite the consumer and, quite plausibly, be used to instantly approve a loan without any document submission,'' says Subhankar Bhattacharya, venture parnter at VC entity Kae Capital.

Investors-stay-bullish-on-fintech-bandwagon

Live demand

Unlike e-commerce, demand is not an issue in lending, notes Lunia of Lendingkart. ''The challenge is fulfilment and execution,'' he says. ''India has always been a credit-hungry market and the open pipe facilitated by India Stack (the ambitious government-supported programme to create a unified software platform) can help digital lending companies serve that demand effectively,'' adds Bhattacharya.

Harshil Mathur, co-Founder and CEO at Razorpay, says the traditionally cash-driven Indian economy has responded well to fintech. And, so many new frontiers have opened for investors, such as payments, lending, security and biometrics, block chain and robo advisory, among others.

Investors say with the ongoing e-commerce and digitisation drive, consumers are getting more comfortable with the money layer being entirely digital. This, combined with a lot more data around consumers and small businesses, allows for more intelligent tracking of a customer and their money, says Karthik Reddy, co-founder and managing director (MD), Blume Ventures.

Adding: ''Despite regulation, and the vantage point lying with banks and NBFC balance sheets, many fintech companies can emerge and build at scale. Paytm has shown this and has started building sustainable financial services and commerce moats on top of payments."

Ahead

Ben Mathias, MD at Vertex Ventures, says the sheer scale of the financial sector in India has resulted in a lot of businesses being created in the past 10 years which have delivered healthy returns to investors. While earlier financial start-ups differentiated themselves by process innovation, they're now differentiating themselves with technology innovation. India Stack has been a tremendous catalyst and a lot of fintech companies have been created around this platform.

''We are particularly excited about insurance tech, where we are seeing the creation of new business models that are driven by the confluence of Big Data, Analytics and IoT (internet of things). For example, data from fitness bands can be analysed to determine the cost of your health insurance,'' he says.

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