Analyzing the Indian Fintech Industry -

Payments & Lending

Getting the initial head start during demonetization and a blessing in disguise during the lockdown, the Fintech industry reached a $2B market size in 2020. Increased adoption of fintech services due to the rise of e-commerce, aversion from cash transactions during covid, traditional banks transforming into apps, and government initiatives like Aadhaar and UPI adding into the India Stack has resulted in a widespread penetration throughout the country.

The industry has seen more than $1.5B in investments with Payments and Digital lending being the leading investment sub-sectors.

Online payments are slowly becoming the most convenient way of transacting. From being highly inconvenient, slow and complex a decade back, digital payment services are now focusing on better user experience, more visibility of financial details, and a more efficient transaction process. This has also led to increased penetration amongst the rural masses, and government initiatives like Jan Dhan Yojana(Bank account for all) also act as a complimenting factor.

UPI has created a new interoperable “tap to pay” environment and this further increases the competitiveness between different payment apps.

The use-case of payment wallets has been eliminated by UPI and the competitive advantage will go to the companies which realize the untapped potential in rural segments of the country where the key factor would be a good user design and experience, easy authentication and onboarding, and aggregating multiple services like wealth management, insurance and e-commerce to the platform. Paytm has the first-mover advantage here.

Retail payments are likely to grow exponentially with the recent announcement by RBI, opening invitations for New Umbrellas Entities(NUEs). These NUEs will be able to take part in a majority of financial activities and hence multiple consortiums, which include big tech companies are taking part in the competition for the license. All these firms are looking to get a larger pie of the growing digital retail payments market in India.

During the lockdown, all major e-commerce companies avoided cash payments and out of necessity, people adapted to cashless e-commerce.

Most Indians had this trust factor which made them aversive about online payments on these platforms. But because of covid, and a smoother payment experience, a majority of people now prefer paying digitally over cash on delivery. This broadened the opportunity and the need for smooth and efficient payments. With 30% of all retail transactions being digital, the whole retail sector is inclining towards digital payments. This was extremely beneficial for POS companies as well as payment gateways.

Lending-Tech is growing at 43% from the last seven years and the post-covid-scenario where the banks are busy redistributing their portfolios to minimize losses and are reluctant to give loans to small businesses/risky assets, there is a demand for working capital loans and short term credit in general. Small businesses right now are heavily dependent on easy credit access which has created a large opportunity for growth in digital lending, especially the hyperlocal segment in metros.

Digital lending has become the most lucrative segment for new venture opportunities with around 44% of total investments in Fintech in 2020, going to the sub-sector.

Microloans, the abundance of consumer data, increasing technology and automation along with the ability of new ventures to innovate, can lead to a lot of possibilities in the lending space. There is also a lot of scope relating to partnerships which include co-lending services, e-commerce-lending partnerships and the definitive partnership with traditional banks. SME loans and personal loans would be key drivers of lending having maximum digital influence.

Also, we can see a lot of players expanding into multiple segments becoming aggregators to establish their dominant presence through-out the Fin-tech space. Wallet companies including PayTM and PhonePe expanding from payments to e-commerce, and gateway companies like Pine Labs and Mswipe, expanding from POS to merchant lending are a few examples of the same.

Neobanks, Open Banks, NUEs, Blockchain-based fund monitoring systems, and crypto are some of the hot developments in Fintech which we are yet to leverage at scale.

This along with the fact that we are yet to even penetrate 50% of the Indian population gives a large growth opportunity for Fintech in India, and it would be interesting to see how it pans out