India’s Fintech Market: Growth Outlook and Investment Opportunities
India’s fintech market is the world’s fastest growing – 67 percent of the more than 2,100 fintech entities in operation have been set up in the last five years. Bengaluru and Mumbai are where most fintech companies have their India headquartered – as they are the country’s technology and financial hubs. Last year, 33 new fintech investment deals worth US$647.5 million were closed in the Indian market in the quarter ending June 2020, compared to China’s US$284.9 million. India’s fintech market is now valued at US$31 billion, projected to grow to US$84 billion by 2025. The fintech transaction value size is projected to grow to US$138 billion by 2023 from US$66 billion in 2019.
Hailed as the third largest fintech ecosystem globally, India’s successes lie not only in the establishment of 2,100 new firms, the bulk of which were set up in the last five years.
Total valuation of the industry is estimated at US$50-60 billion. According to a Boston Consulting Group report released March 2021, Indian fintech companies will reach a valuation of US$150-160 billion by 2025, becoming three times more valuable in five years.
A research report by RBSA Advisors stated: “Amid COVID-19, India has seen a 60% increase in fintech investments to US$ 1467 million in H1 2020 compared to the US$ 919 million for the same period last year.”
India’s fintech industry remained attractive despite the pandemic, with the emergence of three new unicorns and five new ‘soonicorns’ (US$500 million+ valuation) since January 2020.
Paytm, a fintech company, is India’s highest valued unicorn at US$ 16 billion and out of 21 unicorns in the country – about one-third are fintech companies.
The Indian fintech ecosystem is made up of various sub-segments: payments, lending, wealth technology or WealthTech, insurance technology or InsureTech, regulation technology or RegTech.
Driving their growth are India’s numerous start-ups that offer innovative technologies to reduce the asymmetry of information between financial institutions and investors. India’s rapid adoption of digital/online payments, since the demonetisation move in late 2016, has also heavily contributed to the growth of the country’s fintech market.
In 2020, fintech software-as-a-service (SaaS) and InsurTech entities saw total investments of US$145 million and US$215 million, respectively, representing a 4-5x growth over their 2015 funding flow.
Out of India’s 50+ fintech entities with more than US$100 million valuation, there are four wealth and broking fintech enterprises, five InsurTechs, and eight SaaS FinTechs.
Since 2016, the fintech industry has seen cumulative investments into domestic fintech entities worth more than US$10 billion.
Fintech clusters in India
- Start-up India: Flagship government initiative to mobilize and strengthen the country’s start-up ecosystem.
- Aadhaar: A biometric identification possessed by persons living and working in India, which can be used as verification during digital payments.
- Jan Dhan Aadhaar: A government plan to link Jan Dhan accounts with the Aadhaar and mobile numbers in order to be able to directly transfer subsidies to needful citizens.
- India Stack: An ambitious software plan that will use application programming interface (API) in connecting the government and start-ups under a unique digital infrastructure to achieve paperless and cashless delivery of financial services.
- Blockchain market: Expected to grow at a compound annual growth rate (CAGR) of 37 percent till 2024.
Growth trends in the fintech industry
As other sectors reported losses in 2020, growth in fintech continued, attributed to the increased requirement of accessing financial services digitally due to the government-imposed restriction on physical movement and by extension, a push towards less physical commodity transactions through cash. In 2021, the consumer demand for digital-based services will thrive, especially as outbreaks of the pandemic continue to get forecast.
Major trends in fintech include:
- Digital banking
The service platform ‘banking as a service’ (BaaS) connects fintech enablers to banks so that the latter can offer financial services to its customers through a network of fintech developers.
- Open banking
Open banking refers to the practice of banks electronically sharing financial information to third parties by the use of APIs, in an effort to improve services and their security. This process is done with the knowledge and approval of customers. In 2020, the open banking ecosystem began to incorporate non-banking financial companies as well. With the adoption of open banking by banks, such as Kotak Bank and Yes Bank, and increase in the demand for digital financial services, this trend is expected to be popular.
- Neo banking
Neo banks traditionally refer to digital banks that have no physical presence, offering digital bank-like services. There are three known types of neo banks – digital only banks, over the top neo banks, and digital-only brands. Digital only banks require a fully operational banking license, over the top neo banks are standalone digital platforms that offer a variety of products, in partnership with banks and fintech companies, and digital-only brands are banks that have been created by traditional banks for the purpose of focusing on India’s young millennials.
India’s central bank, the Reserve Bank of India (RBI), does not allow digital only banks, but has allowed companies to test any innovations that they may have regarding it.
India’s predominant neo banks include YONO (by State Bank of India), Digibank (by DBS Bank), and Kotak 811 (by Kotak Bank).
While ‘fintech enablers’ provide software solutions to incumbents, ‘distributors’ are fintech firms that dispense specific financial products while ‘full carries’ both develop and distribute their own financial products.
In the InsurTech segment, India has over 100+ players across ‘aggregators (distributors)’ (Policybazaar, PolicyBachat, PolicyBoss, Policy Planner, PlanCover, Coverfox etc.); ‘online first insurance’ (Acko, Digit); ‘APIs’ (Stickynotes, Finmantra, Riskcovry etc.); claim management (Vitraya, VahanCheck, SureClaim etc.) and internet of things (IOT) (CariQ, Trak N tell etc.). The InsurTech aggregators in particular are enhancing customer digital experience by providing a single platform for the comparison of various products based on cost, features, and needs.
Under the WealthTech space, India has 480+ start-ups segmented in ‘personal financial management’ (Paisabazar, Tarraki, Fintoo, etc.); ‘investment platforms’ (Zerodha, Upwardly, FundsIndia etc); ‘robo-advisors’ (Goalwise, Scripbox, Robocapital etc.); and others (like Screener, Streak, Capitalmind etc.). This industry is also poised for phenomenal growth owing to both rise in high-net income groups looking for specialized advice and on other high middle-income groups looking for low-cost but effective advisory to manage their funds.
- Autonomous finance
Autonomous finance is a method of automating financial decisions, such as paying utility bills, cable subscriptions, and insurance, with the help of new age technologies like artificial intelligence (AI) and machine learning. It is a new fintech solution, expected to be adopted in 2021.
Key fintech players in 2021
- Cashfree: The company provides businesses with payment processing solutions and gateways and plans to process transactions worth US$30 billion by the end of 2021.
- CoinDCX: This company is a cryptocurrency exchange platform that allows users to buy, sell, and trade digital currencies via an encrypted network. It recently launched the app CoinDCX Go, which plans to take trading in cryptocurrencies to a higher level.
- Money Tap: The company deals in personal credit, having an app with a built-in AI feature that assesses credit applications within minutes. It has also partnered with other multiple fintech players for the purpose of enabling easy repayment options for customers on other platforms, such as PhonePe.
- Niyo: The company is a digital bank, that has a zero-balance account named NiYO Payroll Card, offering facilities, such as salary advance, and free accidental death insurance. It will expand its platform, Niyo Money in 2021.
- Yap: This is an API infrastructure company, that enables businesses in rolling out their payment products. It has already partnered with 15 banks, such as Yes Bank and DCB Bank to roll out their services.
Goal of financial inclusion underlines Indian market viability
In India, one-eighth of the population still remains unbanked, which is why holistic financial inclusion has been a key factor driving government support for fintech innovation.
Over the years, marquee government initiatives like the unified payments interface (UPI), has aided in centralizing the country’s digital payment landscape. However, obstacles to achieve financial inclusion remain due to the lack of verifiable credit history, lack of documentation, and the unstable income of the underbanked population (such as, self-employed micro-entrepreneurs and blue/grey-collar workers).
Fintech innovations are thus urgently needed and may provide hyperlocal solutions. With the aid of internet penetration and smartphones, it will be possible to collate data on the population and use it to determine the financial status of each household, without having to rely on multiple pieces of tangible documentation.
New age fintech companies and start-ups have only just begun steering this financial movement.
India Briefing is produced by Dezan Shira & Associates. The firm assists foreign investors throughout Asia from offices across the world, including in Delhi and Mumbai. Readers may write to firstname.lastname@example.org for more support on doing business in in India.
We also maintain offices or have alliance partners assisting foreign investors in Indonesia, Singapore, Vietnam, Philippines, Malaysia, Thailand, Italy, Germany, and the United States, in addition to practices in Bangladesh and Russia.
- Previous Article Investieren in Indiens Online-Gaming-Industrie: Marktprofil, Wachstumstreiber
- Next Article New Tax E-Filing Deadlines in India: Check List to See if it Applies to You