Indian Fintech In 2020: Not Quite Pandemic-Resistant But Pandemic Compliant

Tech kept the world moving in 2020. Amid a pandemic and a lockdown, tech became a bigger enabler for most industries, including financial services.Still, fintech, an overarching term covering segments ranging from payments, digital lending, insurance and cryptocurrencies among others, did not emerge unscathed from the Covid-19 crisis. Value and volume of funding for Indian fintech firms dropped in 2020 but the large got larger as money chased fewer, more established businesses.Venture capital funding flows into Indian fintech startups halved to $1.4 billion in 2020, compared to $2.8 billion in the previous year, according to data from Venture Intelligence that tracks deals. The number of companies that raised funding this year also dropped to 91 from 127 a year ago.At these levels, the value of deals was the lowest since 2016.This, according to Fali Hodiwalla, partner - financial services and consulting at advisory firm EY, was mainly because venture capital investors were being more discerning and leaning towards fintech startups that have a clear path to profitability, especially as they looked to conserve capital during the ongoing pandemic..The Big Deals Of 2020The companies that benefited this year benefited big. A few saw large jumps in valuations as they raised fresh funds.At a post-money valuation of $5.5 billion, digital payment company PhonePe raised the largest funding round this year as it got nearly $700 million funding from its parent Walmart Inc and some existing investors, the company said in its Dec. 3 statement. PhonePe currently commands a near 40% share of payments via the Unified Payments Interface.Pine Labs, which provides point-of-sale machines among other infrastructure, was valued at over $2 billion in December. The company raised an undisclosed amount of funding in December from the US-based hedge fund Lone Pine Capital.Besides PhonePe and Pine Labs, online payment gateway provider RazorPay raised $100 million in its series D financing round at a $1 billion valuation, becoming the latest entrant to the unicorn startup club.PolicyBazaar, an online insurance aggregator, raised $95 million from the Softbank in July at over $1 billion valuation, according to data from Venture Intelligence..Digital Payments Gets Maximum FundingAcross different fintech segments, digital payments got the maximum funding for the sixth consecutive year, as 21 companies raised $547 million in venture capital, data showed.However, going forward investors will focus on profitability and the average revenue per user generated by the payment startups, said Ashish Fafadia, partner at venture capital firm Blume Ventures, which has invested in fintech startups such as insurtech platform TurtleMint, business-to-business (B2B) payment solutions startup Instamojo and cryptocurrency exchange Unocoin, among others.“I do see that digital payment companies, if they get further capital, it will be more on how they are able to use their existing network and customer base to monetise their platforms further, in terms of higher average revenue per user by offering other services,” he said..Insurtech And Lending Startups In FocusBeyond digital payments, the other sub-sectors that also gained traction during the year, included Insurtech and lending. Both consumer and B2B firms raised funds.While 14 insurtech startups got $283 million in funding, consumer lending came a close third with 15 startups securing $220 million. This was followed by B2B lending that saw 13 startups attract $146 million in funding, according to Venture Intelligence.“The other side of insurance that has largely been untapped includes providing insurance offerings on the B2B side, and that is also expected to gain traction,” said Fafadia.B2B Fintech Firms Play Catch UpEven as business-to-consumer (B2C) models, which got nearly 56% of the total funding into fintech startups in 2020, got more investments than B2B, the trend is likely to reverse in the future, said Vivek Belgavi, partner and fintech leader at PwC India.“As MSMEs (micro, small and medium enterprises) in India, which were earlier considered to be offline stores, move towards becoming more digital, fintech companies that facilitate this shift are gaining investor attention. With this shift, startups that can provide value-added services, software products and e-commerce pathways to small and medium businesses, will also be able to secure more investments in the future,” Belgavi said.Also, further disintermediation, according to Fafadia, will not be easy for fintech companies, and startups that are able to facilitate business for traditional banks, NBFCs and insurance companies will gain investor interest.“It will definitely not be easy to disintermediate further in financial services, as most of it has already been explored through digital models around insurance, payments and lending. So, B2B2C (business-to-business-to consumer) will be the flavour, is my sense,” he said..Cryptocurrency Startups Get Investor InterestA trickle of Investments returned to cryptocurrency startups as India remained in regulatory vacuum. Three startups secured $11 million this year, compared to $5 million last year.On Tuesday, Indian cryptocurrency exchange CoinDCX, in a statement said it has raised $13.9 million in its series B financing round led by US-based blockchain software company Block.one..2021: One-Stop-Shops vs. SpecialisationIn the near term, large fintech companies are expected to evolve into ‘one-stop-shop’ platforms for financial services, said Hodiwalla.“Going forward, valuations for fintechs are expected to be ascribed more to business models which converge different cohorts such as lending, payments and wealth management into a single platform. It is expected that investor interest would center around these converged models rather than standalone verticals,” he said.The business models for large payment companies, according to Belgavi, will be focused on neo-banking and fin-commerce, which involves providing financial and non-financial services products in one platform.“As larger players turn towards becoming one-stop-shops for the financial needs of their customers, their valuations would be reflective of sustainability and profitability of the business model. Further, we will also see more specialised fintech companies, especially on the wealth management and lending side, coming up to cater to specific consumer needs, which will also gain traction from investors,” he said.Fafadia differs. According to him venture capital investments will become more focused on specialised companies. “Over the next few years investors would realise that when it comes to fintech, it is not going to be the ‘winner takes it all’ approach and there will be more specialisation and verticalization,” he said.The focus, he said, will be more on verticals like insurance and credit, and investors will focus on companies that cater to specific needs of customers within these sub-segments. “There will be different use cases that will emerge within credit and there will be dedicated fintech startups catering to those, but a large successful company taking care of everything will not be very attractive for investors.”

Indian Fintech In 2020: Not Quite Pandemic-Resistant But Pandemic Compliant

VC funding into fintech startups slowed in 2020 but a few firms still raised big money at tall valuations.

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