India-China Fintech Summit 2019: India’s Fintech landscape and investor worries

Momentum Works’ strategic partner – The Passage, a startup channelising the tech-information flow between China and India – jointly hosted the first “India-China Fintech Summit” in Bengaluru recently.

Momentum Works was one of the investment partners invited to attend.

The summit had a range of speakers across the breadth of the fintech landscape from India and China. Many tech heavyweight companies and investors were there, including RBL Bank, ICBC, Whatsapp India, Alibaba Cloud, MobiKwik, 9F, and Flipkart.

It was a platform for the fintech communities of India and China to interact, connect and collaborate.

Chinese players see India as a huge untapped opportunity- often said to be at the same stage China was 7-8 years ago. Both the markets have some obvious, interesting similarities and stark differences, and there were vibrant discussions on how businesses and investors can use their knowledge gain in China’s digital boom to navigate through India’s largely untapped market.

I. Fintech landscape in india

As with most emerging markets, all participants were of the opinion that fintech in India is still in its early stages.

In 2018, fintech was the most invested in sector in India (it was e-commerce in 2017 due to Flipkart’s mega round) with close to $2 billion being injected in total across 65+ deals. However, it was a drop from the previous year’s $2.7 billion signalling that investors are not ramping up just as yet. More on why they are cautious later.

Paytm received the largest dollars with $300M capital injection by Warren Buffet’s Berkshire Hathaway. Other notable deals include PolicyBazaar’s $238 million funding from Softbank and Pine Labs funding of $125 by Temasek and PayPal.

Industry experts at the summit shared that less than 10% of fintech companies make profit in India. The opinion is that they need to leverage more on technology to make data driven businesses and function effectively.

Similar to other markets, the fintech landscape in India is led by marketplace lending (29%) followed closely by payments and remittances (27%).

Lending

In India, fintech started with lending, not payments. ApnaLoan was the first lending startup founded in 2000. Currently, there are close to 13-14 lending types in total. However, at present both consumer and enterprise lending are not growing at a very large scale.

To understand why, here are three basic pillars that govern the fintech lending space-

1. Availability of source capital. The barriers here are high and players need to rely on banks and big NBFCs (Non Banking Financial Company).
2. Data for credit scoring. Bigger players like Flipkart, Paytm etc have large pool of data but they haven’t opened it up to all. Availability of data is difficult for small players and can get quite expensive for them. Although India does have a Credit Information Bureau, ratings are not enough for the large population. As a business you need to have your own risk models.
3. Regulations. Regulators in India are nimble. The data protection bill of 2018 and strong privacy laws are a concern for foreign players. India often has elaborate debates on privacy and the need for individuals to have control of their own data.

Payments

When it comes to payments, inclusiveness is the primary demand. The more you include, the more you serve.

India has a very successful Unified Payments Interface (UPI) that facilitates interbanking transactions which cuts costs due to infrastructure sharing. Here were some of the discussion points around UPI-

• It has grown by leaps and bounds over the years and is projected to hit Rs. 5 trillion in 2019
• It has made payments accessible by cutting across different tiers of the Indian market
• It also allows fintech to plug into banks easily. Earlier one had to depend on payment gateways or bilateral links with banks
• UPI growth is directly proportional to smartphone growth. With the user base expected to cross 700 Million By 2020, payment penetration too will grow
• Drawback: UPI needs to prove its mettle on the merchant side

However, payments on its own is not money-making. Thanks to UPI, the unit cost is almost zero which is great, but the revenue too is almost zero which makes profitability difficult.

Only those with extraordinarily large instalment base can succeed. For the rest, payments is just an acquisition channel. You need to have services on top such as loans, insurance, stocks, etc.

One interesting observation about payments in India is that since a lot of the big players such as Paytm, PhonePe, Google Pay, Whatsapp Pay are already doing B2C, a lot of the smaller, new entrants are working for some aspect of B2B by enabling payments for businesses such as newspaper, hospitals, kirana shops (neighbourhood mom-n-pops), etc.

II. Investor perspectives – Caution is the word.

From the investors’ perspective, it’s a period of testing the pool first with your feet before making a full dive. Their main concerns:  

1. 1. No barrier for entry. India has more than 600 startups in the fintech space alone according to India’s Make in India initiative. The fintech ecosystem especially gained momentum after the demonetisation in 2016 and this is only on the rise. However, a lack of differentiation between various products makes it difficult to tease apart the noise in the market.
   2. Fintech is going the e-commerce way. It’s easy to slip into the trap of vanity, surface-level metrics early on, just like e-commerce companies in India did (and self-admittedly regretted later). Many lending companies boast of loan amounts disbursed and payment companies report huge transaction volumes conducted. But what do they actually translate to? Two companies lending out the same amount may end up performing different- how is the credit rating model? How are the NPLs? Investors need right indicators.
   3. Regulations are tight and will only tighten further. While China focussed on innovation first, grew dramatically and then retro-fitted regulations, India is working the other way around. Regulators are more focussed on consumer protection and handholding fintech companies through sandbox regulatory methods. This compromises scale.  
   4. Payments on its own is not profitable. Only those with extraordinarily large installment base can succeed in pure payments. You need to have other services on top of it. In China, WeChat pay was built over a content platform. Alipay was built after Alibaba’s ecommerce. However, in India this prospect looks tricky. No platform is profitable, the scale doesn’t match China, and regulations are discouraging. Investors are of the opinion that building fintech over a company that is already bleeding (e.g. e-commerce platforms) is dangerous.
   5. Chinese investors such as Morningside VC are not jumping into fintech right away and are playing it cautious because for a foreign company to access capital and obtain an NBFC (Non Banking Financial Company) license for lending is difficult. However, they announced that they will have representatives basing themselves permanently in Bengaluru, which shows that they’ll be watching the space closely on the ground.
   6. Keeping interests and ambitions continually aligned. Investors also mentioned that they need to work closely with entrepreneurs and be cautious of changing ambitions. For instance, in the lending space an entrepreneur may start off with student loans, but may want to switch to another soon.

IV. Fintech in Flipkart – a case study

Mr. Ravi Garikipati from Flipkart’s fintech department shared his experience on how an ecommerce company in India is venturing into consumer lending space.

Flipkart themselves observed that 60% of the shopping customers don’t have access to credit. This means that a large number of them can’t engage in big purchases- curtailing Flipkart’s growth.

Flipkart has already partnered with many banks, NBFCs, and Bajaj Finance to offer products with monthly instalment plans. However, the gap is still significant. This spells huge opportunity and Flipkart wants to underwrite for these customers.

Hence, they are in the midst of the application process of an NBFC (non-banking financial corporation) license which will allow them to lend to customers (and sellers!) directly without a banking license.

Their advantage is that they are able to assess customer risk with the large amount of data at their disposal. With multiple-touch points engaging the customer pre and post-journey, they have about 200 data points as part of their risk assessment model. Data such as how much time a customer spends on the app, what brands do they look at, time of purchase, are they brand conscious? are they single or married? And so on.

Flipkart made an interesting finding – folks with higher credit bureau scoring often have a poor payback record. Smaller companies that don’t have huge data to work with and a strong credit risk model of their own often rely on bureau scores.

So how are they performing? They mention that their instalment plan has around 800,000 users and a 60% repeat purchase rate. They claim that their NPL rate is 2%. Of course it wasn’t this low from the start. They got better with every data gathered.  

Overall, the fintech industry in India is evolving but at a regulated, controlled pace. This is something we listed in Momentum Works’ predictions for 2019 – India as well regarding  specifically WhatsApp Pay. India’s financial regulation is very, very smart and cannot be underestimated.

The question of profitability vs investment remains. Should fintech follow the ecommerce ideology? That is, don’t worry about profit now, just focus on scale. If you continue to scale you will eventually make profit. Or given the high risks involved in fintech, should you worry about unit economics, do people want to see some profit before scale?

MW Emerging Markets Tech Investment Index – Fintech in India

Momentum Works has released the Emerging Markets Tech Investment Index for various emerging markets. As part of this series, we came up with our projections for opportunities and risks in Fintech in India. We believe that Fintech is at the early stage and the image below shows the projected time between the different stages and the valuations you can expect at each stage:

Our index also shows that the risk is high which ties in with the concerns expressed by investors at the summit especially keeping in mind availability of source capital as well as stringent regulations.

If you are interested, please write to us at [email protected] with your name + email + company + position to get more details about the report.