The year 2022 tormented the Indian fintech space with a rock slide of setbacks such as crashing valuations, the cold harsh winds of the funding winter, funding free-falling to worse than pre-Covid-19 levels, and young enterprises collapsing at a catastrophic rate.
Data from research firm Tracxn shows that funding in the Indian fintech ecosystem almost halved to roughly $5.7 billion in 2022 from $10.3 billion in 2021.
And then there were the regulatory calls for tougher policing in order to better protect users. The Reserve Bank of India (RBI) prohibiting non-bank fintech businesses from loading their prepaid instruments using credit lines impacted the business model of fintech start-ups Slice and Uni. Also, the significant asset price falls of the crypto industry have contributed to the sector’s woes.
Despite the challenges on the horizon, fintech industry stakeholders seemingly share a sense of optimism about where the fintech industry will go in 2023.
Moreover, the domestic fintech sector is poised to reach $1 trillion in AUM and $200 billion in revenue by 2030, according to an EY report.
This puts India in a unique position to lead a renewed spirit of innovation in fintech.
Prabhtej Singh Bhatia, Co-Founder of Falcon, an embedded finance startup, is confident that India will lead the charge in the development of the next generation of fintech infrastructure. “With our talented workforce, expertise, and cost-effective operations, we have the potential to become a global powerhouse in this industry,” he says.
Also, India has been a success story when it comes to fintech adoption and usage. “With adoption rates close to 90% compared to 60% globally, India is far ahead. With innovation, more use-cases, government and regulatory support, combined with 5G and maturing infrastructure, fintech in India will continue to grow,” says Vinod Keni, managing partner, Indian Angel Network, an early-stage venture capital firm.
Also, several of the fintechs that have had success in India may find their models being replicated in other emerging markets. “With higher adoption rates and newer B2B fintech startups scaling up, revenues and business models will demonstrate growth and maturity,” he adds.
Experts share that payments could remain the most-funded sector within fintech, especially startups focused on B2B payments. While emerging markets present another growth opportunity for fintech startups as there’s a lot of underserved communities across the country in terms of access to even the most basic financial products. They also expect consolidation as funding dries up, and fewer companies can scale up.
As 2022 was the year of the funding winter, which is expected to continue for another 6-12 months, what will 2023 bring? “There is definitely slow progress on the equity side, but the measurement matrix has changed, says Pravash Dash – Managing Director & CEO, Arthan Finance, a micro, small and medium enterprise-focused fintech platform.
Dash adds that investors are looking at differentiated, sustainable and profitable business models. “Many of the fintechs, particularly the ones in the lending business, have incredible growth potential and 2023 will see many consolidations in the fintech space, which have already started happening.”
And the likes of Keni believe that this is not the funding winter; this is the normal as the pace of investment over the past three years was an aberration. “Good fintechs with innovative products/offerings, sound unit economics, especially in segments that are under-penetrated such as insurtech, regtech, assurance, accounting, B2B will continue to attract VC interest,” he says, adding that regulatory issues may make investors a bit more cautious, but the investments and interest in fintech will continue to remain strong.
While the funding landscape may be challenging in the short term, Bhatia states that this period will give rise to enduring, game-changing fintech companies. “Keep an eye out for the hidden gems that will emerge from these trying times and pave the way for a more mature fintech ecosystem in India,” he adds.
Experts agree that fintechs with proven business models, innovative products and offerings, strong teams with ability to execute and scale will continue to attract capital, albeit at lower valuations than before.
On investments going into risk and compliance departments due to RBI regulations, Sugandh Saxena, CEO at Fintech Association for Consumer Empowerment (FACE) thinks that regulatory developments have rightly brought risk and compliance to the fore, with fintech deploying greater focus and resources. “More than investments, there is a paradigm shift to weave together risk and compliance thinking and culture across functions and processes, which will hold fintechs in good stead,” she observes.
And fintechs will continue to empower consumers to better manage their finances. “Credit is an important pillar for customers to manage their finances– tapping into opportunities or paying for planned expenses or unexpected conditions,” states Saxena.
Experts opine that the power to change the landscape of fintech this year lies with Gen Z.
As the last couple of years have been a rollercoaster ride for Gen Z , having gone through a pandemic, lockdowns, a cost-of-living crisis and now a looming recession, to say the least, there is belief that they could change the scope of fintech technology.
“Innovation in technology has always been inclined in favour of the newer generation presenting ways to improve their way of living. The same goes for fintech as well – access to credit is now easier with new ways to check credit worthiness and assessing risk,” says Satyam Kumar – Member at FACE and CEO & Co-Founder at LoanTap, a digital lending platform.
A report by credit information company TransUnion CIBIL found that there has been significant improvement in credit awareness among Indian citizens, especially Gen Z consumers and those living in the non-metro areas.
It’s of little surprise that more Gen Zs are now coming under the umbrella of a profile that the fintech players want to serve.
“Technologies like the Account Aggregator framework and AI are playing a big role in making credit more seamlessly accessible at a higher credence. “The tech-savvy Gen Z could prove to be the catalyst for the next wave of the fintech industry’s growth.”