By Mayank Jain
Historically, as a venture fund, we have approached the sector of Software as a Service (SaaS) for banks, wealth management firms, and insurance companies in India with a degree of skepticism. This perspective has stemmed from two primary concerns. First, there was uncertainty about whether banks would be willing to invest in software beyond IT services, leading to a lower annual contract value (ACV) per customer. Second, the limited number of large banks in India restricts the potential client base for such startups. Unlike in the U.S., where numerous major banks provide a broad market, India’s banking landscape has fewer large players.
Together, these factors raised doubts about whether a bank SaaS startup could realistically achieve a $100 million annual recurring revenue (ARR) within a decade – a threshold necessary for any venture-backable business. However, in light of some companies achieving meaningful scale in recent years, we decided to reassess our views on this sector. Our findings present a complex but evolving landscape for bank SaaS in India.
Challenges facing the bank SaaS sector
The road ahead for bank SaaS is fraught with challenges. One of the most significant hurdles is the entrenched nature of existing software systems within banks. Many banks utilize custom-built software developed either in-house or by IT services firms. Over time, these systems become deeply integrated into the bank’s operations, making any transition to new software a daunting task that requires extensive change management. This inertia creates a significant barrier to entry for new software.
Additionally, the limited universe of potential clients further complicates matters. While private sector banks are generally more receptive to SaaS offerings, there are only a handful of institutions that significantly contribute to ACV, often less than 20. This concentration poses a risk for SaaS companies, as a small number of clients may account for over half of their total ARR.
Another major challenge is the need for comprehensive product validation before a bank will consider implementation. The principles of the Lean Startup approach – such as releasing a minimal viable product and iterating quickly – are difficult to apply in the banking sector. New products must clear various internal committees, including IT, compliance, and legal, which slows down the entire process. Consequently, the sales and implementation cycles are typically lengthy, often extending up to several years.
Opportunities in the market
Despite these hurdles, the landscape for bank SaaS in India is not devoid of opportunity. One notable trend is the dissatisfaction with existing legacy systems. Many bank employees express frustration with outdated technology, which can be inefficient, costly, and incompatible with modern initiatives like credit on UPI. This dissatisfaction makes a compelling case for new software solutions that can streamline operations and improve customer experiences.
Further, there has been a marked increase in technology spending by banks. Over the past decade, the percentage allocated to technology spends has doubled, from 5% to 10% of operational expenditure (OPEX). This shift is driven by regulatory mandates and competitive pressures within the banking sector. When one bank modernizes its technology, others often follow suit to maintain their competitive edge.
Additionally, the rise of fintech companies is forcing traditional banks to rethink their service offerings. As fintechs unbundle banking services – improving user experiences in areas like payments and lending – banks must adapt to meet evolving consumer expectations. This growing competitive landscape presents a prime opportunity for SaaS providers who can offer innovative, customer-centric solutions.
The way forward
While challenges persist, there are attractive aspects to the bank SaaS model. Existing players in the market have demonstrated that it is possible to achieve high ACVs through usage-based billing models. Companies using this model are successfully scaling their revenues by processing more transactions and files, aligning their earnings with customer growth.
Moreover, once a bank successfully adopts a SaaS product, the relationship tends to be highly sticky. This retention can be advantageous for vendors, as banks become more willing to purchase additional products from trusted suppliers, leading to high net revenue retention rates.
The presence of key opinion leaders within the banking sector can also provide a significant advantage. Successful case studies with influential banks can serve as powerful endorsements, making it easier for SaaS companies to attract additional clients.
Companies aiming to penetrate this market should focus on addressing immediate pain points for banks and look to innovate in segments where competition is minimal. We believe that founder archetypes with strong backgrounds in banking or IT services are well-positioned to succeed in this space.
As the sector continues to evolve, strategic investment in bank SaaS could yield substantial returns, especially for those who are willing to navigate the complexities and seize the opportunities that lie ahead.
Mayank Jain is Principal at Stellaris Venture Partners. Views expressed are personal. Reproducing this content without permission is prohibited.