Fintech sector: At the tipping point?

   2023-02-19 17:02

The past few years have been nothing less than dramatic for the fintech sector in India. Its growth accelerated during the pandemic, with the number crossing 7,500 fintech startups. During 2014 to mid-2022, the sector received more than $30 billion in funding.

The main forces driving the acceleration of this sector have been product innovations in customer acquisition, underwriting, pricing and collections, and customer services. Technology has gone from being an enabler to a business driver for this sector.

The rapid growth of fintechs can also be attributed to favourable macroeconomic and demographic factors, including rising middle class with higher disposable incomes to buy, borrow, save and invest more; increasing mobile access and digital adoption; abundant financial services and technology talent in the country; availability of equity and debt capital; and above all, government initiatives and regulatory efforts to create a conducive environment.

It is estimated that Indian fintechs represent about $100 billion of enterprise value (EV), compared to an overall EV of financial services (FS) of $1.4 trillion, in 2021. The Indian fintech sector is poised to capture nearly $350 billion in EV by FY26, contributing more than 15% of FS EV. Similar is the story of insuretechs and wealthtechs. The fintech ecosystem in India, in short, has evolved and is poised for a giant leap.

But challenges remain. That said, 2022 was not a kind year for the sector. It faced a series of adverse events. Central banks worldwide started withdrawing liquidity released during the pandemic to tame inflation. This resulted in fears of a recession in developed countries, prompting investors to hold on to equity investments. As a consequence, funding to the fintech sector also dipped. After a good run over the past couple of years, the fintech sector in India witnessed a 41% drop in VC funding in 2022.

Regulatory action played its own role in slowing down the sector. The Reserve Bank of India action was not a bolt from the blue. It re-iterated aspects of the 2015 master circular on outsourcing and emphasized data privacy as another chief concern. As fintech had an unbridled acceleration till 2021, the regulator put in some bumps and guardrails to control the speed and avoid potential mishaps. The RBI action directed innovation constructively within the current set-up. Nevertheless, sudden action from the regulator was a shocker for all involved in the fintech sector – founders, investors, and customers alike.

Yet, it is also evident that the regulator appreciates financial innovation and founders’ efforts in the financial sector. RBI governor Shaktikanta Das said last October, “Regulator will continue to adopt a participative approach for facilitating innovation in the financial sector as fintechs play a transformative role in the financial system through digital innovations offering better delivery of financial services.” He also said that sustainable development and ensuring a resilient financial system form the fulcrum for RBI’s policy architecture.

For the sector to achieve its promise, fintechs must build bridges with the regulator. Fintechs can contribute to relevant and important areas, such as working on credit delivery in partnership with traditional lenders, especially in rural and semi-urban areas; making credit available in a timely and cost-effective manner, especially for agriculture and allied activities and MSMEs; by participating in regulatory initiatives like Regulatory Sandbox.

But most importantly, fintechs can reconcile by playing the game by the rules. The commonality of intent between fintechs and the regulator —customer centricity and transparency—provides a durable foundation.

Moreover, abiding by regulations would give implicit credibility to the sector. This, in turn, would give confidence to investors as well as consumers in innovative financial solutions.

Regulators also need to adopt a more collaborative approach as it would create the necessary environment for innovation to flourish. They will need to balance their concern for customer protection, data security and privacy with the need to provide a large market and supportive policies for the growth of this sector.

In short, fintech as a sector is at a tipping point. It undoubtedly has a bright future, given the positive encouragement from the regulatory authorities in the past. By consulting and collaborating, the sector can easily achieve its promise.

Sandeep Patil is Partner & Head, Asia, QED Investors, a fintech focused global fund.

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