What was 2023 like for India’s fintech startups? Paytm inched towards profitability but ended the year on a sour note and PhonePe bagged the majority of all startup funding and is all set to race it out with the likes of Groww, CRED and BharatPe with its super app.
But the super app story of 2023 was tempered by tightening regulations amid the funding dip and shutdowns of heralded startups such as ZestMoney.
The RBI’s directive to regulated entities (banks and NBFCs) to increase risk weights has complicated the already-murky buy-now-pay-later (BNPL) world. Several startups are still feeling the hangover of last year’s directives for prepaid payment instruments (PPIs) to rejig their lending models.
At the same time, the fintech market is set for a disruption with the entry of Jio Financial Services, which has eyes on pretty much every vertical that these players have staked their claims on.
One also cannot forget the potential merger between fintech unicorn slice and the North East Small Finance Bank, which is likely to add another dimension to the competitive landscape.
11 Trends That Will Shape Indian Fintech In 2024
Moving on, there are some big questions ahead of 2024: Will fintech startups crack the profitability puzzle after a year of rationalising costs? With the exception of Zerodha, Neogrowth, Indifi and Groww, a majority of the fintech companies in India continue to grapple with losses, even if the likes of Paytm and CRED claim to be moving towards this milestone.
While many of these startups have banked on UPI to grow their user base, they now find themselves caught in a paradox — UPI does not have the revenue upside, but it’s still the most necessary component of the fintech stack.
These factors make for a very interesting 2024. Founders and investors believe only a laser-sharp focus on profitable verticals and growth areas will deliver the results for startups. Startups have banked on VC funding to grow their user base but now when it comes to unit economics and profitability, they are looking to extract the most out of this user base.
How will these moves play out in 2024? Here are 11 trends that we believe will permeate through the fintech ecosystem in the year ahead.
Fintech Super Apps Will Foray Into Consumer Services Verticals
The convergence of financial services across unicorns and major players has been a major trend of 2023, even if their strategies are quite different.
We have taken an in-depth look at these various approaches throughout the year — whether it is Groww building on its funnel of investment tech users, BharatPe’s merchant-first approach, or CRED’s product direction targeting the cream of the Indian fintech market. Also, one cannot overlook PhonePe, which is investing in developing and growing four separate apps, including the Indus Appstore, a unique proposition in the fintech world.
In 2024, we expect startups to keep fleshing out these models as they look to wean themselves off the UPI reliance. UPI has become a crutch and a cross to bear for these players.
For instance, Mastercard CFO Sachin Mehra said in October that UPI has been a painful experience for ecosystem participants. His concerns over the sustainability of the payments stack have been echoed by others too.
Some startup founders had earlier told Inc42 that NPCI does not seem to be worried because it is actually making money from UPI. Unlike fintech startups building on UPI, NPCI is a profitable entity.
But try as they might, super apps cannot afford to cut off UPI. Instead, we will see them build new products and verticals that will be supported by the user inflow that UPI brings in. CRED’s Garage (vehicle management product) is one such product, and we can expect startups to enter into new consumer services verticals to capitalise on any UPI momentum they have.
Founders and experts believe that fintech startups have an advantage over ecommerce platforms in building and pushing super apps since they have more habituated users than say Meesho, Amazon or Flipkart. These platforms have built the tech stack around financial services and have a clearer view of how these areas are evolving.
“There is a strong possibility of 2024 turning into a year of super apps particularly for CRED, Paytm and PhonePe. Traditionally, if you look at larger financial services companies like Bajaj Finance and even banks, they have tried to cross sell with varying degrees of success. This will happen in fintech as well,” Ashish Khandelwal, founder of Kunal Shah-backed ANQ Finance, told Inc42.
Funding To Remain Slow, Except In Digital Lending, Platform Models
The funding activity overall across the startup ecosystem and fintech, in particular, may see moderate growth in 2024 compared to last year, as per analysts. A bulk of the funding will go for platforms that have inched towards profitability, but this does not ensure that sustainable models will be the future course.
In the absence of such a surety, investors will continue to back those fintech models that are growing fastest. Here again, super apps and platform plays will be preferred due to the potential to scale up revenue. And, of course, lending tech is more or less a permanent investment focus area, given that these companies require more capital and their revenue models are time-tested and enduring.
This is particularly true for digital lending startups that have established robust partnerships with banks, and those with profitable models — the likes of Indifi and Neogrowth turned profitable in FY23, for instance. Digital NBFCs are also likely to get a lot of investment interest as well as lending SaaS companies that are creating new-age risk assessment models.
Case in point: Even as overall funding plummeted in 2023, the fintech sector saw the highest funding in Q3 2023, with $442 Mn invested as per Inc42 data, and this was driven by lending tech.
Industry experts say that although funding activity may improve compared to last year, it will not reach the 2020 or 2021 levels when fintech was one of the highest-funded sectors in India.
Ashok Hariharan, CEO and cofounder of risk management platform IDfy, expects fintech companies to see good deals from March 2024 onwards. “There may be muted funding activity towards the traditional lending-based fintech firms. Similarly, I see fewer Series A and Series B rounds happening, compared to the late stages. However, we cannot expect 2024 fintech funding at par with that of 2021 levels,” he added.
High Valuation Fintech Giants, Listed Companies To Drive M&As
The past two years have seen two major acquisition bids fail, but it gives us an idea of where the market is trending. Whereas CRED’s acquisition bid for smallcase in 2022 fell through due to valuation differences, PhonePe pulled out of the ZestMoney deal this year after issues emerged in its due diligence.
The build-vs-buy debate in fintech is particularly complicated because of regulatory overhang. Companies invest millions in building up verticals and then have to scrap them due to regulatory changes, whereas acquiring smaller players allows them to not only bring in talent but also import technology that is better suited for regulatory changes.
Plus, in some cases, there is a revenue upside from acquiring that can boost the bottom line. To bolster its lending vertical, CRED also acquired lending SaaS startup CreditVidya in November 2022 and operationalised another NBFC Newtap that it had acquired in 2021. These deals enabled the company to grow its revenue by 3.5X to INR 1,484 Cr in FY23.
Similarly, BharatPe is looking to make deeper inroads into lending with its acquisition of Trillion Loans NBFC in 2023. Trillion reported a profit of INR 74 Lakh in the financial year 2021-22 (FY22) while its revenue stood at INR 7 Cr. The acquisition is a critical part of the consumer lending plans for BharatPe, which has so far relied heavily on merchant loans.
“There will be a possibility that the large fintech platforms may open their network to smaller players who have niche products,” IDfy’s Hariharan added.
Climate & EV Financing Will Emerge As New Areas Of Growth
While 2023 was a relatively slow year for climate tech development, funding is one of the major challenges that will be hurdled in 2024 as we wrote in our outlook for this sector.
Investors and VCs are waking up to the business models that will have a more immediate impact on the market, and climate financing, including EV auto loans, is one of the areas where there should be plenty of activity in 2024.
The expected higher inflow of capital in this sector is in line with the government’s push. At the recent COP28 summit, the Indian government emphasised the need for substantive enhancement in climate finance for developing countries, questioning existing claims about FDI inflows in this regard.
While those discussions are unlikely to yield immediate results for investors and VCs, climate financing is a model that is better understood than other climate tech models. However, so far the focus has been on electric mobility.
In 2023, the EV financing landscape saw some major shifts owing to the increasing adoption of EVs. Recently, B2B SaaS startup Finayo, which connects lending partners with EV retailers and OEMs raised $1.9 Mn, while EV financing startup Revfin raised $14 Mn in its Series B funding round led by Omidyar Network India.
A number of EV original equipment manufacturers are tying up with financial institutions to facilitate loans. IPO-bound Ola Electric entered into partnerships with Shriram Finance and other institutions to facilitate EV sales.
Jio Financial Services Expected To Give A Though Time To Fintech Giants
The launch of Jio Financial Services in mid-2023 has already upset the fintech applecart to some extent. However, in 2024, we will see the ‘nascent’ giant flex its muscles.
Not because Jio has shown its disruptive capabilities in India’s digital commerce as well as the infrastructure sector in the past couple of years. JFS has not only launched personal loan services for salaried and self-employed individuals but also has the Jio Payments Bank to rely on to improve its payments vertical and capitalise on UPI.
Plus, JFS has signed a JV with investment giant BlackRock for an asset management company (AMC), challenging the likes of Zerodha and Groww which are building their AMCs.
At least one founder told us, “Any industry that Reliance enters will be up for disruption given the scale and capital at which the conglomerate operates. There is a possibility for consumer durable lending for JFS since they already have a huge network of consumer durable outlets in the country. The disruption Reliance may cause could lead to a change in the business models of rival firms,”
ANQ Finance’s Khandelwal is, however, of the opinion that fintech incumbents need not worry about big players entering their arena as technology is still a massive competitive moat.
“The fintech industry is different because there needs to be a niche focus and expertise in digital innovations which large conglomerates don’t always have. For instance, Bajaj Group came up with Bajaj Finserv and it took them many years to establish themselves as a digital-first company,” he added.
But even at its inception, JFS was the world’s highest-capitalised financial services platform, according to RIL chairman Mukesh Ambani. This financial safety net is one of the key potential competitive edges for JFS in a fintech market where startups are not exactly flush with funds.
Fintech Unicorns Eyeing India Listing To Reverse Flip
If PhonePe’s redomiciling to India has inspired a wave of startups to take the same route, it has also inspired some fear given PhonePe’s huge $900 Mn tax outlay for this.
But for Indian fintech companies that are looking to list in the domestic bourses — Razorpay, Groww, Pine Labs, for example — bringing their holding companies to India is imperative, no matter the bill.
Groww has reportedly applied to the National Companies Law Tribunal (NCLT) to shift its base from the US to India. Payments major Razorpay is also exploring a similar strategy, while Singapore-based merchants’ payments platform PineLabs is also planning to redomicile, as per reports.
In 2024, the government is likely to ease some of the tax burden on the redomiciling of businesses in India, but there are no guarantees.
According to Manish Lunia, cofounder of lending tech startup FlexiLoans, companies are likely to move on this front with friendlier policy measures.
Others have pointed out that the GIFT City in Gujarat is one way that the government might woo Indian startups registered overseas. For the Indian government, redomiciling of startups is being seen as a priority given the amount of value it would retain within the Indian economy.
Already, many investors are lamenting the IP and value drain from India when it comes to enterprise tech, where most large startups are registered outside India. According to an analysis conducted by Inc42, approximately 65% (or 13) of Indian unicorns with headquarters abroad operate in the enterprise tech (SaaS) sector.
Speaking at Inc42’s MoneyX in July 2023, Dipesh Shah, executive director (development), IFSCA, said, “We have structured the GIFT IFSC to stop the trend of entrepreneurs moving abroad in search of better opportunities and simpler regulations. Whatever tax and other benefits PE investors would get (there), we are offering similar facilities here.”
UPI’s Product Spree, Global Foray To Continue
Whose side is the NPCI on? That’s what many fintech startups asked Inc42 when we were on the ground at the Global Fintech Fest in October.
That’s because while on the face of it, this was an industry event, one could not help but feel that the dominant factor was NPCI. Nevertheless, NPCI’s pet project UPI is easily the most important pillar of fintech.
The Indian government has already set its intentions clear of making UPI a global phenomenon. NPCI has leveraged the success of UPI in India to export it to geographies like Southeast Asia, the Middle East, and the UK.
This past year, UPI received upgrades and new features such as conversational payments, NFC-based offline payments, UPI Tap & Pay and credit line on UPI. Either way, UPI is not about to slow down after a year especially after the total transaction value touched INR 17.40 Lakh Cr in November.
Lending Tech Set For Another Disruption With ONDC, Credit On UPI
ONDC is eyeing the fintech space keenly. Inc42 reported the digital commerce network’s plans to tap into financial services after the disruption of ecommerce and food delivery. Lending tech startups would be glad for the automatic scale this might open up, but a lot of the specifics are still unclear.
For one, the government-backed ONDC has not even clarified the future fees for seller apps and buyer apps even for ecommerce. Will this be another UPI that companies have to support without seeing much in the way of revenue?
Speaking of UPI, Prithvi Chandrasekhar, the CEO of consumer finance at fintech unicorn InCred, expects UPI’s credit features (linking with credit cards and more) to gather further momentum in 2024. But there is also a fear that it steps on the toes of fintech startups that are lending outside of UPI.
There is some fear that the entry of UPI in the credit space will give banks more leverage over startups. And it’s no surprise that a lot of startups are looking at NBFC and bank licences (more on this later)
“There will be some consolidation and some rationalisation in the lending space. Small-ticket BNPL and SME loan startups are potential acquisition targets for larger players. Similarly, a lot of fintech companies will be on the lookout for NBFC licences to reduce costs,” IDfy’s Hariharan said.
Automation And AI/ML Engines Will Reduce Dependency On People
Amid its decision to scale down small-ticket loans, listed fintech giant Paytm sacked hundreds if not thousands of employees, citing the increasing usage of artificial intelligence-led automation.
If a company with the highest revenue in the Indian fintech space of nearly $1 Bn is laying off employees citing AI, we can expect others to follow suit without blinking.
“AI and ML have played a pivotal role in the digitisation of the financial sector, and the rise of AI is only bound to streamline operations, reduce costs and enhance efficiency in the coming years,” Rahul Agarwal, cofounder of lending and alternative finance startup FinnUp, told Inc42.
The path to profitability in the Indian fintech landscape will require strategic considerations of automation.
It’s not just Paytm, of course — a whole host of companies are looking to shed human resources in favour of AI, especially when it comes to content creation (financial education and engagement), risk assessment models, underwriting models, ancillary data processing, robo-advisories, document processing, KYC and more.
Bengaluru-based Plum launched a PolicyGPT feature to solve customer queries related to insurance claims. Revenue-based financing platform Velocity also integrated OpenAI’s ChatGPT to furnish business data to its customers. But these solutions are rudimentary, the real efficiencies will be driven by fintech-specific AI models, which will come into the picture in 2024.
Regulatory Focus On Payments Gateway, API Banking
Digital lending has been the primary focal point for the RBI and the central government in the past few years, and this is not about to change in 2024.
For instance, there was a directive in the last week of the year about digital platforms advertising fraudulent loan apps, and the crackdown is expected to bring some pause to legitimate apps too.
RBI has also taken note of the exponential growth in unsecured lending, leading to the announcement of stricter guidelines for banks in November 2023, which is likely to culminate in higher lending rates when it comes to retail loans.
A senior partner at a Bengaluru-based consulting firm said that these two regulations have almost led to the closure of many fintech businesses.
“This is especially true for the lending tech companies that did not have correct underwriting models in place. The cost of bad loans has not hurt these companies as much as the VCs and banks now staying away from them because of the new regulations. ZestMoney is a prime example of this. The fintech startup was relying on BNPL and unsecured loans to save itself. However, the RBI has come down hard on each of these sectors making it unsustainable for companies to operate,” the senior executive further said.
Banking-as-a-Service (BaaS) is an area that is emerging as a potential game changer for fintech, particularly API banking and embedded finance.
But many of the startups that offer core banking software to small finance banks and cooperative banks in India also have international operations. As such these startups will likely face some challenges from the Digital Personal Data Protection Act, which governs the role of data fiduciaries, data storage, data sharing and user consent mechanisms.
Payment gateways are also likely to come under the scanner as per investors and founders we spoke to.
In December 2022, the Reserve Bank of India imposed an embargo on payments aggregators which lasted till December this year, and in the case of Paytm Payments Bank, the RBI embargo is still applicable.
The payments bank is hoping that the restrictions will be lifted by March 2024, which would then allow it to bring new customers on board.
Regulations are a reality for the fintech ecosystem, but they are not always unwelcome by investors.
Speaking to Inc42 earlier, Sandeep Patil, head Asia and partner at QED Investors, said, “Regulations may create short-term disturbances in the market, but it is definitely attractive from a long-term perspective. This is because we get more clarity into the dos and don’ts of operating in a specific space.”
Fintech-Bank Partnerships Will Take On A New Colour
BharatPe and slice are the two fintech startups that have stood apart from the competition. This is because the duo have banking licences, unlike others.
But the startups have something else in common.
The Punjab and Maharashtra Cooperative Bank (PMC Bank) acquired in 2021 by a BharatPe-Centrum JV was on the verge of collapse. The resulting Unity Small Finance Bank is currently in the long-drawn process of clearing out the dues of the erstwhile PMC Bank.
And the North East Small Finance Bank, which is in the process of merging with slice after the latter received an in-principle approval from the RBI in October this year, is looking to sell its over INR 600 Cr of stressed loans, about one-third of its loan portfolio. This is after reporting INR 213 Cr in losses in FY23.
Even if slice gets the merger approval, there is a long way to go before the acquisition pays off for the Bengaluru-based fintech unicorn, as the merged bank has to dig itself out of a financial hole.
“The rationale behind the RBI approving these new banks becomes clear when one sees that both banks were distressed and obviously, the central bank did not want any more banks to go down,” the founder of a home finance company told Inc42.
And while there have been some murmurs about other fintechs going for a bank licence, the chances look bleak given that there are more experienced financial services institutions also vying for the same.
A senior investment advisor working with multiple fintech companies said that the startups which are well-capitalised are also keen on acquiring NBFCs or small banks to ensure their sustenance, but RBI is unlikely to be moved by market sentiment, especially given how critical banking is to the economy.
So bank partnerships are the only way forward for fintech startups in the current climate, till there is another opportunity to grab a licence, which may or may not arrive in 2024.
[Edited by Nikhil Subramaniam]
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