Deploying $15MM in 4 diverse companies over one week is a strong signal of how particularly interesting financial technology in India is. When it comes to fintech, the first (and only) name that comes to mind is Paytm, while other sectors like e-commerce have (ersthwile?) unicorns Flipkart, Snapdeal, Shopclues.
Yet in 2018, the most well-funded sector was not e-commerce, but fintech.
More than $2Bn was deployed across 120+ deals, an average ticket size of ~$16MM per deal. If you remove the top 10 deals that accounted for $1.2Bn, you will notice that the average ticket size for the remaining $800MM deployed is ~$8MM. Just like last week, the ticket size is a signal that there is significant investor interest across multiple companies. Compare this to accommodation which saw $1.06Bn deployed, and one company OYO accounted for 95% of the amount.
Why is there so much confidence in Indian fintech, in diverse companies?
Fundamentally, economies are built on financial transactions. For an economy consisting of 1.2Bn people, with a growth rate of ~7%, financial transactions already account for $1Tn. Of this, digital transactions form around ~30% in volume, and are expected to grow rapidly. There are multiple forces making this happen, the largest being the explosion of mobile usage and data. In just one year, data consumption has gone to 5GB per month, from 1GB. Mobile phone users have grown by 200MM users in 4 years. Most tellingly, 40% of India’s population is unbanked.
The confluence of mobile, data and a lack of financial inclusion will help many users leapfrog into digital transactions.
Leapfrogging is a phenomenon that was seen in full force during China’s e-commerce boom. China went from small retail stores to giant e-commerce companies without the “intermediary” step of big-box retail (e.g. Walmart). In a similar manner, a lot of Indians who have never transacted with a bank, or had an account, will directly start with mobile transactions. This is an entirely new market and way of life, which means there are new rules and no players.
With no “competition” or incumbents, this is incredibly attractive for startups.
Driven by this leapfrog into digital transactions, innovation is happening across verticals. Consumer requirements can be segmented into 5 themes – payments, investments, planning, borrowing and insurance.
As it now becomes clear, each of the 4 companies that raised this week ties to one of these 5 themes. CreditVidya facilitates lending, MoneyOnClick provides loans, Groww helps with investing and Kruzr facilitates insurance. Planning is likely to become important after there is some financial maturity, while payments are already dominated by Paytm, signalling why the 3 themes are likely to see the most activity going forward.
All this does not mean that the road will be smooth sailing for fintech.
2017 and 18 were great years for fintech, driven by the once in a lifetime customer acquisition opportunity called demonetization. The Indian government made Digital India the core of their strategy to bring more people into the formal economy. Aadhar was revitalized, and the UPI was launched through BHIM in 2016.
All of this evolved into a popular technology moniker called the India stack, which almost became a buzzword for the fintech community.
The idea of the India stack is powerful. It allows businesses to effectively build in a paperless, presence-less ecosystem through digital identity (Aadhar, eKYC) and single interface payments (UPI). It would make onboarding customers frictionless and low cost, and allowed businesses to build for a financial ecosystem through a set of APIs.
But a 2018 Supreme Court ruling would drive a dagger through the heart of the stack.
The October ruling banned the use of Aadhar for private companies, making the digital identity block of the India stack redundant. This would increase the cost of onboarding and acquiring customers, around which a lot of businesses were built for scale.
This would significantly impact businesses that have digital identity at the core, and I would expect consumer lending (but not business lending) to be significantly hurt going forward. There are a considerable number of companies doing digital lending, and I expect consolidation in the sector. Companies like Capital Float, which I had covered, are likely to still do well driven by lending being a requirement for businesses.
On the flipside, the incredible growth in UPI transactions are going to provide a filip to payments and investing businesses. I have been extremely optimistic about retail investing, as I had postulated in my analysis of Zerodha, and I think these factors will only contribute further to investing at a retail level.
Beyond regulations and short term disruptions, I am optimistic about the fundamental requirements for financial solutions for Indian consumers. We are a growing, young and aspirational population, and financial technology will be front of centre of the development of the economy.
As a long term investor, one should put their money (quite literally) into financial technology.