$1-trillion Valley Of Good

The year was 1991, India found itself teetering on the edge of a perilous economic precipice. Yet, from this crisis emerged the New Economic Policy. Led by then Finance Minister Manmohan Singh, India embraced the pillars of liberalisation, privatisation, and globalisation. Industrial licensing and trade restrictions were abolished, empowering industries to diversify and flourish. Public sector undertakings were privatised, freeing them from political interference. Tariffs were reduced, inviting global trade and investment. The reforms unleashed unprecedented growth, with sectors like aviation and telecom thriving. The License Raj crumbled, giving birth to a vibrant business ecosystem. 

As the echoes of the transformative reforms of 1991 reverberated through the years, a new wave of revolution now sweeps across India, heralding a promise to democratise finance for every citizen. At the forefront of this movement are the dynamic fintech companies, leading the charge towards a more inclusive and accessible financial landscape in 2023 and beyond.

Global Scope, India Focus
A recent report by BCG and QED Investors projects remarkable growth for the global fintech industry, anticipating a six-fold increase in revenues from USD 245 billion to USD 1.5 trillion by 2030. The sector is expected to capture up to 7 per cent of global financial services revenue, with banking fintechs comprising a quarter of all banking valuations worldwide. 

The Asia-Pacific region is poised to surpass the US and become the leading fintech market, driven by a projected 27 per cent compound annual growth rate (CAGR) and underpenetrated financial services revenue pools worth nearly USD 4 trillion. Countries like China, India, and Indonesia, with their robust fintech companies, underbanked populations, and tech-savvy demographics, will be key contributors to this growth. 

India, in particular, is emerging as a fintech hub, buoyed by supportive regulations from the Reserve Bank of India (RBI) and pioneering startups like Paytm, Zerodha and Cred. According to VC firm Bessemer Venture Partners, the India’s domestic credit will double and become a USD 5.5 trillion market, mutual fund assets under management (AUM) will grow 5x from USD 400 billion to USD 2 trillion and insurance will grow from USD 100 billion to USD 500 billion by 2030. This translates into opportunities aplenty for new and seasoned fintech players alike. 

“The entire world is looking to what India is doing and what India is up to, and that's where the entire fintech ecosystem has become extremely interesting now, right from the payments (since 2015), lending tech and so much more. We started off the whole revolution,” says Deena Jacob, Co-founder and CFO at Open.

The Indian fintech story would be incomplete without a mention of UPI. Launched in 2016, UPI's success cannot be overstated. Its user-friendly interface, seamless integration with various banks, and its ability to facilitate instant, secure, and convenient transactions have made it a central component of payments in the country. The Indian government's push for a digital economy and the growing acceptance of mobile banking and e-wallets have also played a significant role in UPI's widespread adoption. In fact, PwC projects UPI to surpass 1 billion transactions per day by FY27.

UPI’s innovation has been lauded far and wide, with some countries considering adopting the UPI system and some working on emulating it. In May, Japanese Digital Minister Kono Taro said that Japan was seriously considering joining India’s UPI system. Meanwhile, we already know that through a collaboration with Singapore's PayNow, UPI enables instantaneous transfers between India and Singapore. This development has inspired other countries to work towards replicating this system, such as the United States' FedNow, which, although similar, offers slightly less advanced capabilities.

I believe UPI has started going towards monetization.” – Vijay Shekhar Sharma, Founder & CEO, Paytm

In May, Paytm CEO Vijay Shekhar Sharma said that he saw the potential for UPI to generate revenue as it expands its use to include different payment instruments. "I believe UPI has started going towards monetisation. Different payment instruments will come on UPI. (The prepaid wallet instrument) has an interesting MDR (merchant discount rate) structure. If our Paytm wallet is being used on somebody else’s QR, the merchant-side QR will have to pay us," Sharma said during Paytm Q4 FY 2023 earnings call.

But monetisation of UPI remains uncertain as industry leaders hold conflicting opinions. While some argue against its monetisation, many believe otherwise. Meanwhile, the government has been clear in its position about UPI being a digital public good, which must not be monetised.

FinTech Funding a Concern?
The fintech industry in India has experienced exponential growth in recent years, positioning itself as a major player in the global landscape. But funding for fintech startups in India experienced a significant decline (Fintech India Report - 2022 by Tracxn). The funding amount decreased 47 per cent to reach USD 5.65 billion, while the number of funding rounds decreased 29 per cent to 390, as compared to the previous year. There were only 13 funding rounds valued at USD 100 million or more in 2022, marking a substantial decline of 50 per cent from the 26 rounds recorded in 2021. In comparison, global fintech funding reached USD 75.2 billion in 2022, marking a 46 per cent drop from 2021 (as per CB Insights). 

The fintech sector has encountered a notable setback in H1 CY23 as well, with a 50 per cent decline in funding value compared to H2 CY22, according to a PwC report. However, despite the decrease in overall funding, early-stage funding rounds were a driving force, accounting for 62 per cent of deals in terms of deal count. These rounds had an average ticket size of USD 5 million, showcasing investor interest in nurturing emerging fintech startups. 

Notably, three key players, namely InsuranceDekho, KreditBee, and Mintifi, collectively secured 64 per cent of the funding, raising over USD 100 million each in H1 CY23. Although facing funding challenges, the fintech sector remained an active player in M&A transactions alongside SaaS and e-commerce and D2C sectors.

India a Fintech Haven
Despite the decline in funding, the Indian startup ecosystem has remained resilient, as indicated by the number of ventures receiving private capital, particularly in the early-stage ecosystem. This demonstrates the industry's strength and potential for a rebound. India currently ranks third in the world in terms of the number of fintech firms, with an impressive 9,646 companies, following closely behind the United States and the United Kingdom.

Looking ahead, the IIFL Fintech Report predicts that by 2030, the industry will achieve remarkable milestones, including reaching USD 1 trillion in throughput and generating USD 200 billion in revenue. These projections highlight the immense growth potential and opportunities that lie ahead for both established players and emerging startups in the Indian fintech ecosystem.

Sector-wise growth projections also paint a positive picture for the Indian fintech industry. The digital lending sector is expected to experience explosive growth, with its market size projected to increase from USD 38.2 billion in 2021 to nearly USD 515 billion by 2030. Similarly, wealth-tech companies are anticipated to grow from USD 20 billion in 2021 to USD 237.4 billion by 2030, while the insurtech sector is expected to be worth around USD 88 billion. The neo-banking sector is projected to reach USD 215 billion by 2030, showcasing the potential for digital banking alternatives to reshape traditional banking services.

Prime Minister Narendra Modi’s recent US visit also put the spotlight on India’s fintech potential as Google announced its plans to set up a global fintech operations centre at Gujarat International Finance Tec-City (GIFT) in Gandhinagar. This move could have profound implications for the country's fintech sector, by hosting Google’s unparalleled expertise and resources, fostering collaboration and driving innovation. The partnership between Google and local players could result in the development of cutting-edge solutions tailored to the unique needs of the Indian market, benefiting consumers and businesses alike.

We are announcing the opening of our global fintech operation centre in GIFT City, Gujarat,” – Sundar Pichai, CEO at Alphabet Inc., and Google

Moreover, GIFT City's selection as the base for Google's fintech operations would solidify the city's status as a thriving fintech hub. The presence of a tech giant like Google would attract other international players, nurturing an ecosystem where ideas, talent, and capital converge. This influx of investment and opportunities would further bolster India's position as a favoured destination for fintech ventures.

Earlier this month, Zerodha Founder and CEO Nithin Kamath welcomed SGX Nifty’s move to GIFT City. The entire derivatives contracts on SGX Nifty, with an approximate value of USD 7.5 billion, were transferred from the Singapore Exchange to the NSE International Exchange (IX) situated in GIFT City. Speaking to BW Businessworld, Kamath said, “Tons of NRIs are interested to participate in the India growth story, if we can unlock the potential for them to effortlessly invest in India via GIFT, a wealth of capital awaits us. The complicated procedures have left countless NRIs hesitant, standing at the edge, withholding their investments from India.”

GIFT City is presently home to 200 companies representing a diverse range of industries, including the India International Bullion Exchange, two international stock exchanges, aircraft leasing firms, alternative investment funds, banks (HSBC, JP Morgan, and Barclays), broker-dealers, clearing corporations, insurance and reinsurance companies, qualified jewellers, and ship leasing firms, among others. With plenty of participating stakeholders, the city is touted to become a hub for financial services and innovations in the space.

But the GIFT City and USD 1-trillion Indian fintech story has just begun. As the numerous fintech companies work to bridge the economic divide and create products for global use cases, they are expected to play a pivotal role in India’s journey towards becoming a USD 5-trillion GDP, while achieving USD 1 trillion in AUM and USD 200 billion in revenue by 2030. Meanwhile, their international forays will continue to drive the global fintech narrative as well.

“For FinTech to flourish, internet penetration was the basic fundamental thing that was required which has happened to a very good extent. But now the entire banking and the financial infrastructure has to be a lot more modernized.” – Deena Jacob, Co-founder and CFO at Open

"While lending is important for credit offtake, it shouldn't be the sole focus. The core product itself should be monetisable. India's market is growing, but we need to explore diverse revenue streams and avoid creating systemic risks through excessive lending." – Nithin Kamath, Founder and CEO at Zerodha