Indian Fintech — hype or substance
(Disclaimer: Long Read. All views are personal and happy to engage to refine my view. Feel free to comment on why you agree or disagree with me. Look forward)
India’s fintech investments grew exponentially from $247 million in 2014 to over $1.5 billion in 2015, as per a recent KPMG report. Many fintech players, like Paytm, MobiKwik, Capital Float and Faircent, have emerged in India and have scaled up rapidly in recent months in segments like payments, remittance and lending services etc. Its clearly the ‘hot-sector’ right now and worth looking at in better detail.
So over the past few weeks, I spent sometime reading, thinking and discussing the Fintech space in India. Have had a chance to speak to multiple VCs, Angels and founders to understand the buzz around the sector and whether its really going to disrupt how you and I do banking.
From what I have gathered, I believe the Fintech in India currently is more hype than substance. Most startups are trying to ape US fintech businesses and there is very little thought on India Specific business models. Here are a few things that I have learnt along the way (a more detailed analysis follows)
Overall Learnings
- FinTech is equal parts Finance and Technology. For the idea to scale and become sustainable one has to focus on both the parts equally. Using technology just for origination/sales will not make a dent. Startups need to focus on underwriting, collections as well.
- Banks are not going anywhere. Banks will continue to be the trusted financial partners.
- The current idea has limited/no focus on Unbanked. Most ideas are geared towards making life of bankable better and channelize and new line of credit.
- SME lending is surely interesting and will continue to see more action. The only concern is the high cost of capital and high NPAs.
Fintech businesses can largely be divided into 4 broad categories:
- Investing
- Lending
- Payments
- Bank Tech/Infra
Investing
Investing includes Personal Finance Management (PFM — apps tracking spending etc), Trading, Mutual Fund Investing etc.
Investing has seen some activity off-late but the space is too small and too nascent to spike any serious interest. Lets look at the Mutual Fund market in India:
Same underlying assets: There are only a few asset classes that are available for investments and everyone is peddling the same. Regulations make it hard to offer hybrid and complex assets that may not be available directly through banks.
Highly Sentiment Driven: Mutual fund folio numbers are not a growth story all the way. Indian retail investors decrease holdings when times are bad and buy more when markets are at peak (lets now discuss on how that is not smart investing). In 2014, mutual funds lost 16 lacs folios when the markets were choppy and added 13% folios in 2015 when markets were peaking. So story of acquiring long-term customers may not pan out the way its planned
AUM numbers: Total mutual fund AUM as of 2016 is INR 13.58 lac crore, up about 13% Y-o-Y. Not accounting for retail vs institutional split, the overall distribution charges and annual maintenance charges (1%) makes it a 13,000 crore market or just short of $2bn. With $2bn as the overall market and multiple distribution channels — banks, direct agents, direct MF sites, Independent fund advisors, the battle for credibility and market share will not be easy and you need to ask yourself is it worth it?
Case in point: FundsIndia which has been in the space for around 6 years has an AUM of Rs 1200 crore and revenues of around Rs 12–16cr.
Hence its not surprising that most institutional investors have stayed away from this space and are not too keen on it right now.
Lending
Lending in itself is huge and has various segments — Mortgage, Consumer, Education, Personal etc.
Current market: Before we get into the details, we got to ask why the need for startups to lend. Aren’t banks supposed to lend money and well banks do lend money.
In the current market, banks do not lend unsecured consumer loans and avoid sub-prime lending. SME lending is also restricted as banks look at financial history and don’t necessarily lend working capital that easily. With the NPAs on the rise, banks have become even more cautious. This is the void that 100s of fintech companies are trying to attack.
Here’s the difference between Banks and Fintech Lending (LendingClub):
Lending essentially has four main parts —origination, credit assessment, under-writing, and collection.
Origination: Lending startups in India have so far focused mostly/only on origination and somewhat credit assessment and have just passed the leads to NBFCs, partner banks, HNIs (P2P). Origination is perhaps the easiest part and its an area where technology has made the most difference. If you need money just fill-up a form with some details and thats it. Sounds simple enough for anyone in need of money. Startups get origination fees and don’t keep any risk on their balance sheets. They are just like another middleman in between but with technology they have wider reach and thus can connect users and banks better.
Credit Assessment: Traditional way of credit-assessment used by banks is the CIBIL score, income statement, balance sheet, assets owned etc. Startups are trying to use all these metrics and adding a layer of social graph on top to create credit history of relatively high-risk/un-bankable/under-banked individuals and businesses.
The entire premise of tech based lending is that you are able to look at more data points and thus under-write better than banks. Banks for the large part have same interest rates for most prime lenders and often deny loans to those they deem sub-prime. There are thus two cases that tech based startups can focus on:
Case 1 — Focusing on sub-prime: If you believe that all the social data and technology will help you under-write sub-prime customer better and thus offer them loans (albeit at high interest rate) then you are opening yourself to a pandora’s box. Collections will be sketchy at best and thus eventually NPAs will be very high. Most startups focusing on this are trying to either finance invoice from blue-chip customers, or e-commerce vendor financing and thus not necessarily focusing on the sub-prime.
Case 2 — Focus on Prime: There is no reason for banks to charge same rate of interest to everyone. Some customers have great financial health and thus can be offered loans at better rates. But given that banks have to do priority sector lending and follow lending norms, its something that they won’t do on a large scale. This is where the tech enabled startups can come in and offer better rates to the Prime customers. However the scale will be severely impacted and thus the loan-book.
Under-writing and collections: This is still largely left to the banks/NBFCs and hardly any startup is looking at this with focus. Till the under-writing and collections are left to the banks, nobody is replacing them and scale will be challenge. There is a large opportunity to tackle these two areas.
An overarching point to remember here is that the cost of capital will catch-up sooner or later. Banks use deposits to fund their loans and will always maintain that advantage.
Startups that focus on the entire chain will be able to create better businesses with higher underlying fundamentals.
Payments
Perhaps the most vibrant space in Fintech which has seen lot of innovations, investments and regulatory changes over the past few years. With UPI coming in and Jan Dhan Yojna knocking the wind out of Payment Banks sails, it remains an interesting area and will see some stability coming in over the next few quarters.
Bank Tech/Infra/Fin Services
Banks are not going anywhere, but banks are not that smart when it comes to data and analytics. Banks treat all customers the same and will never offer one-to-one banking. This is where the opportunity lies. More and more banks are realizing this and are more than willing to undergo change and reinvent themselves. Banks are open to trying new partnerships, new distribution channels and new technologies.
This makes the Bank Tech space the most lucrative place to be in the Fintech scene. Startups should focus on working with bank’s exiting user-base and improve experience. B2B SaaS startups with focus on analytics, real-time personalized communication, great UI/UX will get a good entry point in banks now. Think how Meniga is serving over 35 million customers in 17 cities by working with the banks. Recently Kalaari invested in Active.ai which appears to be working on similar lines.
Benefits on Bank Tech:
No distribution cost: Standard approach of making an app and then spending money on acquiring downloads is not going to give scale anytime soon. On the other hand, banks have their apps and integrating an SDK (lets say analytics) in it gives you scale instantly. Distribution cost is thus borne by the bank.
High Exit Barriers: If you are good at what you do and constantly innovate, its hard to replace you from the techstack. As long as you stay with/ahead of the market you will stay in the banks’ tech
Primitive Customer Engagement Currently: Banks have a lot of data about my financial health but seldom engages with me. For eg. i didnt get a single notification from my Bank about how year was about to end and I hadn’t done my 80C savings. A simple notification with yes/no button and life is great. Another example, all banks run discounts on 100s of merchants but when was the last time you used one?
Right information at the right time and right device for banks will work wonders. Question is who is building it?
PS: All views are personal and happy to engage to refine my view. Feel free to comment on why you agree or disagree with me. Look forward
PPS: Read report by Goldman about the opportunity and risk in Shadow banking. US context but still worth a read. Link: http://www.betandbetter.com/photos_forum/1425585417.pdf
