Emerging Fintech: Enabling cross-border investments from India
The startup ecosystem in India is exploding! There are now 100 Indian startups that have attained unicorn status, behind only the USA and China, which have 559 and 173 unicorn startups respectively. Out of these 100 unicorns, 21 operate in the fintech sector, trailing the leader — e-commerce, which has 23 unicorn startups, by just 2. Out of the next 100 Indian startups predicted to attain unicorn status, 31 are from fintech — perfectly showcasing the breadth of opportunities that exist in this sector and how promising the future of the fintech ecosystem in India is.
While most of the big fintech startups in India have been from payments, insurtech, and lending segments; wealthtech is rapidly gaining traction — a phenomenon in line with rising global interest in this segment (wealthtech startups globally had a great 2021, raising $14.6 Bn in funding, up 156% from 2020). This segment in India is witnessing the rise of several innovative start-ups, which is a breath of fresh air in a market that has traditionally been conservative when it comes to introducing new asset classes for retail investors. I had the opportunity to interview one such entrepreneur who is revolutionizing the retail investment market in India — Abhishek Banerjee, Founder and CEO of LotusDew, an early-stage fintech startup that is changing the way Indians invest in capital markets overseas by enabling cross-border investments.
Tarang: Can you share a bit about your background and LotusDew?
Abhishek: I have been a programmer since I was 10 years old. To me, code felt like brushes to a painter or words to a poet — where imagination becomes reality. I was also fascinated by stocks ever since I was about the same age. I remember plotting charts by reading prices off daily newspaper into a graph and pretending I could predict prices the next day as a child. By sheer chance, I was even right sometimes! However, growing up in a small town in the east of India and with my family being in the energy distribution business, it took me the next 28 years to realize my two passions meet in the world of quantitative investments.
Lotusdew was founded in May 2019, as a deep tech company that uses unstructured data and behavioral finance techniques to screen for stocks. We are registered with the Indian regulator SEBI and US SEC (Disclaimer: Registration as an investment advisor with US SEC does not imply a certain level of skill or training) to offer our solutions to retail investors. Our ambition is to build a global asset manager that caters to the world. We offer investment advisory services in global listed equity and asset allocation based on their risk profile. We are focused on creating strategies that are truly diversifying by investing in stocks that are usually non-overlapping with clients’ present investment portfolios. Our mission is to accelerate the financial freedom of our customers. Once free, they can focus on their passion and solve problems for the world we cannot solve. Hence our target is customers who want financial freedom and are problem solvers.
Tarang: After having worked as a portfolio manager for a multi-billion-dollar sovereign pension fund, what inspired you to start Lotusdew? What were some of the biggest challenges that you faced as a first-time entrepreneur?
Abhishek: After finishing grad school, I spent the next 10 years learning how to invest with data. My job as a portfolio manager was to do due diligence on investment strategies on behalf of the funds we managed and create portfolios using asset allocation. In this role, I became intimately aware of all the public regulatory disclosures that are mandated by different regulators across the world. To me, this was a gold mine of data but hard to harness as it’s unstructured. Moreover, in this role, I met some of the smartest minds and most successful fund managers across the world and was privileged to learn many things from the very best. For example, I learned investing has only one activity — it is to measure and measure better than others. That’s it. However, something bothered me throughout this decade, the fact that a few minds must eventually predict what’s right. I thought this was not sustainable and people who managed to do it were rare and expensive. Thus, making such solutions unaffordable for the masses.
At Lotusdew we are trying to solve this very problem. We use non-balance sheet data at scale like the quality of board members, investment decisions already made by large funds and their behavioral patterns, tax litigation history, regulatory disclosures of companies which is often unstructured data and to create a clean database that allows us to compare companies on factors that are not quantitative, to begin with. These adjacent indicators we believe allow us to generate global investment recommendations at fraction of the cost of traditional funds thus allowing us to democratize the privilege of what we think are accelerated wealth opportunities. Our core philosophy is that aggregate expert intelligence is superior to any individual intelligence, and we strive hard to express this by collecting whatever data we can to measure expert intelligence.
As a first-time entrepreneur, I was ignorant about how hard it was going to be. Running a startup to me is like balancing a steel ball to remain exactly at the center of a glass plate. It’s precarious and every little move eventually counts. I feel as an entrepreneur the biggest challenge is to articulate a hazy vision of something no one has seen and do it succinctly and quickly before you lose attention. The best quote I have heard was from Elon Musk which went something like starting a business is like eating glass and looking at the abyss. It’s just hard and requires a lot of energy every day. But eventually, the monster fades and fun emerges. Also, many personal notions get shattered as you start. Firstly, you realize you don’t even know your real competition. Another example is that you will have to hire vendors who do things every day that you need a few times — hence pricing those services is a challenge. Finally, building a team means selling your company to seed employees as you also sell to seed investors. I thought because I saw how business was done in my family, I could easily convert myself from an employee to an entrepreneur. That’s not true at all. However, I was lucky as my co-founder Dr. Prachi and other board members have been my guiding angels who stuck with me in some of my darkest moments. Just having great people on my board boosted my confidence and tricked me into thinking I must be doing something right. But the truth is everything I imagined seems fiction and reality develops every day as we move forward. For example, when I started what I thought will be my main source of revenue turned out to be a hard sell, and things I thought were marginal plays ended up becoming the most popular.
Tarang: Could you share some pivotal moments in the journey of Lotusdew so far? How do you see the fintech industry, especially the wealth tech sector, evolving in India?
Abhishek: When we developed the technology to be able to create investment solutions, we had to choose what license we need to apply with the local regulator to do the business we want to do. Due to lack of starting capital, we decided to go for the least expensive investment advisor, but it had major constraints like we could not take custody of client assets or execute trades on behalf of clients. Whereas being a broker would not have these constraints but had to acquire our own brokerage clients. At this time, the brokerage industry was shrinking as discount brokers took business away from small regional brokers. Moreover, discount brokers were offering excellent platforms but usually didn’t have research desks to provide investment advice. We saw this as an opportunity for a win-win for all, where we could advise clients of brokers to execute cheaply on their own as DIY investors and brokers had customers who stayed active because they were not losing their money trying to trade on their own. I think looking back this seemed like a smart thing to do — but looking forward from where I made the decision, it was purely the constraints we had.
However, the opportunity is much bigger. India has less than 5% of its population who invest and save in financial assets like stocks compared to 60% in the US. With many discount brokers offering free accounts, zero brokerage, and great platforms — a new problem has emerged. Many first-time investors have multiple trading accounts, and many will go inactive in the next 2 years simply because it’s hard to keep track of so many accounts. This means new brands that help investors consolidate investments and accelerate wealth generation will emerge and we want to be at the forefront of it. Also, we want to enable ease of choice by making transactions as frictionless as possible. For example, we have built technology that onboard a customer in less than 1 min while fulfilling our compliance obligations.
Tarang: Lotusdew is a tech-first startup, could you share how you went about the development of the platform and making sure that it is intuitive to new users?
Abhishek: Technology is the bridge between demand and supply. Our technology has two legs. Firstly, to invent new investment solutions using technologies like machine learning, and secondly to enable distribution of this using quick customer onboarding and transaction platforms. Also, at the core, we believe in open architecture and empowering our customers to choose easily yet within guide rails of advice.
In India, the primary objective of investors in capital markets is to improve lifestyle, and hence often investments are acted upon as discretionary spending. Hence brand, service quality, predictability, and ease of use are key to offering a lasting experience. We are developing an AI-based goal engine that will nudge the customers towards goals they might find most attractive and connect these goals to non-investment products like loans, insurance, education, home, and spending.
Tarang: You mentioned that Lotusdew is considering harnessing the power of blockchain to make its platform offering more robust. What is the synergy that will be created by introducing blockchain technology within the Lotusdew ecosystem?
Abhishek: One of the problems that remain is the inability of customers to move assets electronically from one account to another. This is a paper-based process in India and has seen numerous frauds where client assets were misused. Due to which the paperwork has been improved which unfortunately creates friction for legitimate transactions. We think blockchain can solve this by creating a trust ecosystem that’s extremely hard to manipulate and yet offers the convenience of digital ease of doing business.
I think blockchain is what the database was in the 1970s. In our opinion, in the next decade, distributed ledger and private blockchains will replace transactional databases. I am a proponent of blockchain as a way to make transactions immutable. With blockchain, we can get rid of all the maker-checker processes that exist in the financial industry effectively reducing the operational burden by half. Moreover, not having a central database means there is no central point of attack which will make these transactions more secure from cyber security threats.
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