Founded by Pranav Pai and Siddarth Pai, 3one4 Capital has been able to attract top-tier global and Indian investors with capital under management at over Rs 1,550 crore. A creative twist on Pai and the formula p, 3one4 has backed some of the fastest-growing startups and portfolio companies have raised over Rs 2,400 crore in follow-on funding. PRANAV PAI spoke to Raghu Mohan on the fintech ecosystem. Edited excerpts:
Fintechs have caused major disruptions to legacy players, but are not yet profitable. What explains this dichotomy?
Common to startups anywhere in the world is that they will primarily spend capital in three areas. The first is on specialised talent, and lots of it. Second, they have to invest in very rapid product development. I mean, what a legacy firm builds out in five years, fintechs have to do in one. And third, a very big cost-centre is marketing and sales, to get the product to end-users. Now specifically, why are fintechs not becoming profitable? They are going after growth. For them, it’s more important to have 150-200 per cent growth every year in revenues, versus breaking even at 50 per cent growth.
There’s also a dichotomy in the legacy environment. Banks are over-regulated to the point where it is very difficult for them to support innovation. Bajaj Finance has come to do what a bank does in a much differentiated manner. Why can’t banks build a franchise like that? It’s not that they are incapable of it, or don’t know how to do it. It’s that they are over-regulated.
Startups have disrupted specific verticals of legacy banks. Yet, the valuations in some cases are much more than the sum of the parts of an entire bank, or nearing it.
Banks can’t move as quickly as startups to capture market share. And they are concerned that in trying to do so they will end up breaking more things! Banks can only expand on the edge, and therefore, are unique. Just like you can’t compare an Infosys with a Freshworks. Or, look at what Cred has done by taking credit-card and rental payments. They have taken the two and made an app just for making those payments, the best possible experience. Now, it’s very hard to argue that Cred is not a good experience. And that’s why almost 20 million Indians are using it to pay their credit card bills and rent.
So, if a few years back someone had said to me that there is an app just to cater to these two services that’s worth $2 billion — only doing these two payments — even I would have found it difficult to believe. And I am supposed to believe these stories! But that’s the fantastic thing about this ecosystem. Consumers’ needs are both large and deep. But until you build it, it’s almost impossible to prove that people will adopt it at scale. And that’s why no startup is guaranteed to succeed. But, when it does so, it’s a win in a core consumer need, and like no one had predicted.
The real-time gross settlement (RTGS) and national electronic fund transfer (NEFT) systems are to be opened up for fintechs. What kind of disruption do you see happening in the payment space, especially on the float-money front?
The success of the Unified Payment Interface has convinced our banking regulator that whether it is legacy banks, non-banks or fintechs, if there’s a fraudulent transfer of funds, it’s not difficult to trace it. Now, since this has been proven at scale, there’s no reason why law-abiding citizens should have limits on money transfers. Why should businesses do payroll payments in batch-files of 10 or 20, rather than uploading one file and saying, “pay all my 1,000 employees”?
But what about its impact on the float-money with banks?
There’s no reason why it has to be with banks. I am in favour of all kinds of players not having such restrictions anymore. Let everyone compete on fair terms. Of course, banks have larger balance sheets and can invest more to compete with fintechs. But, fintechs move faster on technology, distribute apps faster, and build cutting-edge user interfaces that banks can’t do, without taking four or five months more in general. So, I think both sides have competitive advantages.
Do you feel there’s a case to revisit the taxation policy for unlisted Indian investors and startups?
Absolutely. The taxation policy disincentivises Indian capital from investing in local startups in two ways. The first is foreign capital investing in our startups pays less tax when they exit. And the second, a listed company’s long-term capital gains (LTCG) tax is less than what it is for an unlisted company. So, if I sell a startup and make some profit — versus selling Infosys shares and profiting over the same time frame — I will pay more tax in the startup exit scenario. We have legacy issues in our taxation environment, and the regulators are aware of it. A lot of work is being done by different stakeholders to build comfort that there can be uniformity in LTCG tax across asset classes and geographies.