Indian fintech sector: A resilient green shoot of the start-up ecosystem

India maintained its position as the third-highest funded fintech industry globally, following the US and UK, similar to last year

The funding winter has dealt a blow to startups across the board, but Indian fintech is a sector that has withstood the conditions.

While investors have begun to hedge their bets, companies have managed to demonstrate a clear path to profitability that has given the sector an edge. Regulatory certainty, increasing scale and rising digital payments have also allowed the space to mature faster than others.

Despite a 67 per cent year-on-year (YoY) funding decline in fintech in the first half (H1) of 2023 — in line with the overall startup ecosystem — investments on a sequential basis have slipped merely 6 per cent.

The sector contributed more than 84 per cent of the total funds raised by Indian startups in H1 2023, according to data from market intelligence platform Tracxn.

Moreover, India retained its position as the third-highest funded fintech industry, after the US and UK, similar to the previous year.

Of the 86,296 start-ups active in India, 8,098 are in the fintech space. These startups have almost doubled in number from 4,198 in 2016. India has twice as many fintech firms than China and Canada, Tracxn data shows.

Fintech has been among the five best performing sectors in terms of funding since 2018, with an exception in 2020 when it came sixth. Fintech funding has increased from just $666 million across 258 deals in 2016 to $5.83 billion across 469 deals in 2022.

Fintech start-ups have raised $1.4 billion in the first half of this year alone, a period in which seven rounds raised $100 million-plus sums.

The increased investor interest in these startups can be attributed to the higher adoption rate of fintech solutions in India, compared with the global average. Multiple initiatives by the government, such as the introduction of Unified Payments Interface (UPI), ease of banking policies, and the introduction of India’s digital rupee are accelerating growth in the segment, according to Tracxn analysts.

Investors have become more selective with their bets. But what has worked for budding fintechs is that many of them, especially those associated with lending operations, have been able to demonstrate a clear path to profitability.

“Our core focus has always been a focus on profitability. I don’t think a company built that way will ever face any concern. Our core businesses are profitable, and we are investing in new initiatives,” says Ankit Agrawal, chief executive officer (CEO), InsuranceDekho.

The Gurugram-based start-up raised the largest-ever series A funding of $150 million in the insurtech space earlier this year.

Madhusudan Ekambaram, co-founder and CEO of lending platform KreditBee, is another who managed to raise $120 million in a series D funding earlier this year.

“Now it’s very hard for any lending fintech to kind of go and raise funds if they are not profitable. (Today), the lending fintechs have put up positive results in their financials. They have become profitable,” he says.

KreditBee reportedly became profitable in FY19. In January this year, Ekambaram told an online platform that on a group level the company was profitable by close to Rs 48 crore in FY19. In FY20, it rose to about Rs 120 crore in profit after tax. The company incurred losses in FY21, but managed to be profitable by September 2021.

Likewise, Oxyzo, a tech-enabled non-banking financial company (NBFC), posted Rs 198 crore in profits for FY23. Revenue at Rs 562 crore was up 79.5 per cent YoY.

“...lending as a core philosophy needs to be profitable as a business,” Ruchi Kalra, CEO, Oxyzo, told Business Standard in a previous interaction.

According to Akshay Mehrotra, CEO and co-founder of lending platform Fibe, efficiency in digital lending, reduced operating costs, automated processes, data-driven risk assessment and quick customer onboarding have allowed lending fintechs to generate revenue and profits.

“These factors enable them to offer competitive rates, attract borrowers, and minimise default risks, contributing to their financial success,” he says.

Increasing internet and smartphone penetration and favourable government policies like UPI have led to an increase in digital transactions in India, which has, in turn, also given a fillip to the fintech sector.

Industry stakeholders also say that the sector has matured much faster than others.

“Technology is evolving at a rapid pace. Earlier, old-companies took 80-100 years to register $50 billion in profit. New-age companies can do that in 5-10 years. The cycle to growth is shortening down,” Agrawal says.

Vikram Chachra, founding partner of fintech-focused venture capital firm 8i Ventures, concurs. “Within our own portfolio, we have witnessed the companies we seeded in 2020-21 scale their revenues 20-fold to 30-fold during the pandemic. If all goes well, we expect these pandemic winners to go from seed to billion-dollar IPOs within 5-6 years, as opposed to 8-10 years which is the norm for successful venture outcomes,” Chachra says.

Unlike many other sectors, fintech also has the advantage of regulatory certainty. The Reserve Bank of India recently tightened the regulatory framework for fintechs, which caused many startups to revisit strategies and enter into fresh dialogues with their private equity backers. Although disruptive in the short term, industry watchers say that the new prescriptive norms offer clarity on the playbooks available for fintechs to build and grow in the long term.

This growth momentum is expected to keep its pace.

“As per our estimates, the revenue opportunity open to fintechs today is around $15-20 billion and is expected to grow to $100 billion in a decade. It’s not difficult to see how this sector alone can deliver up to a trillion dollars of market cap to investors by 2033,” says Chachra.