Those who think that the $4.7-billion PayU-BillDesk is a sign of consolidation in the Indian fintech
space, emulating what’s been happening in edtech, need to think again. The Indian fintech
market is poised for multi-fold growth with enough room for newer business models to emerge.
market is currently valued at $31 billion and is expected to grow to $84 billion by 2025, a compounded annual growth rate of 22 per cent. The fintech transaction value size is set to grow from $66 billion in 2019 to $138 billion in 2023, a CAGR of 20 per cent, according to government statistics. India is amongst the fastest growing fintech markets in the world, and of the over 2,000 fintechs in the country today, over 67 per cent have been set up in the last five years.
The fintech segment has several sub segments such as payments, lending, wealth tech, personal finance management, insurance tech etc., so to see one deal as the point of consolidation within the industry can be misleading. Navin Surya, chairman emeritus, Payments Council of India, who has seen the fintech industry evolve over two decades (he was founder of ItzCash that was acquired by Ebix for Rs 800 crore in 2017), said such M&As are a sign of the maturity of that segment within the fintech segment.
“Everyone was confident that the Indian payment story is huge and intact but no one had an answer by when India would match some of the other global payment ecosystems. I think today I can say confidently we have reached there,” he said.
Over the past few years, Surya added, “the focus was on acquiring consumers, but now the focus is on acquiring the merchant side of business. PayU-BillDesk acquisition is the high point of this wave”.
“Payments within the fintech space are always about scale and every three-four years you will see such a strategic foray that hints at consolidation. The payments/fintech industry is huge and has several components. I do not think we are seeing consolidation,” he pointed out.
The PayU-BillDesk deal in the payment segment also resembles what is happening in the global payments business. For instance, in 2019, US-based FIS acquired WorldPay in a $35-billion deal and French payments players Worldline in 2020 acquired Ingenico for $8.6 billion. India, too, has seen its fair share of acquisitions in the payment segment. PayU acquired Citrus Pay and Snapdeal acquired FreeCharge in 2015.
Rakesh Pozhath, partner, financial services, Bain & Company, said, “The fintech landscape in India is still in its early days; segments such as neo-banking and insurance are still at the nascent stage. The payment segment has matured. Especially when you see the UPI-based payments ecosystem, the top three players have captured the majority of the market.” Here, PhonePe leads the chart with Google Pay and Paytm interchanging.
He also believes that with consumer acquisition in place, players are focusing on revenues. “Wallets or the UPI-based payment do not allow you to make money. Monetisation will happen by acquiring merchants or expanding their financial offerings to the user base that they have now acquired. You will see the next growth happening in these segments,” he said.
KPMG’s Pulse of Fintech, an overview of the fintech landscape, also points out that digital banking is a big play in India, but with a unique model compared to other jurisdictions — with digital banks acting primarily as Software as a Service (SaaS) providers and regulatory responsibility remaining with bank partners. In the first half of 2021, the fintech industry has seen investments of $2 billion, an amount equal to what the industry saw in the whole of 2020.
In recent times we have seen banks and fintechs also partnering with big tech players like Google and Amazon. Equitas Small Finance Bank is offering its fixed deposit product to users of Google Pay. The bank believes that the platform will give it access to new users. Similarly, Kuvera.in said that it would provide its services, products and technology know-how to create an exclusive experience for Amazon Pay users to facilitate investments into mutual funds, fixed deposits, and more over time. Both these deals are a paradigm shift in how banks are working with fintech players.
Sanjay Doshi, partner and head — financial services advisory, KPMG in India, said, “Over the next 12 months, we expect leading fintech unicorns trying to tap into the strong capital market by looking at an IPO. Banks are also keen to partner with fintechs, especially neo-banks and wealthtech platforms.”
One of the fast-growing segments has been lending — in formats such as buy-now-pay-later (BNPL), sachet sizes loans or advance salary. After the initial shock of Covid-19, the lending segment has seen a steady recovery. The digital lending segment has seen a huge rush of newer players. According to an Inc42 report, the country has 1,263 digital lending start-ups, though the B2B lending segment dominates.
Anurag Jain, founder, KredX, and president, Digital Lenders Association of India, believes technology adoption will be a permanent change and will have a positive impact on digital lending. “In the last few months, digital lending businesses have noted a much higher demand for credit from not just small businesses but also from retail consumers. A higher digital transaction/digital footprint has made it much easier for any lender to evaluate and underwrite a customer. Our overall outlook for digital lending is definitely one of positive growth,” he added.
Again, India resembles global markets in this segment. “BNPL has grown at a scorching pace in the last couple of quarters and has spread its wings to businesses as well. Even internationally, we see a lot of momentum around this space. An example is Square’s acquisition of Afterpay for $29 billion recently. We expect it to evolve in different avatars across various cross sections of digital lending and grow rapidly in the next couple of years,” said Jain.
India, as the KPMG report suggests, is a unique market where the regulator has been actively involved in giving access to new-age fintech players to work in tandem with the traditional banking institutions. The idea is to ensure that digital banking increases penetration of digital finance to those who have limited access to banking. With so much potential, M&As will be a minor aspect of this business, for now.
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