Fintech Funding Outlook

For the past 15 years financial services have been an important component of PE/VC investments, constituting around 40 per cent of capital deployed. Fintech has enjoyed a similar kind of importance for the last 10 years and has steadily increased its contribution to reach around eight to nine per cent of PE/VC investments over the last three years. 

The first wave of fintech started with digital/mobile wallets, moved to UPI/payments over the next few years and using the massive data trails created by the JAM (JanDhan, Aadhaar and Mobile penetration) trinity, digital lending became a large segment. With banks joining the mobile banking bandwagon, digital banking infrastructure became a large theme. Insurance and wealth management have also been a part of the fintech wave in recent times.

The last few years has seen the emergence of players of significant scale across segments like payments, MSME lending, consumer lending, wealth and insurance. Massive digital penetration has seen several of these segments adding millions of customers to the banking, wealth and insurance sectors. 

However, a few challenges persist. Cost of acquiring customers digitally is still high and cost of operations have remained high given the early stages of the segment. This has given rise to questions around sustainability of business models. Of late, a few players have started demonstrating profitability (for eg: Oxyzo, Indifi in MSME lending and Moneyview, in consumer lending). Public market debuts of companies like Policy Bazaar and PayTM have also shown the intent as well as ability of larger players to demonstrate a path to profitability. Newer segments like supply chain financing, credit cards and digital banking infrastructure have also shown a faster road to both scale and profitability. At TVS Capital, we have invested in companies like PhonePe, Yubi, goDigit and Insurance Dekho, who are leaders in their respective segments and have demonstrated significant scale and systemic influence, while also building a path to profitability.

Regulation has also caught up with the changing dynamic of fintech and the last year has seen increased regulation as well as scrutiny by the regulators. While this has led to some short- term pain in the segment, in the longer run, the clarity brought in by well-articulated guidelines will benefit the overall system and lead to a much better environment for greater growth in the segment.

Reflecting the uncertainties of business model challenges, rapidly evolving regulations and a tough funding environment, there has been a steep fall in funding flowing into the system. We saw deal value drop from a peak of Rs 45,048 crore in CY2021 to Rs 30,267 crore in CY 2022, nearly a one third drop and the trend continues in the first half of CY 2023. We expect momentum to return towards the second half of CY 2024, driven by a more stable environment (regulatory and funding) and a better demonstration of sustainable business models by many players. We also expect a few players to make their public market entry starting FY2026 and this will drive further capital into the segment.

In summary, we believe fintech has established its value to consumers and small business alike, in creating access to multiple financial products. Fintech has also been able to demonstrate value to the greater ecosystem of banking, insurance and wealth in driving millions of customers to formal financial systems. Partnerships between incumbents and fintech players have been established over the years and with a clear regulatory framework, we expect such partnerships to significantly enhance the overall functioning of the financial   services system. In this backdrop, we expect fintech funding to continue to sustain its momentum in the coming years.