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Owing to an increased focus on scale as opposed to profitability and compliance, majority of Indian fintechs may not be able to hit profitability in the next 2-3 years. 

A report titled ‘State of India Fintech Union 2022’ by Matrix Partners India and Boston Consulting Group highlights how the last few months have been challenging for fintechs in general with the “funding winter” approaching and pressure on demonstrating profitability, besides customer acquisition. 

As per experts, startups in the space are not going to turn profitable any time soon. Fundamentally, business drivers are not in the right place—not easy to pivot from growth to profitability, said a CXO. 

On the other hand, fintechs that have a proven value proposition and business model will need to be prepared to operate in the new environment and in a different context to sustain and thrive.

“While scale is an important driver of profitability, early stage focus on unit economics is a critical orientation needed. With the race for customer acquisition, and surging funding over the last 5 years, profitability and compliance has been an after thought for many players,” the report highlights. 

Over 125 founders/CXOs of leading fintechs along with industry leaders were surveyed for the same.

The experts reiterate that as the industry matures, it would be critical for fintechs to have a deep understanding of the financial products, revenue pools and business model intricacies so that they can demonstrate ‘profitable unit economics’ potential early on. This will be key to survival, and will give them a runway to innovate and grow

Further, compliance will help in creating sustainable growth models. “It would be important to build integrated governance practices across the organisation, reduce embedded risk through automation, embed compliance in product squads, create secure data architecture giving back control to customer, and communicate early and proactively with regulators to shape enabling provisions for new business model,” it adds.

Challenges in incumbents and fintechs collaborations

While collaboration between incumbents (government, financial institutions) and fintechs is seen as a powerful tool to bring together, reach, innovative products and seamless customer experience, there are many challenges. 

“Regulatory clarity on what fintechs and incumbents can do comes across as a strong enabler of efficient collaborative models. Other challenges to collaboration seen are low capacity of incumbents, preparedness of incumbent tech stack, low trust factor, risk sharing, data sharing and customer ownership,” it says. 

It adds how regulators are adjusting and understanding the new models and have been fairly supportive in audit situations. “It’s a learning curve for all”. 

Some segment-specific highlights are: 

• Lending: Cards/BNPL, unsecured lending, supply chain financing are the top choice as areas to be disrupted. Over 50% of respondents believed asset quality, CAC and regulations are top challenges to the sustainability of the business model. 

• Payments: Payments have moved from being barebone APIs to becoming a holistic experience-product. 70% of payment players are looking to tap into alternative revenue sources and lending emerges as the clear winner here. UPI-powered credit, MDR commensurate to value-added and monetisation through value-added services are seen to drive growth and innovation. 

• Insurance: 50% of respondents believe that health insurance is most likely to be disrupted. Product flexibility in structure and pricing, going beyond insurance to service and solutions, leveraging changing regulatory landscape to drive growth ahead.

• Wealth Management: Wealth techs are focused on driving monetization via expanding into new assets. Players see opportunities for disruption in investment advisory, through helping customers avoid “money mistakes”. Easing the process for advisor fee collection, and providing access to AA ecosystem, with market-wide depositories information access are key enablers needed. 

• Neobanks: Seamless onboarding and frictionless customer journey are a major value proposition for customers. Key challenge for neobanks is the path to profitability given high CAC (67%) and low ARPU (61%). Enablers like AA and a supportive digital banking regulation can help drive sustainability and make Neobanks mainstream.

“Relentless focus on innovation and customers made fintechs successful. This should continue. Nonetheless, new muscle needs to be added for newer priorities. Growing together in partnership with incumbents and private innovation on public utilities will be key moats,” said Yashraj Erande, Managing Director and Partner at BCG. 

“We’re at a fork in the road in the India fintech story with sceptics raising many questions. Indian fintechs have undeniable scale, provided superior value to customers and have emerged resilient through a once-in-a-lifetime crisis in Covid” said Vikram Vaidyanathan, Managing Director at Matrix India.