Fintech Profitability in Doubt for Next 2-3 Years

As India is booming with startups in fintech, industry leaders remain sceptical about its success
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With the latest trends in sight, fintech has erupted worldwide — but the profitability remains doubtful. According to a recent report by Matrix Partners with Boston Consulting Group (BCG), 70% of the respondents believe that most fintech companies may not hold profitable in the next two or three years. 

The report was based on a survey of over 125 founders and CXOs from leading Indian fintech firms, who pointed out expansion of products, improving customer service, and hiring as the current top priorities. 

As per Invest India’s latest reports, India is among the fastest-growing fintech markets in the world – home to 6,636 Fintech startups. The industry is estimated to reach $150 billion by 2025. The payment landscape has evolved into the most advanced system with regard to digital payments by volume (CAGR 50%) and value (CAGR 6%).

There is a strong need to improve the risk management framework, along with improving competitiveness that can supervise fintech innovations without meddling with their economic potential. 

State of Indian fintech Landscape 

A fintech or financial technology firm merges the upcoming technological trends to provide better financial solutions through digital payments and transactions. This sector has seen the growth of numerous startups. The Indian fintech enjoys a strong position in the global financial market, clocking over $800 bn + annual payments transactions value, making it one of the strongest contributors to the economy. The report is a collective segment of insights that can be critical to the $5 trillion Indian economy, bringing out the need to re-evaluate their financials for innovative investments. 

Highlighting the growth of Indian fintech, Yashraj Erande, managing director and partner, BCG, says, “Indian fintechs are reaching scale and the industry is moving towards becoming mission critical, thus having a national role to play in achieving India’s pursuit of a 5-trillion economy. Fintechs and conventional players will co-exist as the need to work together is becoming imperative to provide a holistic experience to the customer. Having good compliance systems will smoothen the process of collaboration as willingness of partners to collaborate with compliant fintechs will be higher.”

Incumbents revealed that monetisation and ARPU are the key priorities and biggest challenges for the industry today. 

Source: State of Fintech Union 2022 (BCG and Matrix Partners) 

The pandemic further boosted payments, leading to a 210% spike in funding between 2020 and 2021. With the rising funding, the industry has seen an upsurge in attracting global valuation. 

But over the past 9 months, $35.6 billion has been pulled out by FPIs (Foreign Portfolio Investment) from Indian markets. The rupee is depreciating at an all-time low of INR 79/$, prompting FPIs to withdraw money before the further devaluation. 

Source: State of Fintech Union 2022 (BCG and Matrix Partners) 

In line with the global dip, a steep drop in funding of 36% in Q4 was seen in India. It indicates that a potential flow of capital can be carried out by improvements in macroeconomic fundamentals. Many business models were forced to re-imagine high credit risk and have people-intensive business models. 

Leaders who still believe in profitability 

Besides a majority of the industry leaders, who were doubtful about the profitability, 20% of the respondents feel positive about the sector. This positive outlook was predominantly from insurtech, paytech, and neo-banking sectors. 

Fintech is fuelled by the post-pandemic impact growth that has increased the adoption of digital services. It has indeed caused disruption but also paved the way for a more effective system. Many sectors such as education and banking benefit from this technology. 

“Fintech sector is mission-critical for the Indian economy; 36% of fintech customers are new-to-credit versus 22% for banks. This means a greater focus on profitability and governance,” said Yashraj Erande, managing director and partner at BCG.

The road ahead

Fintech is set to grow in the next 5 years and the report summarises the future aspects to tackle potential challenges. About 82% of the fintech companies believed that product expansion was the highest priority in the industry, with 61% improving customer service and 75% hiring the right talent. In contrast, cost reduction, fundraising and internal controls remained the least priority.  

It further suggests that fintechs need to bring more attention to governance for companies to outgrow advisors over a period of time. This can be achieved once companies proactively report their governance practices to garner trust from both customers and regulators. 

The pandemic has transformed the world into a digital hub. Fintech is a growing industry, and the opportunities are limitless. According to Market Research Future, global blockchain in the fintech market is expected to expand to USD 6700.63 million by 2023. With more streamlined algorithms to drive financial services, businesses will directly engage with the customers. With better frameworks and regulations, business models can be sustained, addressing uncertainties. 

“Profitability in lending is not a post-facto thought. The key is to get the basics right: continuously improve underwriting models, leverage tech to reduce opex and have a clear plan to reduce cost of funds with scale. Fintechs are battle-tested survivors of multiple debt-crises, and will continue to learn and emerge stronger,” says Vikram Vaidyanathan, managing director, Matrix Partners. 

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