Can Fintech Startups Contribute a Lion’s Share to India’s Unicorn List?

In the past few years, India’s startup ecosystem has emerged to be a flourishing ground for its participants. Almost halfway into this financial year, we have 107 unicorn startups, and globally the country ranks third in terms of the size of the startup ecosystem.

Where do fintech startups stand in this picture?

The Fintech industry, with 22 unicorns, takes second place behind the e-commerce sector both in the number of unicorns as well as the total funding raised. Furthermore, 33 soon-to-be unicorns are identified, which are expected to lead the unicorn startup list in the coming years. The Indian fintech industry is estimated to be valued at USD 150- 160 million by 2025.

Fintech Startup Ecosystem in India

India ranks first in fintech adoption globally, with 87%, which is much more than the global average of 64%.

Several reasons contributed to India’s quick surge of fintech startups. To a casual observer, this might seem like a snowball effect triggered by demonetisation, which picked momentum with the pandemic. But the country’s fintech growth is the result of years of spadework involving :

• Financial literacy initiatives
• Financial inclusion programs
• Adoption of technology in the banking sector
• Revamping of policies
• Devising of regulatory framework
• Building the technological infrastructure

Growth Story of Fintech Startups in India

India celebrated its first Fintech unicorn in 2015. After that, it took a matter of three years for the next group of fintech startups to enter the $1 billion club. As many as 11 startups (out of the total 44) made this list in 2021 itself. During the current year, from January till August, 4 fintech unicorns are added to the list, the latest one in July.

Fintech startups account for approximately 1/5th of the total unicorns in India to date. If favourable conditions sustain, then fintechs will surpass other sectors to produce the largest number of unicorns in India.

Among the fintech segments, lendingtech, with an expected $614 billion, is expected to have the largest market opportunity in the coming two years. It will be followed by insuretech ($339 billion) and payments ($208 billion).

Factors Driving Fintech Growth

In India, a lot of factors continue to transform the fintech market scene. While there are many hurdles, Indian fintechs have rapidly found a foothold in the financial market dominated by traditional BFSI giants. The market is still evolving, with exponential opportunities to scale up.

Let us examine some conditions which work favourably for fintech startups.

• Sizable Untapped Market

There is a huge demand for BFSI services in tier II and tier III Indian cities. The lack of traditional infrastructures coupled with the constraints during the pandemic forced people in these geographies to adopt e-commerce and digitised payment models.

This opened a huge market for low-cost, convenient options like UPI payments, digital wallets, etc. There is also a growing demand for credit in these areas. Customer segments in tier II and tier III towns have bypassed credit and debit card products and moved to smartphone banking and BNPL schemes.

• Promising Investment Ecosystem

While the fintech firms started operations as early as 2008, the funding for the sector remained very low till 2015. Ever since, venture capital and angel investors have favourably considered fintech startups, with the investments witnessing a whopping 210% spike between the 2020 and 2021 calendar years.

Fintech firms have raised a total of $29 billion in investments between January 2017 and July 2022. On the investment front, the prospects are very bright for fintech startups.

• Favourable Demography

More than 65% of India’s population is under the age of 35, who adapt to new technologies faster. The number of smartphone users is increasing each day, and so is internet accessibility.

Moreover, it is expected that India will have 140 million middle-income families and 21 million high-income families by 2030. All these indicate the need for improved financial management, thus the growth of fintech startups.

• Technological Advancements

In addition to technology adoption by the masses, technological developments by the government also favour the fintech sector. India stack is a digital infrastructure that facilitates governments, startups, businesses, and developers to move towards cashless and paperless service delivery across sectors. Together with another initiative called JAM trinity (Jan Dhan Yojna, Aadhar, and mobile number), the India stack has been a prominent factor boosting fintech adoption.

Hurdles for Future Unicorns

While abundant opportunities exist in the fintech market at present, so do challenges for startups. Navigating them successfully will greatly improve the chances of emerging unicorns. Some of these challenges include,

• Rapidly Changing Regulatory Requirements

This sector is still relatively new in India, due to which fintech startups face quick and unpredictable policy changes more often than their counterparts in other industries. Both the participants and the regulators find themselves in uncharted territory as new issues crop up. The regulators have to address the problems as and when they arise and are not able to provide pre-emptive guidelines to the fintechs.

It is disadvantageous to the fintech firms, often forcing them to rethink their whole business plan. E.g., in June this year, RBI prohibited loading credit lines to non-bank prepaid payment instruments(PPI). This decision was to stop PPIs from being used as credit instruments. The regulation affected fintechs which extensively used credit line loaded PPIs for applying for BNPL schemes.

• Concerns of Profitability

Though the funding aspect looks favourable for the fintech unicorns, profitability is still a worrisome factor for fintech startups. Only a third of the unicorns have posted profits so far. For the unicorn growth to continue, more fintechs need to move out of the red zone.

• Lack of Awareness

Financial inclusion and financial literacy initiatives in India still have a long way to go. According to an NCFE report, only 27% of India’s population are financially literate.

Looking Forward

The conditions are favourable for the growth of fintech startups in India. The startups can rise to be unicorns by adopting tactics like collaborations (with banks), product innovation (using big data, AI, and machine learning), seeking opportunities offshore, etc.

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