Fintech in India has a bright future, with caveats

Written by Kapronasia || September 07 2023

In recent years, India’s fintech market has come into its own, and is now one of the world’s largest. In Asia, it has arguably become the single most important market. A new report by Elevation Capital, which has offices in Bengaluru and Salt Lake City, Utah, finds that India’s fintech ecosystem has grown especially fast since 2018. Funding increased from US$2.2 billion that year to US$5.8 billion by 2022, while the subcontinent’s share of global fintech funding jumped from 2.9% in 2018 to 6.5% in 2022.

One of the most important trends highlighted by the report is the increasing market share of fintechs in various segments of India’s financial sector. During the 2022 fiscal year, Indian fintechs had a 70% share of the digital payments market, a 45% share of retail lending and a 50% share of investment. The only segments in which their footprint remains nascent are asset management (11%) and insurance (7%).

We expect that India’s fintechs could still increase their market share in lending and investment significantly. While the report did not cover non-retail lending, that segment is one of India’s most promising, especially for firms willing to forego the temptations of retail lending and focus on MSMEs.

One company that has been successful using a variation on this formula is the unicorn Razorpay, which achieved its second consecutive profitable year in FY22. Backed by Tiger Global, Sequoia Capital India, GIC, Lone Pine Capital, Alkeon Capital, and TCV, Razorpay was valued at around $7.5 billion in its last funding round in December 2021.

Despite their rapid growth, fintechs in India remain small players in the country’s financial sector in terms of their overall share of revenue. That figure stands at just 3% of an estimated US$210 billion to US$220 billion.

At the same time, the report highlights something that we’ve been talking about for years – the profitability conundrum. To be sure, this challenge is not unique to Indian fintechs, but given the size of the Indian market, it is one that was perhaps overlooked especially often in the go-go years of free-flowing VC money, low interest rates and seemingly infinite low-hanging fruit.

One trend we will be following closely cited by Elevation Capital is rising competition from incumbents. While Indian banks may not be as well positioned as HSBC or DBS to meet challenges from fintechs head on, they nonetheless have structural advantages and enjoy the confidence of regulators in a way that the fintech upstarts do not.