Fintech: 2022 Year in Review | A tumultuous 2023 awaits fintech startups

The operating environment is expected to get tougher for Indian fintech startups next year amid a worsening funding winter and regulatory changes over the past few months, multiple founders and investors told ET


With the regulatory overhang on fintechs continuing, and the Reserve Bank of India (RBI) taking steps to regulate various aspects of the sector, investors are expected to remain selective in their approach, leading to potential consolidation in the coming months, these people said.
Further, with the
release of the new digital lending guidelines, banks and non-banking finance companies (NBFCs) have also moved away from first loan default guarantee (FLDG) partnerships, dealing a blow to smaller fintechs by forcing them to lend at higher costs, at least five entrepreneurs and executives told ET.

Fintechs off to a tough startETtech

“Fintechs that have learnt to work within regulatory guidelines and achieved scale stand to gain. In the short term these larger fintech incumbents will build on their lead. Over the long term, regulations could be the best medicine the industry hoped for as they bring operating clarity for new players entering the market,” said Bala Srinivasa, managing director, Arkam Ventures.

Funding winter bites fintechs

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According to data sourced from research firm Tracxn,
funding in the Indian fintech ecosystem almost halved to roughly $5.7 billion in 2022 from $10.3 billion in 2021. However, investments in Indian fintech this year are still significantly higher than in 2020, when the sector garnered just $2.02 billion in equity funding.

Funding for Indian fintechs by yearETtech

“During this slowdown, investor expectations on unit economics have moved from ARR (average recurring revenue) to profit after tax (PAT), which has made a lot of companies unlucrative because they can’t show profits,” said Akshay Mehrotra, cofounder and chief executive, Fibe (formerly EarlySalary). ”Also with PE funds writing large cheques back-to-back in the digital lending space, this year, the focus is more than ever on profitable growth.”

Private equity majors have continued to write growth cheques this year as valuations have tempered in the bearish market. According to Srinivasa, early-stage valuations have also been impacted and are down “almost 25% to 35% or more” from high-growth years.

Fibe and
KreditBee are among the few digital lending startups this year to have raised growth rounds from private equity majors including the likes of TPG, Norwest Venture Partners, Premji Invest and Motilal Oswal Alternates.

Yubi (formerly CredAvenue) also
raised $137 million in March this year from the likes of Insight Partners, B Capital Group and Dragoneer.

Personal loan provider
MoneyView is also in the final stages of closing its $150 million equity funding from Apis Partners at a unicorn valuation, ET reported on October 27.

Top deals in Indian fintech in 2022ETtech

“The key thing for investment now (in fintech) is whether the business model is good and defensible today. Whoever can prove their business model will be able to raise. The second part is whether they are building a profitable business. Average business models will not be able to raise funds in 2022. The strong will get stronger and the weak will disappear,” said a fintech entrepreneur who was looking to raise capital at the start of the year.

With the RBI delivering a final blow to card-based fintechs by barring prepaid payment instruments (PPI) from being loaded with credit lines, category leader Slice, which set out to raise $100 million in fresh funding,
halted its fundraising plans, ET reported on July 18. It had raised $50 million from existing investor Tiger Global in June. Instead, the firm has been focussing on digital payments, entering the Unified Payments Interface (UPI) space and
seeking a PPI licence.

The RBI’s circular has also affected its competitor Uni, which is trying to find an alternative business model.

Consolidation underway?

As global macroeconomic headwinds due to rising inflation and interest rates continue to drive a rout in public and private market valuations for global fintech majors such as Stripe, Klarna, Zip and others, Indian fintechs have also found it harder to raise capital this year.

ET reported on November 25 that digital payments major
PhonePe was close to buying buy-now-pay-later (BNPL) startup ZestMoney, signalling a potential wave of consolidation in 2023.

“The regulation landscape has made several practices such as FLDG unavailable to fintechs. This coupled with the funding winter ensuing globally means the coming year is likely to see dampening in terms of funding. Investors are expected to become more selective. There will be consolidation in the market, an uptick in collaborative models with regulated entities and exit of firms with a weaker footing,” said Kunal Pande, partner, KPMG in India.

Pande added that with things still evolving on the ground after the recent regulatory changes, “investors are expected to continue following a wait-and-watch approach over the next 6-12 months”.

Meanwhile, large fintechs such as Cred and Razorpay, which raised large rounds until 2022, are looking to grow into their valuations. It’s no surprise that even as online credit continues to face regulatory scrutiny, several neo-banks and payment companies with wide distribution have been vying to enter the lending space, owing to margins the segment offers.

Indian fintech investments by roundETtech

“We think in the more mature segments like alternative lending, you will see consolidation. Strong companies with strong balance sheets will have to strengthen their product portfolio and financial services anyway is never a one product play … Whether you are a neo-bank or payments company, it’s not going to be any easier to adopt a lending-first approach in 2023,” added Srinivasa.

To add to the challenge, the Reserve Bank of India (RBI) has been stringent in terms of providing NBFC licence to fintech firms, multiple entrepreneurs told ET.

As fintechs search for new business models, the macroeconomic uncertainty has pushed the larger ones into cash conservation mode as new fundraises take longer to close.

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