It feels like we are back in 2013 when it comes to FinTech…
Back then; e-commerce was at its peak. Entrepreneurs, investors and the media were all enthralled with the hype surrounding the industry. The watching public was fascinated, perplexed and enamoured. After the e-commerce bust, came the “in the blink of an eye” rise-and-fall of FoodTech.
FinTech is the latest darling of the startup world.
While understanding how you’re going to get your pasta or paratha in 30 minutes flat was easy enough, the intricacies of finance, coupled with the short-attention span of the media (and investors) has left the general consumer a bit lost.
Here are the questions I get asked frequently:
Are banks going to be totally disrupted?
I’ll save my long answer for a different article, but the short answer is NO. They do have their issues, but the private sector Indian banks are very aggressive and have some very smart people working on their product and technology. But they have to adapt fast, and undoubtedly, some of the slower ones will perish.
Is the field in India different from that in other countries?
Mostly, yes. India is different. Our regulations, laid down by the RBI, SEBI, and so on, are far more restrictive than the West or China. The penetration of finance is dramatically different. While the economics, cost of capital, and operational costs are much higher than most countries, consumer awareness and the willingness to take risks is much lower.
For example, in the US, credit comes to your house. Literally. You get credit cards through the mail with your name on them. You peel off the sticker, call a toll-free number to activate the card and go shopping in minutes. No application forms, no KYC (my American friends always think it’s an Indian form of Kentucky Fried Chicken!), no visits to your home, no photos, and no address proof.
Almost every startup that tried to copy the US model has failed. Some of India’s hottest startups, such as PayTM, MobiKwik, EZEtap and SmartOwner, either don’t have American counterparts or have very distant cousins in America. The dynamics are so very different.
There is so much hype around UPI and IndiaStack. Is it justified?
Yes, it is. These are the true Indian innovations, and although it may not seem apparent now, in a year or two, we will look at them as part of our daily lives- just like we now order an Uber without getting wowed every time! (Full disclosure: I was an UIDAI volunteer)
So, broadly speaking, what are the types of FinTech companies?
Here are the broad buckets:
a) Technology providers for financial institutions (FSS, Prism Payments, Perfios, Yodlee)
b) Payments and Remittances (Citrus, RazorPay, PayTM, MobiKwik)
c) Consumer Lending (Bankbazaar, Paisabazaar)
d) Small Business Lending (Capital Floats, KredX)
e) Investment enabling of some sort (ScribdBox, FundsIndia)
f) Personal Finance Management (MoneyView, Walnut)
g) Selling insurance or other products (Coverfox, PolicyBazaar)
So, how will these startups make money?
a) Take a cut of the transaction (like all payment companies do)
b) Online/partially-offline lead generation for banks or insurance companies
c) If it’s a loan, take a part of the “spread” - the difference between the cost of borrowing and the cost of lending after the bad-loan write off
d) License fee or some kind of per transaction fee for the technology companies
Who are the customers these startups are selling to?
a) Those who sell technology or license to financial services companies (banks) either charge an annual fee or per transaction fee or a combination thereof. So, the customer is a bank.
b) All the payment companies try and take a cut of your transaction (e.g. credit card gateways) from the merchant you’re transacting with. It’s a tiny fraction of a percentage, but it can add up. So, the customer is a merchant, though they usually work with a bank to get that merchant on board.
c) All the lead-generation companies get a customer lead on the web and sell it to one or more financial institutions for a fee. So the customer is a bank.
d) There are a few companies that sell services directly to small businesses or enterprises (happay or NiYO). In these cases, the small business or enterprise is the customer.
e) Very rarely do customers actually pay directly for a financial service.
In part 2 of this article, I will touch upon the sectors under FinTech that are hot at the moment, and also elaborate a bit on why they are the centre of attention. We will also talk about why investors love this space and whether these startups will fizzle out or stay-put.
Which of the Fintech sectors are the hottest and why?
The three sectors that have caught both the investors’ and the media’s imagination are Payments, Consumer Lending and SME Lending.
It is a massive pain for a consumer to make an online payment to pay any merchant (e.g.: Flipkart) or any service provider (e.g: Uber). The RBI, with the right intention of preventing online fraud, tried to make online shopping safer for the consumer. They forced the consumer to enter an OTP (one time pin) when a credit or debit card transaction is done online. But it created a massive pain, with costs and drop-off for the online companies as well as consumers. Flipkart introduced Cash on Delivery (COD), which solved this and the trust issue, very successfully. But using cash entails other headaches for these companies and the consumer.
The first generation of startups tried to solve this from 2006-2012 for the PC and Desktop era. Enter smartphones and the second generation companies with Mobile Wallets, which solve the payment problems with a special license from the RBI that lets consumers move their own money to PayTM, MobiKwik or Freecharge and park it there. Transactions then become very easy. This is like putting one Band-Aid on top of another Band-Aid.
Since most of us don’t want to leave money sitting in a wallet, the average bank balance in mobile wallets is very low. The RBI has put a third Band-Aid on top of the second by allowing these companies to pay interest to the consumers for the money sitting in the wallet. We’ll have to see how many consumers are enticed by this. Nevertheless, these mobile wallets neatly solved the problem of paying for services, such as those provided by Uber and Ola, that we use a lot, and we need to thank them for that!
The best solution might be IndiaStack’s UPI, which has just been introduced. Using Aadhaar, this allows for money to move between any two bank accounts – whether it is between friends, or between you and a merchant – using highly secure and regulated rails built by NPCI, a consortium of banks. Once this is live, there is no need to move the money to a mobile wallet and then pay someone. It will be possible to just transfer the amount directly to the person. It would be an awesome solution, but currently, the big banks are dragging their feet implementing it, as it levels the playing field with other banks.
B) Consumer Lending
Most of us need to borrow money for something or the other. Almost everyone borrows to buy a house or a vehicle. And for smaller needs, the pawnbroker, at least for the middle class, has been replaced with gold loans. All these are “secured loans”, where you lose your house/car/gold if you don’t pay up. The interest rates you pay range from 9-12 percent from banks.
There is a second category of loans that are called “Consumer Durable” loans, where you walk into a Tata Croma showroom and buy a TV or mobile phone on an EMI. This is widely popular, though with 0% EMI plans, most people don’t even think they’re taking a loan and paying interest (you’re paying for it, believe me!). Bajaj is the king of the hill in this category.
Then there are “unsecured loans” which, by definition, is where you get money without putting up collateral. Credit cards are the best example, though there is a small (but growing) category called “PL”, Personal Loans, from banks that just give you cash. The interest rates for credit cards in India are 38-42 percent, though most people don’t know that. Personal Loans range from 15-24 percent. Obviously, since the banks are taking higher risk, they charge a higher interest.
The penetration of credit, especially unsecured credit, in India is pathetic. While the US has nearly 1 billion credit cards for 350 million people, we have 24 million cards for more than a billion Indians.
Lack of credit is a big problem for any economy, and there is a growing list of startups trying to tackle this problem of unsecured credit.
A number of startups, about 150 by last count, are trying to solve this in different, innovative ways. But the banks are no fools, and there are very good reasons why credit is anemic in our country.
All the products launched here have to answer these questions:
- Who is providing the capital that is at risk and who is collecting the repayment from the customer? It’s either the bank, borrowing from other people online (peer-to-peer, in industry parlance) or using investors’ money.
- What is the interest they’re planning to charge? The profile and risk of the customer changes based on this. Most banks lend at 14 percent- 19 percent. NBFCs that are regulated institutions (e.g.: Bajaj Finserv) charge all the way from 14 percent to 26 percent.
- How is the credit evaluated? CIBIL – the national credit database – has a report that provides deep insights about a customer’s background. Looking at a bank statement is another way.
- And lastly, exactly what is the product? As in, a credit card or a loan or something different?
C) SME Lending
Every business needs credit to smooth out the gap between income and expenses, and make investments to grow the business. While the tiny sliver of “venture funded” startups have the luxury of having someone write them a cheque even before the company has revenue, 99.99 percent of the Indian real businesses – factories, shops, services – are permanently cash-starved. The banks have traditionally lent to the Mallyas of the world, but not to the small guy.
A dozen new startups have stepped in to fill the gap in the last two years. Though it’s a bit unclear exactly how they use technology to evaluate credit, they are certainly filling a major void. As a result, they have started pushing the banks and NBFCs to be more aggressive in lending to this sector.
Why do investors like this space so much?
a) They see parallels of what happened in the US or China and think it’ll happen here.
b) The more seasoned investors correctly see that India is vastly under-penetrated in consuming financial products. With the advent of smartphones and data usage, they feel that startups can now access (sell), deliver and service these customers cheaply.
Is FinTech an old wine in a new bottle? Didn’t we see a bunch of companies getting funded in the last wave?
Yes and no. Between 2007-2011, before the word “FinTech” was coined, there were many payment companies, such as NG Pay, mCheck, and PayMate. In many ways, they were ahead of their time; there weren’t enough online merchants to take payments and not enough e-commerce customers buying online.
In the current scenario though, there are a new set of Payment Gateways and Mobile Wallets, which are an alternate payment methods, and there are also new categories such as investment advisors, and lending for small businesses and consumers.
So, will FinTech also suffer the same fate as hype-and-crash segments like e-commerce and FoodTech?
Nobody knows. Some companies will suffer for sure, that’s the nature of capitalism. Those started after the e-commerce crash might have reasonable valuations and have a good chance of growing into the valuation if they’re smart and thrifty.
It’s money-business after all - it pays to be thrifty!