A recent report by YES Bank - India Fintech Opportunities Review (IFOR) - lists the key trends – opportunities and problems - seen in the Indian fintech startup ecosystem.
Over the last year and a half, the financial technology ecosystem has emerged as one of the hottest sectors in India’s internet play. With funding pouring in, even global players like Google and WhatsApp are looking to get a piece of this pie.
According to NASSCOM, the Indian fintech market is expected to grow at a CAGR of 22 percent for the next five years. Another KPMG report states that the transaction value for the Indian fintech sector was estimated to be approximately $33 billion in 2016 and is expected to reach $73 billion by 2020.
A recent report by YES Bank called India Fintech Opportunities Review (IFOR) reveals some key trends currently defining the Indian fintech ecosystem.
The report was developed after speaking to 611 Indian fintech companies, 123 of which are global firms. It also included inputs from more than 100 ecosystem members, including investors, academia, and incumbents.
We list down eight important findings from the YES Bank report:
- Fintech in India is still young
The report states that almost 64 percent of fintech organisations in India have been in business for close to three years now, with a median employee strength of 14 people.
Furthermore, 61 percent of the founders are under the age of 40 (25 percent less than 30 years of age, and 35 percent between the age of 31-40). Being at a nascent stage, only 7 percent of respondents have seen their companies turn profitable.
- India has the second highest global fintech adoption rate with collaboration
As per EY, the fintech adoption index in India is the second highest and 59 percent higher than the global average.
IFOR states that incumbents and fintechs have moved from competition to co-opetition and collaboration. Seventy-nine percent of respondents view incumbents as partners while 13 percent are indifferent and only 8 percent of them view them as competitors.
- Lending is a massive opportunity
The report states that Rs 26.5 trillion of the SME debt demand unmet by formal channels presents a huge opportunity for fintech firms.
Further, it highlights that MSMEs often do not have access to formal lending channels, and rely on the informal sector, at interest rates as high as 30 percent.
Moreover, smaller businesses also have limited financial history and might not have detailed documentation available at hand, which becomes a major hurdle in the loan disbursement process.
- The talent pool is not ready for the future
As many as 87 percent founders identified that employees focused on technology development or coding are the core of their workforce.
On average, 33 percent of total employee strength (in Indian fintech) comprises of coders; this number is as high as 67 percent for idea and pre-revenue stage startups.
However, the report goes on to state that the current talent pool for Indian fintech is low on future tech skills or knowledge. About 71 percent of respondents state lack of deep tech expertise as a key impediment to their growth.
The report states that all fintechs using Blockchain technology highlighted that the availability of coders in the technology is especially low, with many respondents hiring their coders from Russia, Poland, or Silicon Valley.
- Proof of concept and early stage funding is still limited
Fintech funding in India rose from $300 million in 2016 to $2.7 billion in 2017. The report states that fintechs have shown a 34 percent year-on-year jump.
However, Proof of Concept (PoC) and early-stage funds are limited as per respondents. As many as 71 percent of pre-revenue and 81 percent at idea stage fintechs noted “severe difficulty” in raising funds.
The respondents highlighted an even bigger challenge in PoC funding – only 11 percent report that they received funding, and 19 percent stated that their industry partners paid for the PoCs.
- Managing burn rate is emerging as a key issue for Indian fintech
According to IFOR, 74 percent of the startups have a burn rate between $10,000 and $50,000 per annum, with only 7 percent of them being profitable.
- Accelerators and incubators might actually be supporting in commercialisation
IFOR states that fintech hubs, accelerators, and incubators might be playing an important role due to their ability to provide mentorship and access to investors, corporates, and funding.
As many as 74 percent of all respondents to the online survey are part of more than one accelerator programme. A whopping 85 percent list PoC development and commercialisation as their top reasons for enrolling in accelerator programmes.
- Understanding of regulatory requirements is not complete
About 12 percent of respondents along with the 34 focus group discussion participants cite understanding and meeting regulatory standards as a challenge in their day-to-day business.