Digital payments seeing second growth spurt after demonetisation, says fintech report by Matrix Partners India

In a report titled 'State of India Fin+Tech' by Matrix Partners India, with McKinsey & Company as the knowledge partner, the investment firm highlighted that fintech startups still have a ray of hope. While lending may have been severely impacted, wealth management and insurance tech recorded growth. 

The report includes results from a survey of approximately 70 fintech founders and CXOs, and insights from a series of virtual fireside chats held with industry thought leaders in August 2020.

In a press statement shared by Matrix Partners India, Vikram Vaidyanathan, Managing Director of Matrix India, said, “With this initiative we’re trying to answer the question – how are other fintechs doing and what can I learn from other founders/CEOs? We’re truly grateful for the responses from and in-depth interviews with all stakeholders in the ecosystem."

"It's inspiring to see how young companies have tackled a once-in-a-lifetime crisis with swift decisive actions and speaks to the resilience of the fintech ecosystem. Over the last year, we have seen an acceleration towards fintech products and we’re long-term believers,” he added.

Rajat Agarwal, Managing Director Matrix India in a conversation with YourStory Media added that despite the negative impact lending startups saw during the six month-long moratorium which was extended, he believes the space will nevertheless see some tailwinds in the near future. 

“Indian fintech industry has proven to be highly resilient and managed the COVID-19 crisis much better than what most people anticipated. While near-term confidence in the sector did take a beating, there are clear signs of recovery and long term potential of the sector continues to be attractive,” said Rajat.

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Report findings 

• In the short-term, the report said the fintech confidence index had uncertainty. But most respondents are optimistic about the long-term outlook.

• The report added fintech across segments have seen mild-to-major disruptions — lending is the most severely impacted, while insurance and wealth management have seen tailwinds.

• Most expect recovery in the next three to six months. And for close to 30 recent of fintechs, time-to-profitability is extended by over six months.

• Digital payments is witnessing a second growth spurt after the 2016 demonisation. This is driven by digitisation of traditionally offline channels (FMCG, govt. payments) and growth of new online segments(gaming, edtech, OTT apps) etc.

• Despite lockdown in many parts of the country, digital payments players reached approximately 82 percent of pre-COVID-19 volumes in June, with average transaction size was 1.1x as compared to pre-COVID-19 levels.

• Close to 30 of the respondents had achieved pre-COVID-19 volumes by July and over 60 percent expect to reach those by September.

• Most players plan to expand into adjacent value pools, especially lending — 93 percent of the players expect to launch credit product within the next three months. 

• As of June 2020, disbursal volumes were down by approximate 80 percent as compared to pre-COVID-19 levels, with close to 50 percent lenders stopping disbursals altogether.

• However, we are seeing some green shoots with close to 20 percent improvement in collection efficiency in April to June period. 

• Bounce rates have also decreased from 34 percent in April to 26 percent in June.

• Secured lending products (gold loans, LAP etc) have performed much better than unsecured loans. Many fintech lenders are betting on embedded finance and context-specific lending products (e.g. BNPL, invoice financing) to drive growth.

• While pandemic has accelerated Indian customers’ adoption of digital financial products (new account openings for Neobanks already above pre-COVID-19 levels), it has delayed product launch plans for 50 percent of the players.

• Close to 70 to 90 percent respondents believe pandemic would have a positive or neutral impact on gross margins, customer acquisition, and commissions.

• Neobanks will focus on large and underserved segments/niches (e.g. SMBs, millennials) and have similar revenue lines as traditional banks.

• While virtual/digital bank licenses are still a few years away, clarity on bank-fintech partnerships will be a welcome step and would reduce confusion among stakeholders.

“Fintechs in India have transformed the financial services sector. This report highlights how players are responding to recent disruptions, perspectives on the future of key sub-segments and as a result, and the journey ahead for fintechs. In addition, we touch upon what’s needed from stakeholders to further enable the impact that fintechs could have on the ecosystem”, said Peeyush Dalmia, Partner, McKinsey & Company.

The report highlights that fintechs are a critical constituent of the financial services in India, having pioneered several innovations that have boosted access and penetration of financial products. It further underscores the importance of supporting infrastructure and regulations, access of capital, and partnerships with incumbent players to expand the relevance of fintechs in India. 

“In a post-COVID-19 world, we believe there will be an increased focus towards digital payments, with a push for contactless transactions. Lending will see a slower recovery, but there will be a recovery in the space,” added Rajat.