Outlook 2021: 5 trends that will shape the fintech sector in a 'path-breaking year'
India’s fintech revolution heralded a new age of banking for the country’s more than 63 million businesses and 190 million unbanked adults who had been on the fringes of financial services for most - if not all - of their lifetimes.
Whether it’s creating a common language between institutional banks and small businesses so they can access financial services, or facilitating quick sachet loan disbursals at moderate interest rates, fintechs today are powering various pieces of important machinery: the Indian economy.
2020 was a good year for the fintech industry: online brokerages gained momentum, enabling mom-and-pop investors to buy equities, IPOs, ETFs, mutual funds; UPI payments skyrocketed; more and more people switched to online banking in a bid to socially distance themselves and keep themselves safe; and insurance buys increased.
Key industry players such as Zerodha, Paytm, PhonePe, and Groww, among others, witnessed growth in activity and users as people turned to digital solutions for investing, banking, and contactless payments.
And most expect the trends to continue into 2021 as well.
For investors, the returns these startups have generated and the problems they’re trying to solve have helped create a bullish thesis. From identifying and catering to new target groups to micro startups that specialise in distinct financial services, opportunities in the fintech startup space in India are aplenty.
Here is what investors expect from the fintech ecosystem in 2021:
Neobanks will stage a comeback
With an increasing number of startups applying for banking licenses and institutional banks looking to expanding their digital offerings, neobanks are seen as the future of banking.
“There will a proper launch of neobank products (which got stymied due to closure of offline shops during lockdown) so some interesting products should get traction and subsequent rounds will happen in breakout companies in this space,” Deepak Gupta, Founding Partner at WEH Ventures, told YourStory.
Globally, neobanks — merely a decade-old industry — are expected to raise $394 billion by 2026, according to a report by PwC. In India, neobanks such as Niyo and RazorpayX raised a total of $90 million in 2019.
And although the RBI, India’s banking authority, does not stipulate for 100 percent digitised banks, some advances in the policy, or at least discussions around it, could be held next year.
In August 2019, the RBI started allowing fintechs to test their innovations in a restricted ecosystem, which portends well for the broader fintech industry and neobanks in India.
Micro-lenders will mushroom
As the fog from the pandemic and the subsequent lockdowns begins to lift, and business activity returns to pre-COVID-19 level, thanks to the imminent arrival of the vaccine, lending activity is expected pick up, especially as small merchants try and rebuild their ventures.
An increase in hiring activity is also likely to spur borrowing as consumption levels normalise, pressuring businesses to meet increasing demands.
This will likely give rise to micro-lending startups that will help process small business and personal loans quickly and digitally, in conjunction with banks. The quick processing time will help businesses get on track quicker, while digitising loan applications, and disbursals will help more people from across the country apply for loans.
Millennials will remain a focus, but multi-player financial services will see an uptick
Millennials have been fintech darlings for the last two years, and many startups have raised capital off the back of this age group.
But investors think there is room for more such startups given their affinity for online financial services that give them complete control over their finances, as evidenced by their demand for online investing services this year.
“Several neobanking and payment products could not be launched properly due to COVID-19 this year, so the millennial generation will continue to remain an important target group in 2021,” WEH Ventures’ Deepak said.
The next level of targeting specific audiences will be multi-user focused — users as a group accessing financial services, as opposed to the single-user focus seen up until now.
“An interesting trend I'm hearing a lot about, though not seeing as much activity in, is multiplayer financial services products versus the single-player ones we are used to. What if getting a loan, investing, buying insurance online could be done more collaboratively with friends/family/folks with similar interests, the way it actually happens offline?” says Shuvi Shrivastava, Vice President of Lightspeed India.
Aggregator platforms could emerge
Thousands of people logging onto platforms such as PolicyBazaar and Coverfox taught the industry in 2020 that the aggregator model works quite well.
Buyers have greatly appreciated the option to compare and contrast not just insurance policy prices, but also after-sales services and claims. There’s a clear indication that there’s more demand for such platforms.
Loan comparison platforms such as PaisaBazaar are useful tools for people too, and investors predict that the next monetisation opportunity for these platforms could be in-house loan offerings where they try to beat the best loan rates in the market and simplify the overall application process.
Even services that allow users to view all financial data and information in one place — called account aggregators — are expected to see traction in 2021.
“We are expecting the account aggregator platform to become fully operational in 2021; a lot of interesting products can be built on top of this platform. For instance, specialised vertical financing solutions could emerge,” Deepak says.
Some consolidation, coupled with large funding rounds
The Reserve Bank of India has come down quite harshly on banks that have technical glitches in recent times. Earlier this month, it directed HDFC, the country’s largest private sector lender, to halt all digital launches after a series of outages.
The central bank has been making a concerted effort to get institutional banks to digitise, which in turn has led to banks looking to the startup ecosystem for strategic buys that could digitise their operations in a way that appeals to their tech-savvy users.
“The COVID-19 pandemic definitely accelerated the digitisation of the banking sector. This year, digital has been established as a mainstay and primary way of business for all small and big banks.  has accelerated the growth on the path of ways of banking,” says Lalit Mehta, Co-founder and CEO of Decimal Technologies.
“The year 2021 will see hybrid banking become more mainstream. In a hybrid banking model, financial institutions combine the brick-and-mortar physical banking approach with virtual banking,” he adds.
On the other hand, well-established startups in the ecosystem are looking to expand into other financial services in a bid to offer multiple products on one platform to ensure customer retention and stickiness. Consolidation could continue to be a theme in 2021, especially as M&A slowed down in 2020 largely due to capital concerns.
Coming to private equity investments, WEH Ventures’ Deepak says large Series B and C rounds could be seen for consumer banking products, along with seed investments in interesting, niche use-cases.
“As a fund, we are looking to invest in teams building industry-specific financing solutions, rewards platforms targeting consumers, and are excited about insure-tech as a whole,” he sums up.
Amidst increasing user growth and traction, the fintech sector is poised for more innovation in 2021.
Decimal Technologies’ Lalit perfectly sums up the last year and the coming year:
“2020 has been a year that nobody expected. It forced businesses to learn and evolve. 2021 is the time to implement those learnings. Undoubtedly, it is going to be a path-breaking year, one we hope will set new milestones for the banking ecosystem.”
Edited by Teja Lele Desai