The Pattern #44: Playing with fire: Can FinTechs continue to risk it all?

Mayank Jain   /    Head - Marketing and Content    /    2023-01-20

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Hello everyone, 

Welcome to the 44th edition of The Pattern, a weekly newsletter where we dissect and analyse all the rumblings from the world of finance, economy, and technology. It has been a buzzing week for the FinTech world, and there’s a lot to unpack. Let’s dive right in. 

Risky business 

Mountain Dew and Thums Up have something in common. Both soft drinks advertise with a ‘face the fear’ tone and try to showcase the spirit and courage of Bollywood stars who climb peaks or jump from helicopters to grab a taste of the elixir that these soft drinks are positioned to be. Do these drinks give one liquid courage, or is this just clever marketing is anyone’s guess. 

But what’s that got to do with FinTech? Quite a bit. 

It turns out, FinTechs might need some of that courage Kool-Aid too. It’s clear that while the sunrise sector is outperforming others in the startup world, it’s still fraught with existential risks for even the largest entities. The recent regulatory clampdown on erring NBFCs shows us that. And so does the RBI’s decision to disallow loophole innovation, and the recent Digital Lending Guidelines were a step in the same direction. 

But what are these risks beyond a funding winter and regulatory uncertainty?

In one word - everything. 

From illegal lenders, cybercrime, and data theft to compliance, funding, and business models - digital lenders of all shapes and sizes have a lot on their minds. This became clear in a comprehensive and one-of-a-kind report by the Center for Financial Inclusion at Accion International and Fintech Association for Consumer Empowerment. 

The report surveyed 30 lenders - banks, NBFCs, FinTechs, and digital lending players - and quizzed them about their perceived risks in the digital lending sector. The revelations are startling.

Turns out that illegal lending apps that spoil the industry’s image, propel more regulatory clampdowns and inconvenience consumers are at the top of everyone’s mind. Next comes the risk of cybercrime and fraud, which is burgeoning in India in general and the FinTech space specifically. 

“Cyber fraud is a massive challenge — we have instances of people using our logo on pages set up on Instagram and claim they are collecting on behalf of us, promising consumers that if they pay through these pages, the consumers will get better rates,or discounts on loans. It is hard to monitor and when consumers report this to us, we escalate it as a cybercrime.” - Interview respondent

Adding to these concerns is the lack of clarity around data privacy frameworks, impending compliance obligations, and inadequate or excessive regulation in the business that makes the entire business environment one of ‘uncertainty’ and ‘slowing down the innovation’. 

“The impact of rapidly changing regulations is on investments. Investors are not sure how the sector is evolving, which will slow down access to capital. We need catalytic capital investors at this stage, not venture capital investors.” - Interview respondent 

“The absence of a data protection law makes it hard to tell if collecting something will become unlawful in the future. From a lender standpoint, this creates a business continuity challenge — we might have to change something in the credit scoring algorithm in the future … it creates uncertainty.” - Interview respondent 

So what are the green shoots? Almost all respondents agreed that despite these risks, there is enough and more to cheer about. For instance, the customer demand for digital credit products is accelerating and shows no signs of slowing down. At the same time, the government’s push towards building a digital economy, as well as enabling frameworks such as UPI and AA, is bound to help the sector grow. 

Let the hunger games begin! 

Positive economics 

We’re counting down to the budget season, and the signals from the industry become much more important this time of the year. And the flurry of reports and data coming in from various sections of the lending industry shows that there’s indeed enough to celebrate. 

First, bank credit jumped 21.3% to retail trade in November 2022, year-on-year, according to the RBI. Meanwhile, wholesale trade credit jumped 10.9% in the same period. This is good news considering that credit expansion usually signals the well-being of the industry, and it seems that the MSME sector in the country isn’t too badly hit by the global slowdown just yet. 

Second, microfinance lenders saw a 10% jump in their average ticket size and a marginal increase in the number of women borrowers. This is coupled with a fall in the default rate with the NPAs coming down from 16% to 5.3% in March 2022. Moreover, there’s a wider dispersion of credit in the industry now and it’s no longer focused on a handful of states and geographies. 

Third, there’s rife speculation that the government may allow upcoming digital banks to fund SME sectors and help close the credit gap in the small business sector. These digital banks might also come with specific business licensing that could make them SME-specialized players, with their deposit-taking and credit operations being exclusively limited to the MSME space. More on this will be known in the budget speech. 

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Between the digits 

$12 billion - PhonePe’s latest valuation which has more than doubled after its recent funding round. The company is now the highest-valued FinTech in the country. 

Rs 15,000 crore - BharatPe’s target disbursals across merchants and consumer lending verticals. It did Rs 4,500 crore last year. 

1021 deals - Data shows that Indian startups cumulatively raised more than $24 billion in the calendar year ended 2022 across 1021 deals. This is 33% lower than the earlier year but more than double the activity observed in 2019 and 2020. 

This is all I have for this week. As always, leaving a list of reading recommendations below. 

Reading list 

  1. How The BNPL Industry Will Shape Up In 2023

  2. How can lenders increase revenue through intelligent customer segmentation

  3. Banks go big on partnerships to expand services, lure customers

  4. Visa, and Mastercard may be allowed a share of India's online payments

  5. Bank complaints rise, what can we learn?

  6. The FinBox guide to Digital KYC

Between the digits 

$12 billion - PhonePe’s latest valuation which has more than doubled after its recent funding round. The company is now the highest-valued FinTech in the country. 

Rs 15,000 crore - BharatPe’s target disbursals across merchants and consumer lending verticals. It did Rs 4,500 crore last year. 

1021 deals - Data shows that Indian startups cumulatively raised more than $24 billion in the calendar year ended 2022 across 1021 deals. This is 33% lower than the earlier year but more than double the activity observed in 2019 and 2020. 

This is all I have for this week. As always, leaving a list of reading recommendations below. 

Reading list 

  1. How The BNPL Industry Will Shape Up In 2023

  2. How can lenders increase revenue through intelligent customer segmentation

  3. Banks go big on partnerships to expand services, lure customers

  4. Visa, and Mastercard may be allowed a share of India's online payments

  5. Bank complaints rise, what can we learn?

  6. The FinBox guide to Digital KYC

Between the digits 

$12 billion - PhonePe’s latest valuation which has more than doubled after its recent funding round. The company is now the highest-valued FinTech in the country. 

Rs 15,000 crore - BharatPe’s target disbursals across merchants and consumer lending verticals. It did Rs 4,500 crore last year. 

1021 deals - Data shows that Indian startups cumulatively raised more than $24 billion in the calendar year ended 2022 across 1021 deals. This is 33% lower than the earlier year but more than double the activity observed in 2019 and 2020. 

This is all I have for this week. As always, leaving a list of reading recommendations below. 

Reading list 

  1. How The BNPL Industry Will Shape Up In 2023

  2. How can lenders increase revenue through intelligent customer segmentation

  3. Banks go big on partnerships to expand services, lure customers

  4. Visa, and Mastercard may be allowed a share of India's online payments

  5. Bank complaints rise, what can we learn?

  6. The FinBox guide to Digital KYC

Thank you for reading. If you liked this edition, forward it to your friends, peers, and colleagues. You can also connect with me on Twitter here and follow FinBox on LinkedIn to never miss any of our updates. 

 

Cheers, 

Mayank 

 

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