FINTECH INDIA: INNOVATION FOR THE NEXT 400M
© September 2016 Kalaari Capital Advisors. All rights reserved
AUTHORS Bala Srinivasa, Partner, Kalaari Capital (
[email protected]) Yash Jain, Analyst, Kalaari Capital (
[email protected])
For more information, write to us at
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FINTECH INDIA: INNOVATION FOR THE NEXT 400M
FOREWORD ...........................................................5 BANKING IN THE TIME OF DISRUPTION .............6 BANKING IS NECESSARY. BANKS ARE NOT. ... 11 KALAARI FINTECH SURVEY 2016 ...................... 14 CONCLUSION ....................................................... 26
FINTECH INDIA: INNOVATION FOR THE
Top: Former UIDAI chairman Nandan Nilekani addresses the audience at Kalaari Capital’s ‘Fintech India: Innovation for the next 400M’ event in Bengaluru in August 2016. Left: Co-founder and MD of Capital Float Gaurav Hinduja shares the India Stack case study at the event. Above: A member of the audience listens to his question being answered by a panellist
Foreword The promise of financial inclusion in India has been around for a long time but has never materialised. The vast majority of a billion-strong country is left out of the financial system, primarily due to lack of infrastructure and the dismal economics of servicing these customers. There are three main issues – the cost of the transaction, the risk of the transaction, and the cost of acquiring new customers. Balancing these variables while building a profitable business at scale has been challenging so far. However, for the first time there seems to be a genuine inflection point based on a combination of technology-led infrastructure (India Stack), favourable government policies, and entrepreneur-driven fintech innovation. At Kalaari, we believe that India is on the cusp of large-scale innovation in financial services, which opens the door to creating massive markets for a range of areas such as consumer lending, small business credit, payments, trade finance, insurance, and health care financing, among others. Over the past 18 months, we have engaged deeply with over 100 fintech startups, industry leaders, senior bank executives and industry organisations to contribute, learn and be part of an industry-reshaping wave of change. This report features an in-depth survey of fintech startups in India. While there are around 800 fintech startups in India, beyond high-level numbers, not much is actually known about these companies. We are grateful to the 350+ fintech founders and senior executives who proactively responded to this survey. It provides, probably for the first time, some granular data on founding teams, business models, customer acquisition channels, technology stacks, usage of Aadhaar and eKYC, funding needs, and much more. We start with a terrific introductory piece by Nandan Nilekani (co-founder of Infosys and former chairman of UIDAI) on 12 trends that he sees as changing the trajectory of financial services in India. This is an abridged version of his fantastic keynote speech at the Kalaari fintech event in early August. In this report we also have a hard-hitting viewpoint by Ravi Venkatesan (former Chairman of Microsoft India and current Chairman of Bank of Baroda) on the strategic choices incumbent banks in India need to be making in order to deal with the impending change. This report is part of Kalaari’s ongoing work in the fintech market in India. We hope you find it useful and welcome your feedback and inputs.
BALA SRINIVASA PARTNER KALAARI CAPITAL
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Banking in the time of disruption NANDAN NILEKANI Nandan Nilekani is the co-founder of Infosys and the former chairman of the Unique Identification Authority of India (UIDAI), which created Aadhaar. The views expressed here are his own.
Banking and financial services are on the threshold of complete disruption in India, one of the largest unbanked markets in the world. Technological innovation is being wrought and deployed across the spectrum of financial services; there is no other sector that is set to change so much. And powering this transformation is the 12-digit Aadhaar number, the world’s largest biometric identification system. With over 1 billion unique identities issued, it is not only the largest database of its kind, but also the foundation on which a cashless – or at the very least, a lesscash – society can be built. The India Stack, a set of publicly available APIs – the largest in the world – uses Aadhaar for authentication and builds layers on top of it to integrate mobile applications that enable a variety of transactions, from eKYC to e-Sign and many more. As a paperless, cashless service delivery system, it is India’s single-most important innovation to formalise the country’s domestic economy through digital services. I see 12 clear trends that will become the hallmark of the transformation in play within banking and financial services: #1. The nature of transactions will change from low volume, high value and high cost, to high volume, low value and low cost. Electronic clearances such as National Electronic Clearing Service (NECS), Immediate Payment Service (IMPS) and National Automated Clearing House (NACH) already surpassed paper clearing in 2015, and are growing at 50% annually. IMPS alone cleared more than the total value of transactions processed using debit cards. The move to a less-cash, less-paper, and eventually an almost paper-less system, is already underway.
Former UIDAI chairman Nandan Nilekani speaks at the ‘Fintech India: Innovation for the next 400M’ event held in Bengaluru in August 2016
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#2. Credentials will go from being proprietary to open. Currently, two-factor authentication is managed by individual providers of financial services. A credit card issuer, for instance, has to send a customer a credit card, followed by a PIN that the customer must feed in to validate the transaction. The process is clumsy and expensive. In contrast, under Aadhaar-based authentication, phones with biometric recognition will replace cards; authentication will be done by Aadhaar and not the bank. India is the only place in the world where service providers can get one-click, two-factor authentication without getting into the business of identity management. #3. The cost of switching will fall further. For example, there is no cost involved when a mobile phone consumer ports to another provider. As a result, only 1 in 20 SIMs is sold to a new user; the rest is churn. In a liquid market, people shop around. Similarly, in banking, when moving assets is easy, churn goes up and costs (of onboarding, transacting and switching) come down. #4. Risk will be individually priced based on digital footprints, and uniform lending rates will no longer apply. In a services economy, companies don’t necessarily have assets that they can mortgage, but they do have cash flows. A risk assessment that is based on the transaction data of a services company will be more accurate and transparent. It will also allow small companies with informal assets to move into the formal economy. #5. Financial services businesses will move to making money from data, rather than fees. Companies like Google and Facebook already do this. A new class of service providers will provide transactions for free as they will monetise the data from each of these transactions. #6. PSU banks will quite likely see their market share shrink (like the telecom monopolies did after the 1990s) to ~60% in a few years. Their market cap is already shrinking, making way for de facto privatisation. They are yielding market share to private banks, NBFCs, and fintech startups, and the government is losing an opportunity to make billions of dollars in market capitalisation.
Ravi Shankar, CEO of fintech startup Active Intelligence, asks Nandan Nilekani a question
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Nandan Nilekani and Sanjay Jain (Chief Product Manager, UIDAI) demonstrating the completely online Aadhaar-based customer onboarding process to a volunteer from the audience
#7. Merchant models will be completely disrupted, starting with credit/debit cards, high interest rates on unpaid balances and eventually, MDR for merchants. Mobile payments will replace card-based payments, while smartphones will replace point-of-sale (PoS) terminals and cards. Transaction costs on merchant payments will end, effectively unbundling supplier credit and accelerating the entry of a larger number of small merchants into the formal economy. #8. Cashless will change everything. Bank branches and cash collection centres will become more and more irrelevant as the smartphone itself becomes a bank. And because everyone would eventually be an ATM, there will be no need for cash itself. Eventually, in theory, the benefit of convenience of being in the formal system will outweigh the challenges involved. Oldstyle assets will be replaced by new ones (think phones, platforms, data, and algorithms). #9. Interest rates will converge. The informal sector – which is where a significant portion of the population conducts its business – pays very high interest rates. As financial services get more digitised, the formal credit system will become more easily accessible. It will lower costs and increase convenience and transparency, leading to the eventual elimination of the informal lending sector. #10. The digital desh is here to stay thanks to the three pillars of Jan Dhan, Aadhaar, and mobile, which is enabling universal banking. Jan Dhan has already facilitated ~23 crore new bank accounts. The Aadhaar system can today enable 100 million transactions per day in real time and is designed for large-scale use. And mobile phone sales continue to explode, with 25 million devices being sold per quarter. Underwriting this trinity is regulatory innovation – in the first 50odd years since Independence, the country saw only 14 new banks come up. Since 2015, however, 21 new banks have been established and banking licences are now available on tap.
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#11. The India Stack, built on these three pillars, is set to disrupt the financial services sector as we know it. It allows for innovation, reduces onboarding and transaction costs, increases transparency and trust, and is a broad-based, ubiquitous, and inclusive platform. It incentivises citizens to maintain a good digital profile, building trust in the system. It also eliminates the need to be physically present for any financial transaction. But most importantly, it aligns market goals with social goals. #12. India will become data rich. Most estimates say that by 2020, 50% of all Internet users in India will be rural, as will 75% of new users. Simply put, the Internet is being adopted in spades and is creating huge digital footprints. It has dramatically opened up data that is given by consent. This electronic consent architecture, also a part of the India Stack, will boost the data economy because every transaction will give the platform more data about a customer, allowing him or her to be served better, thereby increasing stickiness. Banks, therefore, are set to become new-age digital platforms where “knowing” your customer will acquire a whole new meaning. Banks and financial service providers, backed by rich data collected electronically, with consent, and analysed by fantastic algorithms, will be able to provide a greater variety of products at significantly lower costs – all without the need for physical presence. The not-so-distant future will see the emergence of low-risk products that allow for higher levels of liquidity and marked-to-market interest rates. The day is not far when we could see gamified products grounded in digital behaviour, or goal-directed savings and hybrid, customised products. The crucial change, however, would be bridging the credit gap and getting finance across to those who need it the most. Lending has grown 15% in the past seven years. A Credit Suisse report titled “House of Debt” has predicted that lending will grow 5x in the next 10 years, going to $3 trillion from $600 billion.
Nandan Nilekani in conversation with Freecharge CEO Govind Rajan and Vani Kola, MD, Kalaari Capital FINTECH INDIA: INNOVATION FOR THE NEXT 400M
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The United Payments Interface (UPI), a key component of the India Stack, is set to unbundle payments and enable merchants to use self-service systems. The low cost of onboarding and transactions will mean that merchants with a UPI-enabled app can accept all customers with an Aadhaar number and initiate both push and pull transactions using any transmission protocol that they choose. Up for grabs is an incremental market capitalisation opportunity in the vicinity of $400 billion. There is no saying who will win the next round – it could be banks (PSU or private), alternate lenders, or fintech companies. Only one thing is certain – banking and financial services will undergo complete disruption and financial inclusion will become a reality.
Bala Srinivasa, Partner, Kalaari Capital, handing over a token of appreciation to Nandan Nilekani
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‘Banking is necessary. Banks are not.’ RAVI VENKATESAN Ravi Venkatesan is the Chairman of the Bank of Baroda and former Chairman of Microsoft India.
So said Bill Gates in 1994, predicting that technology would transform even this stodgy sector protected by regulation and incumbency. However, globally, banks have proven to be extraordinarily resilient institutions that have weathered many crises, nationalisation, regulatory backlash, fraud and poor management. So Bill’s prescient quote has been forgotten until the recent frenzy over “fintech” startups. The question now is whether they will be able to outmanoeuvre the latest threat to their existence. A combination of technological advances, the pervasiveness of smartphones and venture capitalbacked entrepreneurs is finally beginning to threaten opaque, multi-layered and transaction costladen financial systems. In theory, depositors and borrowers will get more direct, more immediate and cheaper access to each other, cutting into the margins of the banks that are today in the middle. Just one digital settlement technology called Blockchain is estimated to save lenders more than $20 billion a year in costs. The big risk for traditional banks is not erosion of margins but customers fleeing from them, leaving them irrelevant and stranded with costly legacy infrastructure. In India the dynamics are even more interesting. The existence of foundational building blocks like Aadhaar and eKYC, financial inclusion programmes like Jan Dhan Yojana, and tech-savvy entrepreneurs like Nandan Nilekani – who are determined to use technology and innovation to bring about inclusion and eliminate corruption – may cause India to once again leapfrog the rest of the world to pole position. This poses a huge risk to India’s banking system, which is still dominated by public sector banks. Even the best private sector banks in the world are struggling with this disruption. This is because banks are designed to be conservative and risk-averse, with cultures that are unsuited to rapid change and unable to attract the best technological talent. In India, the challenge is profoundly greater because our public sector banks are facing an existential crisis of weak balance sheets and huge non-performing assets and are hamstrung by the limitations of government ownership. Their only shield, which is regulation, is also coming down as the RBI is permitting the entry of new competitors. The risk for our public sector banks is that they become sitting ducks as new competitors nibble away at their best customers and the most lucrative part of their business, leaving them with a declining and low-margin portfolio. This could severely cripple the government’s priority sector lending ability and the nation’s development. However, banks should not be underestimated. Banks’ greatest strength is their customer franchise and hard-won reputation for trustworthiness and stability. Banks also have considerable expertise in regulatory compliance and risk management. Finally, banks have capital. They have the capacity to invest and the staying power to weather intense competition. It turns out that fintech startups and banks have exactly complementary strengths. These new breed of companies are entrepreneurial, nimble and can attract the smartest minds, but they
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have a voracious appetite for capital as they grow, they have yet to build strong brands based on trust, and they lack a sophisticated understanding of regulatory compliance and risk management. Therefore, the most promising future scenario is partnerships and ‘co-opetition’ between the new disruptors and incumbent banks. There are two broad responses to the new threat of disruption in the industry today. One response is to shut one’s eyes and hope the threat goes away, or at least materialises on someone else’s watch. The second is to blindly mimic what the startups are doing; witness the number of banks who are offering mobile wallets, mobile apps, building concept digital branches and so on. The latter are necessary learning experiments but far from sufficient. What might be more successful is a more disciplined, three-pronged approach. First, use technology to radically simplify the customer experience. Think Uber or Amazon and use them as benchmarks for simplicity. Second, get teams to work on radically simplifying and speeding up internal processes. Think about a 95% reduction in the time to approve a loan or open a new account. When it comes to new business models, it is hard to predict what or who will succeed and the best approach might be corporate venturing rather than in-house innovation where banks get into strategic partnerships sometimes cemented by equity investments in promising startups, thereby creating valuable options for the future. It is famously said that culture trumps strategy and this is never more true than in the conservative world of banking. So executing such strategies, while conceptually simple, poses a severe cultural challenge. Banks will have to find a creative way to create an organisationally distinct unit that has the ability to bring in outside talent where essential, free from the constraints of the procurement process and which has the mindset and ability to partner with startups. For this, strong personal leadership from the CEO and unambiguous support from the Board becomes imperative. It is crucial that RBI and the Finance Ministry support the creation of such ambidextrous structures by at least a few of the largest public sector banks. The disruption posed by financial technologies is like a tidal wave. We overestimate the speed of change in the short term, but we radically underestimate the magnitude of their impact in the long term. Banks have a rapidly narrowing window of opportunity to position themselves to ride the wave.
(This article was first published as an opinion piece in The Economic Times.)
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Perspectives from industry thought leaders For those entering the formal financial services system for the first time, the India Stack will create a more trustworthy ecosystem where individuals will work hard to keep their payments history clean. It will empower merchants to build their own payment system, almost like bringing this facility as a selfservice.
Sanjay Jain – Chief Product Manager, UIDAI
Rural households do a variety of jobs and businesses to diversify risk – it’s a very expensive way of diversifying risk because the implication of not having the right financial products is huge. We don’t have ways for these customers to manage concentrated risk that can eventually trigger bankruptcy.
Sucharita Mukherjee – CEO, IFMR Holdings
When you unbundle things, disruption happens. In the case of Aadhaar, once we unbundle the APIs, layer by layer, complete disruption happens. Layered innovation has led to mass flourishing. Aadhaar has expanded because it is being used.
Pramod Varma – Chief Architect, Aadhaar
There is a lot of momentum for digital payments, and the government is taking initiatives to address the challenges in this space. The major challenge is to create acceptance of cashless or digital payments through point-of-sale machines. These barriers can be dispensed with (by having) digital payments on a reliable platform where cashless payments become frictionless.
Govind Rajan – CEO, Freecharge
India has the dubious distinction of leading the charts when it comes to accidents. More often than not, accidents have serious financial implications for the victim’s family. Insurance is largely perceived as a commodity that is useful in times of emergencies. But the need of the hour is awareness about the importance of financial safety through insurance.
Yashish Dahiya – CEO, PolicyBazaar
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Kalaari Fintech Survey 2016 There is a lot of interest in the fintech space in India. According to Tracxn, there are 800 fintech startups in the country. Most of these companies were founded in the past three years as entrepreneurs took on the challenge of trying to digitise Indian financial services. However, beyond high-level numbers, not much is actually known about these startups. We wanted to know more about founding teams, areas of focus, customer acquisition channels, the technology stack, usage of Aadhaar and eKYC, funding needs and much more. We rolled out the Kalaari fintech survey in late July and were gratified by the strong response. Over 350 startups filled out the survey, making this the most comprehensive data set on Indian fintech startups to date. Rather than make this a laundry list of questions and answers, we have tried to combine questions into areas of relevance and also added some Kalaari viewpoints based on the work we do in this space.
Bala Srinivasa, Partner, Kalaari Capital, talking about the India fintech opportunity
I.
Founder experience and fintech areas of focus
It is generally believed that a sector like fintech requires domain expertise. Understanding the nuances of working with banks and other financial institutions is critical to the success of fintech startups. However, the current set of fintech startups in India don’t necessarily feel that way. About 50% of founders have less than 2 years of financial services experience prior to starting out on their own. Industry veterans, those with 10+ years of financial experience, account for 17%. Around a third of startups have founders with 2-10 years of financial services experience. It will be interesting to observe which cohort makes the most impact. Note: Numbers in the graphs in this section of the report have been rounded off.
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In terms of the areas that fintech startups are going after, it was no surprise to see Payments and Lending figure in the top three, as both sectors have seen massive funding. More than a third of VC funding over the last five years has gone into Lending and Payments. (refer to the graph on total VC funding on page 17). What was more interesting was Personal Finance (for the survey we included wealth management, expense tracking, tax management) occupying the second spot. While this category has received some funding, it has been tepid relative to other segments. Entrepreneurs, however, think this is an area ripe for change and are ploughing right ahead. There is a case to be made that India fintech trends – Jan Dhan Yojana accounts, Aadhaar, eKYC and smartphone penetration – do create a new environment compared to prior efforts in this area. Some personal finance providers are showing reasonably strong traction that may support an inflection point.
II. Challenges in building an India fintech startup Raising capital, customer acquisition and monetisation are identified as the top challenges by the respondents. Capital is always a scarce commodity, and given the large numbers of new startups and a somewhat tighter funding environment, it’s not surprising that it makes the list. Customer acquisition is something every Indian fintech startup finds tough. The vast majority of addressable customers are offline, and the cost and scale of operations required to bring them online is
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significant. Every startup has to have its own answer to this challenge. Subsequent questions drill down in different
approaches that seem to be coming into play. Similarly, monetisation is a key issue that keeps founders up at night. A fintech startup either achieves rapid scale and escape velocity that allows it time to figure out a monetisation model, or it has to find a balance between gaining customers and also showing progress towards an economic model that looks sustainable and eventually profitable. In terms of relative spread of capital raised, our survey found that 13% of respondents have raised more than $2 million, which is not too bad given the large number of startups that have emerged and the fact that they are still in the early stages of their funding lifecycle. In terms of capital needed to build a successful business over the next five years, 70% believe they need less than $25M. This is interesting and seemingly contradictory to responses in terms of business model. As shown in the business model question (chart on page 19), 40% of these companies are building a direct consumer business that may end up needing a lot more than $25M to scale and build a
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national brand. That said, we would not read too much into this dichotomy at this early stage of the Indian fintech ecosystem. It will be interesting to see how this response evolves in future years as companies make more progress and founders contemplate longer-term issues. Finally, reflecting the reality of the current fundraising environment, only 6% of fintech founders think it will be easy to raise the capital they need. Half of them believe it will be fairly difficult, while 43% are somewhere in between.
Source: Tracxn, Kalaari estimates
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III. Fintech growth strategies that account for India realities While the image of a fintech service conjures up smiling millennials transacting away on their smartphones, the reality in India is quite different. There is a massive need for new financial products and services that address large latent demand. However, unlike the West, it involves a lot of consumer education, trust-building and market creation. Some fintech services such as consumer and small business lending have a significant “pull” factor but still have to find ways to been seen and heard by the customer. A pure digital customer acquisition strategy becomes risky unless there is a viral component to the product or service that takes care of brand and customer acquisition. It is therefore not surprising to see more than two-thirds of fintech startups surveyed thinking of a hybrid “online + offline” strategy. Around 12% of startups surveyed are marketing only through third-party channels like banks and NBFCs. As the market matures and services such as eKYC, digital verifications, and digital payments take hold, it is not hard to see a rapid shift to a pure online model. However, for the next couple of years, it seems startups are very much in the camp of finding a hybrid strategy that can solve the customer acquisition issue and also deliver a high-quality service given the infrastructure bottlenecks in India. Around 23% of startups have taken the B2B route. These are mainly companies who see a big business opportunity in helping banks and other financial institutions upgrade their technology (transaction management, customer interaction, digital verification, document management, etc.) to compete in the new era. Around 38% are focused on a B2C model which is consistent with the choice of focus areas such as personal finance, payments, and consumer lending discussed earlier. Another 38% are targeting the consumer but are trying to do this via bank and NBFC partnerships. The B2B2C component is a bit surprising in terms of its magnitude and needs deeper analysis to get a sense of the actual drivers.
From left: Freecharge CEO Govind Rajan, PolicyBazaar CEO Yashish Dahiya, and Kalaari Capital MD Vani Kola during a panel discussion on ‘What are the keys to scale?’
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Despite all the talk about mobile, only 16% of startups surveyed had a mobile-only mode of service delivery. Over two-thirds (70%) said they deliver their services through both mobile and web, while just 14% said they used only the web. This is an interesting insight. One way to look at this is while 70% of the 350 startups surveyed are focused on the consumer, the fact that only 16% are “mobile-only” seems to indicate startups are primarily targeting the top 5% of the population with both mobile and web access. It also shows the nascent state of the Indian fintech ecosystem and the possibilities ahead in the very near future as it becomes economically viable to address the hundreds of millions of Indians who need a range of mobile-first financial services and products.
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Sucharita Mukherjee, CEO of IFMR Holdings, talks about the high risk that rural households face in the absence of affordable financial solutions
IV. Current technologies and platforms being used Fintech providers in India understand the role of technology to reduce the cost of transaction and also increase on-boarding efficiency. This is the one area where a fintech provider should have hands down advantages over incumbents. About 66% of those surveyed listed on-boarding efficiency as their top priority. This is consistent with what we observe in our discussions with founders. By on-boarding efficiency we mean the entire process of activating and completing the first transaction for a customer. This is a huge area of inefficiency in India which fintech startups can immediately address, especially by leveraging India Stack components such as Aadhaar, eKYC, UPI and the digital locker. Almost half of those surveyed are leveraging machine learning and advanced analytics to support the chosen financial services process they are attacking. This is easier said than done in India where there is still a dearth of deep digital data that can be used to drive these analytics. This is a top priority for Indian fintech startups, with the full recognition that it’s a long-term investment that delivers returns as the underlying data quality and volumes increase. Leveraging social media data, messaging-based interfaces, and secure infrastructure round out the top priorities.
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When it comes to service providers, Amazon Web Services (AWS) continues to dominate the fintech hosting solutions space with a majority of respondents (59%) saying they use AWS, closely followed by Microsoft’s Azure (16%) and IBM (4%). The remaining 21% claim to be using other services including Google Cloud Services, Linode, Digital Ocean and Bluehost. With all the talk on AI and machine learning, we thought it may be interesting to understand how fintech startups see these technologies being deployed. Around two-thirds (68%) believe AI will play a key role in improving customer experience (through apps, helpdesks, or issue resolution). This was followed by machine learning for improved marketing and sales (55%), As with most startups, finding and retaining top technology talent is the number one issue. Right behind it is the lack of availability of data. This is more relevant for lending and a few other areas where deep consumer or small business transaction data plays a big part in the quality of insights and consequently the financing decision. The other issue for some startups (17%) is lack of analytics to make sense of dark data (video, text, voice, etc.) which, while stored, is not easily analysed for patterns like structured data.
Note: Respondents stack-ranked their choices, so the total is >100%
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Note: Respondents stack-ranked their choices, so the total is >100%
V. The India Stack is on track for rapid adoption While there is a lot of buzz around the India Stack, we wanted to see how startups were using the various components. Aadhaar is rapidly catching up on one-off identifiers such as mobile number and email and name as the primary customer key. 43% of startups currently use Aadhaar for customer identification, and this should easily double within the next 12 months. eKYC was listed by 39% as the top India Stack component critical to fintech startups. With all five regulatory bodies in India giving the nod to accept or consider accepting Aadhaar-based eKYC, we should see a lot of progress in the digitisation of the eKYC process across all types of financial services and other verticals.
Note: Respondents stack-ranked their choices, so the total is >100%
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Pramod Varma, Chief Architect, Aadhaar, talks about the potential of India Stack
Only 20% of respondents viewed UPI as being critical to their solution at this point. Given that UPI as an API service just kicked off with a handful of banks, it is still early. It is definitely an area of opportunity for a new generation of payment startups. Based on our analysis, we see UPI being a major factor in helping broaden the use of financial services in India and expect to see its usage increase significantly within the next 12 months.
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VI. ‘Co-opetition’ with banks A Goldman Sachs report estimates $470 billion of profits at risk for traditional financial services institutions due to fintech invaders. While this may be true, banks should not be underestimated either. There is a lot of synergy in startups and banks working together. Banks’ greatest strength lies in their large customer franchise, trust and credibility, and it would take a significant amount of time for a startup to build this on its own. Therefore, startups need not look at banks as their direct competition but as their partners. Our survey shows that 40% of startups feel that they are not working in competition with banks or traditional financial institutions, while a significant 37% feel that they will compete with banks in the future. 23% say they are already competing with banks. There has been a lot of push from banks to work with startups as well. Global banks have been partnering with, investing in, and incubating fintech startups. Indian banks have only just started to do so. Axis Bank has launched an innovation lab called Thought Factory to identify, mentor and possibly invest in fintech startups and also has a number of related ongoing initiatives. State Bank of India has inked a deal with IIT Bombay’s business incubator SINE to promote innovations by fintech startups. Other banks such as ICICI Bank, HDFC Bank, Kotak Mahindra and Yes Bank too have launched various programmes to partner with or invest in fintech startups.
VII. Too small to be regulated just yet Financial services remains one of the most tightly regulated industries in the world. From policymaking to licensing, regulators play a key role in shaping and monitoring the way the industry operates. Globally, regulators are increasing their oversight of fintech startups. Our survey findings showed that regulations impact fintech startups in various ways. More than half (54%) of startups feel regulatory compliance is a burden during the customer on-boarding process. One example would be the need for a field inspection of a loan applicant even after completing an eKYC. In terms of transactions, the vast majority (67%) feel that regulatory compliance requirements today have some impact on the type of user experience they want to deliver. We feel a lot of this is due to the current state of change in the financial services industry in India. There has been a lot of simultaneous and rapid progress in a range of drivers such as bank accounts, India Stack, use of alternative data and digitisation of processes. These strides are often against the backdrop of regulations that were outlined in a different and much more paper-based era. It will take time to get alignment where regulation catches up with new ways of delivering financial services. Fintech startups, though, need to get used to working with regulatory processes as they are not about to disappear anytime soon.
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Around half of the respondents also said that regulatory requirements cause challenges in leveraging SaaS and compel them to move towards on-premise solutions. At the same time, 75% feel a local data centre could improve usage and add stickiness to a SaaS model delivery. Government policy and regulation has actually been a net positive for Indian fintech startups. The RBI, in particular, has been at the forefront of encouraging mobile and technology innovation that can enable financial inclusion.
Chetan Naik, VP-Enterprise & Mid-Market, IBM India/South Asia, talks about working with banks
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Conclusion Overall what is clear from the survey is that these entrepreneurs see a massive opportunity to build on top of the upcoming new financial infrastructure. We see the India Stack or even individual layers such as Aadhaar, eKYC and UPI enabling the “sachetisation” of financial services in India. This is required innovation to build segment-specific vertical products unique to India and the needs of the next 400 million customers. We are seeing some early examples that include smallticket, unsecured loans, pre-paid plans for single medical procedures, instant point-of-sale credit, pay-per- day insurance, and micro-investment products, among others. The same applies to the SME market where there is a plethora of opportunities to satisfy strong demand for smallbusiness working capital, trade finance, and leasing. There are several areas such as monetisation, target customer segments, service price points, frequency of usage, cost of acquisition, and incumbent bank strategies, among others, that were not covered in this survey. We expect to continue researching and collating this data in subsequent studies.
The Kalaari and Kstart teams with Nandan Nilekani
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Resources 1. The parallel universe of Indian fintech By Bala Srinivasa http://bit.ly/2cmR02I 2. Banking is necessary. Banks are not. By Ravi Venkatesan http://bit.ly/2co3t9t 3. Indian Banking: In a time of change By Nandan Nilekani http://bit.ly/2cPiEuu 4. Towards presence-less, paperless, and cashless service delivery The India Stack by iSpirit/Product Nation http://bit.ly/2cPivr3 5. Fintech: Global and India perspectives By Bala Srinivasa http://bit.ly/2cjRJ6Y 6. Fintech India: Innovation for the next 400M Nandan Nilekani – Keynote address http://bit.ly/2cWCmAM Pramod Varma – Understanding the India Stack http://bit.ly/2crqqaf Sanjay Jain & Gaurav Hinduja – How does India Stack work? http://bit.ly/2cWCHDg Vani Kola in conversation with Govind Rajan and Yashish Dahiya http://bit.ly/2cFmHJD Chetan Naik – How to partner with banks to make your startup successful http://bit.ly/2crr6MQ
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ABOUT KALAARI CAPITAL Kalaari Capital is an early-stage, technology-focused venture capital firm with $650 million in assets under management. Since 2006, we have empowered visionary entrepreneurs building unique solutions that reshape the way Indians live, work, consume and transact. Along with capital, we focus on a long-term partnership with entrepreneurs to help unlock large value through disruptive innovation. For more information, write to us at
[email protected] or visit kalaari.com
