Fintech valuations may quadruple by FY26, amid growing credit growth

New Delhi: Fintech firms in India are set to boom on the back of growing credit demand from both businesses and consumers. 

According to the India Fintech Report 2022, published on October 19 by market researcher Bain & Co., a boom in India’s smartphone adoption, tipped to reach 1.1 billion devices by FY26, could push the net valuation of fintech services to quadruple in India — up from around $100 billion at the moment, to $350 billion in this time period. 

This, in turn, may peg India’s fintech startups to account for 15% of the domestic financial services industry — up from 7% right now. While Bain valued India’s overall financial services market at $1.3 trillion, its projection pegs the industry to be valued at around $2.3 trillion by FY26.

The projection is in line with the growth of Unified Payments Interface (UPI) services in India. Since introduction, the National Payments Council of India (NPCI)’s mobile-linked payment method has seen an aggregate growth pace of over 75% annually, and in September, hit a record monthly transaction value of ₹11.2 trillion according to monthly NPCI data.

UPI payments, including merchant and peer-to-peer (P2P) transactions, reached ₹32.5 trillion in Q2FY23 — up 71% from ₹19 trillion in the corresponding quarter last year.

Rakesh Pozhath, partner at Bain & Co., said that the fintech industry could grow on the back of software-as-a-service (SaaS) and fintech infrastructure providers — who are servicing legacy banks with digitized services. He added that firms providing credit to small businesses are expected to grow at around 15% annually going forward.

As banks and non-banking financial corporations (NBFCs) look to digitize their services to catch up with this demand, there is a market gap for financing consumer purchases and enterprise business plans — which may lead to a rise in unsecured loans and credit cards, he said.

However, for many fintech firms, profitability could be a struggle. One97 Communications, which operates the Paytm suite of services, opened its initial public offering (IPO) in November last year. The company sought to raise ₹18,300 crore from public shareholders at a valuation of ₹1.39 lakh crore, at an offer price of ₹2,150 per share. However, since listing, One97’s shares have fallen over 69% — closing at ₹656.9 at the end of trading on Tuesday.

Bhumik Gada, a Mumbai-based financial advisor, said that public investors are wary of investing in fintech services due to their concerns around profitability. “Paytm is still not a profitable company — shortly after listing, its quarterly results showed its losses to have risen. This created a negative market sentiment, which persists for the fintech sector as a whole even today,” he said.

Gada added that unless fintech firms can offer a perceivably profitable business model, companies in this sector may struggle to grow their ventures.

To be sure, Paytm is the only major fintech firm in India to have gone public so far. PhonePe Private Limited (India) is expected to be the next major IPO from India’s fintech sector.

Ranadurjay Talukdar, partner and payments advisory leader at consultancy firm EY India, said that one way for fintech firms to grow could be by targeting enterprises with smaller margins and shorter settlement cycles in comparison to traditional financial services.

“For instance, with UPI, you do away with the merchant discount rate (MDR) — which could amount to nearly a quarter of a venture’s profits, just to accept online payments. New age payment solutions also offer same-day payment settlement options, thus increasing the cash in hand for businesses. This increases a major hurdle for a small business to have enough operating cash,” he added.

Fintechs offer easier and faster routes to credit for small businesses, the experts said. Pozhath added that working capital financing demand for MSMEs, from formal and secured sources, is “much higher than the actual supply of credit,” that is still low at around 20-30%.

“To address this wide gap, traditional banks, insurers and NBFCs are increasingly partnering with fintech service providers to digitize their services, which makes for a major growth avenue for these companies,” he added.

The government, too, has helped the growth. For instance, on June 26, the union ministry of finance urged public sector banks to strike more partnerships with fintech companies in order to digitize their services, and grow the rate of successful issuance of loans by implementing data analytics.

Banks, too, have started signing an increasing number of partnerships with fintech SaaS providers to offer digitized services. On October 7, the largest domestic private sector lender, HDFC Bank, partnered with fintech SaaS platform Mintoak Innovations to launch SmartHub Vyapar — an app for paperless merchant onboarding.

Similar deals include Punjab National Bank’s co-lending agreement with fintech platform Lendingkart in December last year. In January last year, ICICI Bank signed a partnership with fintech credit provider Niyo — to issue prepaid cards to employees of MSMEs. In March, Bank of Baroda Financial Services partnered with fintech firm CreditAI to launch a credit card aimed at farmers.

An October 6 report by French IT services firm Capgemini further backed up the growth potential for fintech companies, pegging them for stronger growth as banks take longer to do away with legacy payment instruments and infrastructure.