India fintech: Corporations act

Strategic investment in India's financial technology space is still nascent, but it benefits from a diversity that is unmatched in developing Asia. As massive social and technology uptake trends reshape the sector, this unique range of inputs could have a decisive impact on one of the subcontinent’s most prospective opportunity sets.  

Several recent deals shed light on the phenomenon, including a $45 million investment by Fairfax Financial in Digit Insurance, a $10 million Series B round for IndiaLends backed by American Express, and a $445 million commitment to Paytm from Japan’s SoftBank Group and China’s Alibaba Group.   

The geographic spread among these investors is a key differentiator between India and both China and Southeast Asia, where a clutch of Chinese tech players including Alibaba and Tencent Holdings appear to hold disproportionate sway. It also suggests a tendency among Asian conglomerates to play in the later stages of the relatively established payments segment while their Western counterparts tinker with more speculative companies in the emerging lending and insurance categories. 

Perhaps most importantly, however, the idea that an international spectrum of strategic players is starting to converge on Indian fintech reflects the infrastructural openness of the industry – despite a reputation for strict regulation – at a time of encouraging demographic shifts. As a result, expectations are beginning to pique that widespread corporate support could prove a highly complementary factor in resolving complex challenges around scaling and modernization. 

“Most of the capital will continue to come from VC and PE investors as opposed to strategics but over the last two years, it has been changing, and we’re seeing more strategics come in as investors, including banks,” says Gaurav Chopra, founder of IndiaLends. “It’s a good sign because there is greater value in the synergies and experience that come with players like Amazon and Alibaba than the big funds, which are more of capital providers only.”

The fundamentals

Underlying drivers of rising strategic interest include an emerging middle class and the growing economic presence of tech-savvy millennials, who are seen as representing a transition toward more of a spending-oriented culture. Some 50 million smart phone users are now said to be coming online every year, with Statista tracking a near doubling of the adoption rate since 2014 to 36% this year. Mobile 4G services are already common and 5G is expected to be available by 2022.  

At the same time, there have been several government efforts to build out fintech infrastructure, most notably the unified payments interface, or UPI, system, which provides an open and interoperable platform for building money transfer business models. Technical innovation has been further supported by a push to improve public access to datasets through various tax number and voter identity registries, rules that formalize previously untraceable transactions, and financial digitization initiatives.  

While six of the 10 biggest Asian fintech deals in the first half of this year have been in China, the remaining four have been in India, and most of these companies had strategic investors. Yes Bank and DCB Bank-backed Lendingkart raised $87 million in February; PayPal-backed Pine Labs received $82 million in March; and Amazon-backed Capital Float raised $67 million in April. PolicyBazaar closed a $200 million round in June led by a venture fund under SoftBank. 

The prevailing sentiment is that this activity represents only the earliest stages of what should turn into a steadier flow of strategic investment into Indian fintech – even though near-term uptake is inhibited by a range of factors largely related to regulations. Institutional investors are watching with interest anyway.  

“You’re seeing more interest from international strategics because they recognize this market is coming of age and they need to find a way to establish a presence there,” says Dhiraj Poddar, country head for India at TA Associates. “The Chinese players have been some of the earliest to see the opportunity and they’ve moved in quicker.”

China is seen as a natural shepherd for India’s fintech development because, unlike the US, it has recently tackled similar issues around infrastructure building and rapidly changing consumer behavior. The democratic nature of India’s financial datasets, however, stands in stark contrast to the Chinese model, where proprietary, closed-loop systems are carefully controlled by the major corporates.  

Strategic investment from China has also been limited in terms of the firms involved. Alibaba is the only standout participant after a number of rounds in Paytm in partnership with its affiliate Ant Financial. Other presumably interested parties, including Tencent, JD Group, and Baidu, have been active with various digital consumer transaction start-ups but not necessarily in pure-play fintech companies.

Indeed, there is a school of thought that many of China’s publicly listed tech giants are dabbling in Indian fintech merely as an attempt to justify their own valuations as domestic economic growth tapers off. In the case of Alibaba, this view sees the company’s move into Indian fintech less as a concerted expansion effort than as a way of continuing to sell a growth story that is becoming difficult to sustain at home. 

US strategic participation, by comparison, has been more varied and experimental. In addition to Pine Labs, PayPal has invested in fellow payments start-up Chargebee, while MasterCard and Visa have joined early-stage rounds for a number of similar companies including Razorpay and BillDesk, the latter of which is also backed by TA. In addition to supporting IndiaLends, American Express has invested Mobikwik and app aggregator Tapzo, which was recently acquired by Amazon’s payments arm. 

“I don’t see the Chinese corporate players in Indian fintech as strategics. I see them more as financial investors,” says one industry participant. “There is this thinking that what has happened in China can be replicated in India, but I don’t see that playing out because India is a much more competitive market. Amazon is taking an organic approach rather than trying to get quick results.”

Amazon is typically cited as the most engaged strategic player in the country at a grassroots level with investments said to exceed $5 billion to date. In addition to Capital Float, these include insurance start-up Acko, financial marketplace BankBazaar, payments platform Emvantage, and gift card tech developer Qwikcilver. Earlier this year it was also reportedly mulling a stake in e-commerce leader Flipkart, which has received large commitments from SoftBank and Walmart. The latter paid $16 billion for a 77% stake in May.

Strategic value-add

Whether exposure is built systematically or through big one-time bets, multinational corporations (MNC) are believed to share a similar endgame of building a centrally connected fintech ecosystem. The key difference between such a network in India and the existing Chinese versions will be the pubic nature of the infrastructure. Ultimately, the government’s National Payments Corporation of India will settle all transactions in any given corporation’s sphere of influence.   

The dynamics around the ecosystem building process will also depend on the profile of the strategic investors involved. New economy players such as Alibaba and Amazon naturally have less experience with India’s on-the-ground realities than the traditional credit card companies that have been operating locally for decades. For companies like IndiaLends, this has translated into significant advantages around navigating Indian bureaucracy.  

“Conglomerates like American Express have been in India for a while, so they understand the regulatory framework, which is important for younger start-ups,” says Chopra. “They can also help in terms of opening doors and setting up conversations with the right stakeholders, whether it’s the government or the regulator.”

If large fintech ecosystems that are glued together by the partnerships of foreign strategics and built on universally available data infrastructure begin to appear, it could result in India becoming an R&D trendsetter in the sector globally. The thinking here is that easy access to data through public channels would create a relatively level playing field for innovation, even as proprietary datasets are being accumulated.

This outlook adds to the uncertainty around how the maturation of various segments will play out. In payments, for example, form factor disruptions in areas such as e-wallets, cards, point-of-sale devices, and QR codes could change investment patterns. New strategic commitments in this vein have come from South Africa-based Naspers and Google with their respective PayU and Google Pay products.  

Meanwhile, insurance business model diversification is expected to proliferate as micro-coverage schemes gain popularity, and lending has emerged as the fastest growing area due to improved access to credit-relevant data. These complexities, along with the influx of different kinds of fintech development paradigms from around the world, are therefore expected to drive further fragmentation as much as consolidation. 

“India’s fintech ecosystems will likely evolve along multiple dimensions to cater to the diverse nature of the India consumer,” says Mahesh Makhija, a partner at EY focused on fintech. “I’m not sure that it really matters which country an investor comes from, but I think bringing in models from different places will help evolve a unique model for India.”

Obstacles to scale

The Indian model is often envisioned as a public infrastructure environment that nevertheless allows for the build-up of intellectual property around data patterns that are company secrets. The question remains, however, whether any new data generated by MNC-centered ecosystems would have value in a market where lending rights are restricted.  

This argument contends that lending and borrowing businesses are the only viable means of monetizing a fintech ecosystem on a large scale. In India, the scenario is complicated by regulations that ensure only the traditional banking sector can provide cash for loans. 

“The challenge in India is that there is very little money to be made from moving money,” says Manish Patel, CEO of Mswipe, a point-of-sale technology provider backed by a number of venture capital firms. “Unless the objective is that you build pipes to move money around and then use that data to build a solid lending business, I’m not sure what the real business plans of all these entities are.”

Patel notes that strategics will also face difficulties consolidating ecosystems due to competition from agile local banks and incumbent non-banking financial companies. “They’re not going to cede control of home turf to the MNCs. I’m not saying it’s impossible, but it won’t be easy,” he adds. “If the argument is that you’re going to have an Alibaba or Amazon come to India and buy out 50 or even just 10 companies over a period of 3-4 years, it’s not going to happen.”

More scaling challenges will stem from the inherent difficulties of tapping growth in India’s smaller cities and rural areas, which are considered indispensable expansion zones for most fintech models but require specialized services and expensive user-education campaigns. This year, the government took a lead role in this space by converting the relatively low-tech post office into a fully computerized bank. 

India Post Payments Bank has mobilized thousands of postmen for door-to-door financial services in regional areas but also offers digital accounts and round-the-clock electronic transfers. For investors leveraging this infrastructure, the focus will likely be on micro transactions in the insurance and lending segments and online-to-offline strategies in payments. The trick is that in order to succeed, these programs will have to be able to cut across 29 states and 22 official languages.

“Of the next 400 million smart phone users that are coming in, 50% of them will be from rural areas, so the rural strategy is very critical for these companies, and innovation around voice and vernacular technologies will be key,” says Manish Jain, a partner at KPMG India focused on fintech. “So, there will be challenges around culture in India, but it’s more about human behavior. Companies that focus on the behavioral aspects will develop much faster than those looking to apply innovation around culture.”   

The imperative to cater to emerging rural areas offers a reminder that the scope of India as a financial services market is insufficiently homogenous for either US-style expansion gambits or China-style monopolies. At the same time, the sheer size of the market means that strategic and institutional investors are likely to continue partnering multiple players more as an effort in addressing a range of white spaces than as a ploy to roll-up any given segment.

“It doesn’t feel like a winner-take-all market, but I’m sure we’ll see consolidation with some of the smaller players eventually folding into the larger ones,” says TA’s Poddar. “And India has a number of larger players that were able to develop and take positions in the market before any entry barriers were created. This is a market where a lot of people want to have a seat at the table.”

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• Topics
• South Asia
• Financials
• Technology
• India
• Financial Services
• Alibaba Group
• TA Associates
• KPMG