Dear Readers,

Hello from Bengaluru. The weather here is extremely beautiful, and filter coffee adds a flavour to it. Koshy's Café and Blossom Book Shop are a few of my favourite places here, which I think carry the legacy of the city. I met a few FinTechs founders here and discussed the current state of the business. While tech is an integral part of the city, FinTechs have also made their space here. In fact, that's why we have chosen Bengaluru for our FinTech event, which we are hosting today/Friday. If y ou are around, do join us - click here.

Must say, while the weather in Bengaluru always impresses me. However, this time, the weather for FinTechs is quite cloudy—and the reason is not just one, but many. My note today is about the same.


The current state of funding

Funding has always been the most integral benchmark for FinTechs. In the last 2–3 weeks, a couple of FinTechs have raised funds, and there is talk that the tide has changed. Do the recent deals in funding mean the funding winter has ended? I don't think so. The silver lining is still blurred. The reason is: the FinTechs which have raised funds in the last 3–4 weeks are not the new ones, but established startups with a track record.


These are the FinTechs which have raised funds, but notable thing here is they are well settled in the market. The small to mid-sized FinTechs are far from raising funds. Even seed funding is slowing down, and overall, there is a drop in funding.

The annual decline in funding is 33%. During 2020–21, FinTechs raised more than $4 billion—which we can say was the highest point—but they are somehow managing $1 billion a year. Not just the amount, but the number of deals is also slowing down.


Now we have to understand a different trend in fundraising. Look at CRED. It raised $72 million, not at a higher or even similar valuation, but at a much lower valuation. This is a strange trend, which simply means FinTechs are reducing their valuation to raise funds. The question is: does this mean their valuation was inflated previously? Or is this a new normal?


In my conversations with investors, what is interesting is that funding is not low because of a lack of dry powder, but because of a lack of FinTechs with great ideas. Investors don’t want to invest without being extremely sure. They already tried and tested it in 2020. Now nobody wants to repeat it.

FinTech complexities

I have been following the FinTech space diligently, and when I look back, I think there are a few things that FinTechs could have paid more attention to. Initially, they focused only on the GMV (gross market value) metric, which actually did not show the real business side. Similarly, the story of higher valuations and the urge to become a unicorn rather than creating a business also dampened the market. I remember speaking to a founder during Covid, whose ultimate goal was to become a unicorn. How? Of course, by raising funds aggressively.


Similarly, those who ventured into lending—which is principally a profitable business—lent aggressively under the BNPL label and also for consumer durables. In my view, BNPL (Buy now, pay later) or digital lending could have been used by FinTechs more judiciously. But somehow, it backfired.

All this led to regulators paying more attention, and now the regulator has defined rules for lending. Concepts like Digital Loan Guarantee (DLG) and FLDG will take some time for FinTechs to absorb.


So now the reality is: investors are going slow, regulators are watchful, and regulated entities (banks and NBFCs) are also going slow on partnerships. This means a bigger challenge for FinTechs.

What next

At today's event, we are going to focus more on what will help FinTechs transition to the next phase. While I am expecting real FinTech practitioners and the regulator to speak more on this… I have a few observations:

1. Business model clarity: FinTechs will have to define a clear picture of what their business model is going to be, and whether they want to be an regulated entity or not. Regulators will not tolerate anything wherever people’s money is involved.
2. Consolidation is coming: Hence, I see consolidation on its way. Bigger FinTechs or top banks and financial institutions will acquire the small to mid-sized FinTechs. This week itself, Razorpay invested $30 million into consumer payments startup POP. Similarly, Ugro acquired Prospectus Capital.
3. Shareholder exits and IPOs: Many investors are now seeking exits. Hence, the rally for IPOs will surge. Already, Groww, Razorpay, and PhonePe are in the process of going public.
4. Tighter regulatory action: Regulatory action will not spare anyone who is not complying. RBI has been more vigilant than ever and will continue to be watchful.
5. Business model redefinition: FinTechs will have to redefine their business models and lead them toward profitability and sustainability. Just acquiring customers doesn't mean business. In fact, the cost of customer acquisition is higher in digital, and if that customer is not giving business, it’s a cost.
6. Cross-border expansion: I also think that FinTechs should try their luck abroad. A few FinTechs are already doing so. But there is opportunity, especially as the Global South is picking up.
   
   In my view, FinTechs are the need of society and will be an integral part of lifting the financial ecosystem of the country. But they must follow a cautious approach. Just because you managed to raise funds from a VC doesn’t mean you can spend it the way you want. I was shocked to see a leading FinTech company spending gigantic amounts on IPL sponsorship. Visibility matters, but not at such costs. Remember, there are many companies that make profits greater than the funds FinTechs have raised , but still don’t spend so much on advertising.

Well friends, I will also share more insights from the event very soon. But I also wanted to tell you—do follow our FinTech funding story for funding details, ( Click Here ) and also our premium property, FinTech Diary, ( Click Here) where we have interviewed

Please share your feedback, suggestions if any. You can reach me on amol.dethe@timesinternet.in and follow me on LinkedIn at ETBFSI Digest.

As usual, I am adding here the top 5 stories of the week, trust you will find them meaningful.

1. L&T Finance aims 20% CAGR, takes ‘cautious stance’ on microfinance
2. Bajaj Finance bets on green finance, tech transformation for next growth phase
3. Explained: Why gold has overtaken the euro as the world’s second-largest reserve asset
4. 10 key insights: Gold prices to rise further in India, consumer demand pick up in FY27
5. UGRO Capital rules out job cuts after Profectus acquisition, sees Rs 115 Cr profit gain

Happy Reading
Amol Dethe,
Editor,
ETBFSI

(Editor's note is a column written by Amol Dethe, Editor, ETBFSI. Click here to read more of his articles exploring several buzzing topics)

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