Investors stay bullish on fintech bandwagon
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Deal activity in the financial services technology (fintech) space continues to remain strong, with start-ups announcing a fund-raise every second week.
Since 2012, investors have pumped about $2.35 billion (~15,000 crore) into fintech firms in 325 deals, says data platform VCCEdge.
The bulk went into payments ($875 million, 109 deals), consumer finance/lending ($875 mn, 109 deals), and other small niches. The $2.35 bn includes the financial software space — Mphasis was acquired by Blackstone for $824.6 mn in April 2016. Even if one excludes deals in financial software, the fintech tally adds to $1.53 bn (~9,800 crore) and this doesn't include SoftBank’s $1.4 bn investment in Paytm. Why so? Why are investors bullish on fintech? That's because this is the next biggest space after e-commerce in India, says Anand Prasanna, managing partner at Iron Pillar, a venture growth investment entity. Amrish Rau, chief executive officer (CEO) at Naspers-owned PayU India, thinks investors feel bullish as there's an opportunity to create great value and earn a good return. For instance, US payments major PayPal enjoys a market capitalisation of $63 bn. Tencent, which owns Chinese messaging service WeChat that also enables payments and ecommerce, is valued at $348 bn. Naspers’ $34 mn bet on Tencent 17 years earlier was valued at $60 bn in 2015, transforming the fortunes of this South African firm. Naspers’ fintech platform ‘PayU’ bought Citrus Pay for $130 mn, delivering an eightfold return for Citrus investor Sequoia Capital India.
Rau says fintech provides an opportunity to disrupt the way people pay, remit or store money, and assess or deliver credit. Take remittances. Existing entities charge six to eight per cent to transfer money; fintech start-up TransferWise is able to transfer money for 1.5 per cent.
Payment firms focused on the b2b (business to business) space enable digital payments in education, insurance, e-commerce, and government, and get commissions (0.25-1 per cent) from merchants. Firms like Paytm focused on the b2c (business to consumer) space have the customer base which they can monetise by launching different financial services. Opportunities The opportunity is huge in a market such as lending. ‘‘A fintech opportunity has been created by the oligopoly of banks working in their comfort zone — in some urban areas and dealing only in housing loans or large corporate loans,” says the managing partner of a venture capital (VC) entity. These banks focus on the top 300 cities and towns in the country, while India has around 5,000. Non-banking financial companies (NBFC) have been successful but are focused on vehicle financing or gold loans. Investors like the lending space as the opportunity is large, and the market, be that for small & medium enterprises’ (SMEs’) financing or consumer loans, is severely under-penetrated. There's an opportunity to create a large profitable company, fairly quickly, Gaurav Hinduja, founder and CEO, Capital Float, told Business Standard in an earlier interview.
‘‘No lender gives loans at a negative gross margin (it’s always positive). You will see lending start-ups becoming profitable very quickly, unlike start-ups in other segments,” Hinduja had said. Investors like to invest in companies that can be large and build scale efficiently and quickly.