India's fintech future

India also ranked third globally for total fintech funding this year, with several high-profile funding rounds geared towards alternative lenders like Credit Saison, Avanse, Perfios and Vivifi India Finance.

And although financing for Q1 2024 doesn’t match previous years – less than half of the US$1.3bn raised for the same period in 2023 – the uptick in fundraising in the sector is an important indicator of the potential for growth.

Tracxn founder Neha Singh says sustained investor interest reflects the sector’s ‘dynamism and innovation’ in India, which could transform the nation into a leading fintech player on the global stage.

‘Dynamic’

‘Growth will be supported by the ongoing financialisation of the Indian economy, leading to increased demand for financial technologies,’ adds Sougata Basu, founder of wealthtech firm CashRich.

India is actively expanding its fintech influence globally through strategic partnerships, Basu says. The scale and success of India’s Unified Payments Interface, which enables instant payments, demonstrates the country’s capabilities in managing large-scale payment systems.

Additionally, India’s Open Network for Digital Commerce (ONDC) could radically change the fintech sector. The open network protocol facilitates seamless e-commerce transactions across various platforms for all business segments.

These efforts not only enhance user convenience, but also promote broader financial inclusion and market connectivity, says Basu.

Funding challenges

Startups will continue to find fundraising challenging. Tracxn found that compared to previous years during the January-March quarter, funding fell across all stages, from seed to early and late-stage startups, while alternative lending, regulatory technology and banking technology were the top-performing sectors.

‘Valuations and investors will become more conservative and risk-averse, betting on bigger players and focusing on profitability over technology growth,’ says Manish Khanna, founder of SW India. He says the shift could impact early-stage startups relying mainly on seed or venture funding, while late-stage funding rounds may slow down and see more realistic valuations.

The drop in opportunities will deal a blow to the startup ecosystem, investment landscape and broader economy, according to Prashant Bhonsle, founder and CEO of fintech education company Kuhoo in Mumbai. The reduced access to capital for startups will ‘push them to take more prudent decisions around their growth plans, talent hiring and R&D spending’, he says, adding that early-stage startups could suffer a higher failure rate.

As available funding shrinks, competition among startups could become fierce. ‘This could lead to more stringent deal terms and valuations,’ Bhonsle says. ‘Startups with stronger products, business models, leadership, governance and more will secure funding, while average or mediocre ones will see funds dry up.’

Basu says that fintech startups are trying to control their burn rates amid capital constraints, while Khanna adds there may be increased interest in alternative forms of financing, such as bootstrapping, crowdfunding and revenue-based models, as startups seek new capital sources.

Other potential by-products include more M&A activity as smaller startups or those unable to raise funds become targets for larger companies looking to expand.

‘While challenging in the short term, a shake-out could lead to a healthier ecosystem over the long term, with more sustainable business models prevailing and potentially less speculation or bubble dynamics in funding,’ Bhonsle says.

Bhonsle pinpoints four factors in India’s ‘exceptionally promising’ fintech prospects. For starters, the government’s initiatives to boost digital infrastructure, literacy and connectivity nationwide are driving progress.

Fintechs can also leverage a robust foundation of technologies targeted at unbanked and underserved groups, such as mobile banking, e-wallets and microfinance.

Then there is India’s massive scale, with many of its over one billion people just gaining internet access for the first time via mobile devices.

The sector is also thriving thanks to investments by domestic and international backers, as well as innovations across payments, lending, insurance and wealth management.

Digital solutions

In wealthtech, Basu says there is a pivot toward digital solutions that democratise access to financial services.

Meanwhile, education fintechs are capitalising on surging demand for online learning, spurred by the Covid-19 pandemic. Bhonsle says this shift toward remote courses and training for entrance exams, skills and professional development will continue as individuals increasingly seek digital options.

India is also stepping up regulatory oversight. In May, the Reserve Bank of India (the central bank) released a framework for self-regulatory organisations in the fintech sector that lays down standards for governance, grievance handling and dispute resolution.

The bank’s initiative ‘marks a significant step forward in enhancing compliance while fostering innovation’, Basu says. ‘Regulatory sandboxes have been introduced to allow startups to test products in controlled environments. The government and regulators are also working to mitigate digital transaction risks through strengthened consumer protections and transparency.’

With these supportive policies in place, the fintech sector could play a crucial role in India’s economic growth ambitions.