Matrix Partners India has released its ‘State of India Fin+Tech Union’ report. The report outlines the impact of the Covid-19 pandemic on the financial services and fintech sectors, and the recovery mechanisms being implemented by various players. McKinsey & Company is the Knowledge Partner for this initiative. The report includes results from a survey of ~70 fintech founders & CXOs and insights from a series of virtual fireside chats held with industry thought leaders in August 2020.
Matrix Partners India is an investment firm with approximately $1 billion under management. Founded in 2006, the firm invests in companies targeting the Indian consumer and enterprise market at the seed, early and early growth stages. Matrix India has invested in several market leading financial services companies, such as, Five Star Business Finance (SME lending), OfBusiness (credit led B2B marketplace), Razorpay (payments), Mswipe (mobile POS), Ola Financial Services (digital-first financial products), Jupiter (consumer Neobank), OneCard (mobile-first credit card), ZipLoan (SME lending), CreditVidya (consumer lending platform), Avail Finance (Neobank focused on the blue-collared segment), LiquiLoans (peer to peer lending), YeLo (mobile-first Neobank), goDutch (group payments platform).
Highlights of the survey include:
- While the short-term FinTech Confidence Index is marred by uncertainty with a score of only 5 (scaled between -100 and 100), majority of respondents are optimistic about long-term outlook – Confidence Index score of 79
- Fintechs across segments have seen mild-to-major disruptions – lending is the most severely impacted (Confidence Index score of -25) while insurance & wealth management have seen tailwinds (Confidence Index score of 63)
- Majority of Fintechs expect volume recovery in 3-6 months; for ~30% of Fintechs time-to-profitability extended by +6 months
Segment specific highlights include:
Payments: While short-term confidence in payments is neutral (confidence index score of 0), 100% of respondents are bullish about long-term outlook (confidence index score of 100)
- Digital payments is witnessing a second growth spurt (after Demonetization in 2016) driven by digitization of traditionally offline channels (FMCG, govt. payments) and growth of new online segments(gaming, edtech, OTT apps) etc.
- Despite lockdown in many parts of the country, digital payments players reached ~82% of pre-Covid volumes in June with average transaction size 1.1X vs. pre-Covid levels
- 30% of respondents had achieved pre-Covid volumes by July and ~60% expect to reach those by September
- While many payment companies have achieved scale, path to sustainable profitability is uncertain. Most players plan to expand into adjacent value pools, especially lending – 93% players expect to launch credit product within next 3 months
Lending has been significantly impacted by the pandemic (short-term confidence index of -25). However, most respondents remain bullish in their long-term outlook with a confidence index score of 65
As of June-20, disbursal volumes were down by ~80% vs pre-Covid levels with ~50% lenders stopping disbursals altogether
- Short-term profit expectations subdued with ~60% higher credit losses. Further, 61% of lenders indicated that limited or no availability of additional debt
- However, we are seeing some green shoots with a ~20% improvement in collections efficiency in April to June period. Bounce rates have also decreased from 34% in April to 26% in June
- Secured lending products (gold loans, LAP etc.) have performed much better than unsecured loans.
- Many fintech lenders are betting on embedded finance and context-specific lending products (e.g. BNPL, invoice financing) to drive growth
Neobanks -While pandemic has accelerated Indian customers’ adoption of digital financial products (new account openings for NeoBanks already above pre-Covid levels), it has delayed product launch plans for 50% of the players
- 70-90% respondents believe pandemic would have a positive or neutral impact on Gross margins, CAC and commissions; ~90% of respondents feel that banks are much open to neobank partnerships
- Neobanks will focus on large & underserved segments/niches (e.g. SMBs, millennials) and have similar revenue lines as traditional banks.
- While virtual/digital bank licenses are still a few years away, clarity on bank-fintech partnerships will be welcome step and reduce confusion amongst all stakeholders
The report highlights that fintechs are a critical constituent of the financial services in India, having pioneered several innovations that have boosted access and penetration of financial products. It further underscores the importance of supporting infrastructure & regulations, access of capital, and partnerships with incumbent players to expand the relevance of fintechs in India.
