Global venture capital firm Bessemer Venture Partners believes that fintech lending is no longer attractive and that the payments business has low monetization potential, as the backer of fintech companies such as Lentra and Rupifi outlined a roadmap for investing in the fast-growing segment.
Bessemer’s early investments in India included retail brokerage Motilal Oswal, non-bank retail lender Shriram City Union Finance, (now Shriram Finance), mortgage lender Home First Finance Company. Since then, it has evolved its investment strategy for the sector, moving away from legacy financial services providers.
The VC, with an intention to underline its reluctance on lending businesses, pointed out four tenets in its report.
It states that lending is not attractive as a venture funded business. "We concluded that we made money investing in lending businesses, but later realised that they are compounding businesses with capital as a raw material."
The second tenet said payments have a low monetization potential. According to the report, due to government-led UPI and regulation, interchange rates are non-existent. In order to take money from payments, software needs an additional value add. A BNPL product can be deemed as an example of the same.
One of the reasons for this shift was that existing traditional players in the industry get to have a long-term edge over new tech-enabled startups on cost of capital, brand, and distribution.
Further, the margins on the distribution side are low and continuously compressing due to regulatory pressures. Moreover, the market included multiple players coexisting without any winner-take-all dynamic.
The third tenet highlighted that infrastructure-led 'pick and shovel' businesses will be long-term.
"We realised that cost of capital will eventually favour big banks, NBFCs and insurers. Sofware businesses must have an ability to play across banks, non-banks, new age lenders, and insurers via a pick and shovel play and a strong winner take-all dynamic, which can lead to outsized outcomes.
Since 2017, the VC firm has backed companies like Perfios, Lentra, Zopper, Rupifi, which are more focused on software opportunities in the sector.
The fourth tenet says that transactional pricing will win. "The fintech products that are best equipped for success will have inherent upsell triggers and pricing power based on granular and metered units of measure."
Going forward, Bessemer would focus more on such companies helping with the infrastructure of the financial services industry.
Overall, Bessemer is betting on the industry reliance on cloud and software, to drive growth.