More than 70% of respondents believe most fintech companies may not be profitable in the next 2-3 years, owing to an increased focus on the scale as opposed to profitability and compliance, a report published by Matrix Partners with Boston Consulting Group (BCG) said.
However, 30% of respondents believe fintechs will be profitable in the next 2-3 years. For 32%, payment technology had a positive outlook, while 82% believed that product expansion was the highest priority among the fintech companies.
On the contrary, internal controls, cost reduction and fundraising remained to be the bottom three priorities.
The report further said that fintech companies needed to pay more attention to governance. Once the scale is achieved, fintech companies may outgrow advisers and over a period, it may be advisable to get independent directors on the board.
Fintech companies need to proactively report their governance practices and initiatives to break the myth and perception of poor governance, and garner trust, both from customers as well as regulators.
“Once the scale is achieved, fintech companies should outgrow advisors, and get an NBFC license,” one of the survey respondents said.
Equity funding into Indian fintech companies has grown at a CAGR (compound annual growth rate) of 26% over the last 4 years, but more rapidly so from 2020 onwards, fuelled by the post-pandemic impact of high growth via increased digital services adoption. The increasing number of late-stage financing rounds is another indicator of the increased maturity of Indian fintech companies.
The report includes results from a survey of over 125 founders and senior management at Indian fintech firms.
Many large fintech platforms had started operations in 2008, with neobanks being the recent entrants. While the number of fintechs scaled up between 2014 and 2021, funding was low till 2015 after which the sector received a rapid funding boost.
The pandemic further boosted the payments space, leading to a 210% spike in funding between the current year 2020 and 2021.
Yashraj Erande, managing director and partner at BCG said, “36% of fintech customers are new-to-credit, vs 22% for Banks. “Fin” in FinTech is acquiring a bigger font. This means a greater focus on profitability and governance. Relentless focus on innovation and customers made fintechs successful. This should continue. Nonetheless, new muscle needs to be added for newer priorities. ‘Growing together in partnership with incumbents and private innovation on public utilities will be key moats.”
Respondents said that cards and unsecured lending are the top choices as areas to be disrupted. Over 50% of respondents believed asset quality, CAC (customer acquisition cost) and regulations are top challenges to sustainability with the meaningful scale being a barrier on the path to building a profitable lending business.
The report noted that 14% of companies improved growth and margin in downturns, while 44% declined in both. With 150 deals/quarter and $9.8 billion funding in 2021, the momentum has remained strong. However, the last few quarters have seen multiple shifts, largely owing to macroeconomic conditions, mostly from the impending possibility of a recession and high inflation globally.