Digital payments shoot through the roof, but fintech funding disappoints

Covid-19 is nothing short of a watershed moment for the fintech industry in India. The fear of contracting the virus has forced people to take to contactless payment methods, which has led to digital transactions soaring.

Payment apps have been seeing an increase in the number of new users and merchants on their platforms . Unified Payments Interface (UPI), Immediate Payment Service (IMPS), Bharat Interface for Money (BHIM) transactions have also been shooting through the roof over the past three months.

Soaring transactions

For instance, according to data from the National Payments Corporation of India (NPCI), while the amount transacted through UPI was ₹2,90,537.86 crore in July 2020, the highest ever, the volume of transactions was 149.73 crore the most since the interface was introduced. The stats for BHIM and IMPS are no different. While the amount transacted via BHIM was ₹6,395.75 crore, the most since February this year, IMPS registered its record highest transaction amount of ₹2,25,775.24 crore, in July.

These figures indicate that Indian consumers are slowly starting to become more comfortable using digital payments. Investments into the fintech sector soared last year and with this increased acceptance and preference for contactless payment methods over the past three months, one would assume that fintech funding would also touch new heights.

Dip in funding

But, contrary to expectations, the funding that went into the fintech start-up space in Q2 2020 was the lowest in the past nine quarters — only $184 million was invested in the April-June quarter this year, according to data from Venture Intelligence, a firm that tracks private companies’ investments, financials and valuations.

“Payment fintech is a crowded segment; the industry operates on thin margins and is always under pressure,” said Pankaj Raina, Managing Director, Research and Investments, Zephyr Peacock India, adding, “The NBFC sector is witnessing several liquidity constraints, overall credit disbursements, some of which that are facilitated by fintech companies have also been impacted.”

“Fintech includes several segments, such as insurance, loans, alternate credit scoring algorithms, lending, etc. There are many players in each of these segments vying for market share. The success factors for these solutions, in addition to value of transactions, include the number of users, revenue per user and margin per user. The margins are lower in these segments as there are many incumbent players in each of these segments,” Raina said.

Investment figures for fintech start-ups in July also do not paint a pretty picture. They garnered only $18.04 million and the sector was among the least funded, last month, while segments such as ed-tech ($164.95 million), media and entertainment ($53.90 million) grabbed more funding comparatively, according to data from Tracxn, a firm that tracks investments and financials of private companies and start-ups.

Weathering the storm

While the trend of online content consumption has been around for quite a few years, in the aftermath of the Covid-19 lockdown, with schools shut and theatres closed, the demand for these sectors (which have a relatively higher margin) has substantially increased. In addition to low margins, incumbent players, and focus on their existing portfolios, the emergence of these new sectors and business models is also another reason for lesser investments in fintech, experts said.

Plus, even as digital transactions grow, fintech is no longer a niche segment; there are market leaders in the space who already have a larger piece of the pie. So, while investors are open to evaluating new models, they are also waiting to see which ones can live through a pandemic like Covid-19.

“Like most sectors, VCs chose to wait and see how companies including (in the) fintech (space) weather the storm. Companies also needed the numbers to come back to initiate conversations,” said Ashneer Grover, Co Founder and CEO of BharatPe. He added that fintechs already with a lending book will be bogged down with non-collections, but the ones with an appetite will build large lending franchises.

Investments* in fintech start-ups

*in companies less than 10 years old

 

Source : Venture Intelligence

UPI transactions in 2020

 

Source : NPCI

BHIM transactions in 2020

 

Source : NPCI

IMPS transactions in 2020

 

Source : NPCI