Fintechs may not be profitable in the next 2-3 years: BCG Survey

Most Fintechs may not be profitable in the next 2-3 years, according to more than 70 per cent of the respondents in Boston Consulting Group’s survey of 125 plus Founders/CXOs of top Fintechs and Incumbents.

While scale is an important driver of profitability, early stage focus on ‘unit economics’ is a critical orientation needed, per BCG’s report “State of the Fintech Union 2022.”

With the race for customer acquisition, and surging funding over the last 5 years, profitability and compliance has been an after thought for many players.

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“As the industry matures and regulatory controls strengthen, “Fin” in Fintech will become big and bold,” the report said.

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Pressure test

The report noted, COVID has pressure tested the business models and balance sheet strength of Indian Fintechs. While some businesses went through closure, a sizeable number of Fintechs have survived and demonstrated their “immunity” to withstand such adverse events.

BCG assessed that funding inflows went through a plunge of nearly 40-50 per cent when COVID hit, driven by weaker Foreign investor funding, but the rebound post that (70-80 per cent+) has given some runway to Fintechs.

“As we see a ‘funding winter’ coming, Fintechs will need to re-evaluate their financials and enable cost controls as needed, to be able to continue innovative investments and scale,” as per BCG’s suggestion.

BCG sees the collective Fintech segment to be mission critical for the $5 trillion Indian economy.

Clocking over $800 billion plus annual payments transaction value, Fintechs have made a strong contribution to Indian economy, and play a powerful role in the provision of full-fledged financial services to all Indians, it added.

Imperatives for Fintech promoters

While customer acquisition and growth is important, deeper understanding of banking revenue pools and designing for profitable operations from the get-go will be critical to success for Fintech founders, the report said.

BCG observed that while profitability will give runway, compliance will help in creating sustainable growth models.

“Communicate early and proactively with regulators to shape enabling provisions for new business model,” it suggested.

“Be known for taking hard decisions because they are right. Tap domestic capital markets – Debt investor contribution, corporate treasury, hedge funds, etc.

“Repivot to domestic capital and equity partnerships with large incumbents when global forces dry up.

“Build a strong partnership DNA and leverage incumbent knowledge and expertise in the innovation journey,”the report said.

Incumbents role

For incumbents, BCG recommended embracing data democratisation, open credit enablement (OCEN), Account Aggregator models. Further, they should invest in layering private innovation on public features to drive economic and strategic advantage.

When it comes to regulatory framework, the report called for differentiated regulatory approach for ‘early-stage’ vs ‘scaled-up’ Fintechs for regulatory supervisioning, introducing ‘Reg labs’ for controlled environment operations and testing.