Fintech Firms are Now a “Critical Constituent” of Indian Financial Services Sector: Report

India is now home to more than 2,000 Fintech companies and has become one of the world’s largest financial technology markets (after the US, China and UK), according to a report from McKinsey & Company that was released earlier this month.

The report notes that the first wave of Indian Fintech firms had focused mainly on offering payments solutions. However, Fintech companies are now present across a fairly wide range of segments and financial services products, “with distribution of companies mirroring the global trend,” the McKinsey report states.

It adds:

“Fintechs have emerged, as a critical constituent in the Indian Financial Services (FS) ecosystem. [These businesses have] catalyzed the transformation of the broader financial services industry… Fintech players have led the innovation agenda, introducing and popularizing several ‘first-for-industry’ across new propositions, experiences and digital-first operating models, while  enabling access to unserved/ underserved segments (e.g., 10mn+ merchants now accept digital payments, ~35% of equity market participants are customers of Fintech companies).”

While India’s Fintech sector is maturing and has made a lot of progress in recent years, there are still very few companies that have managed to effectively scale and achieve “sustainable profitability,” the report revealed.

It also mentioned that the COVID-19 crisis has made it even more challenging for some Fintechs to maintain operations.

Despite these issues, India has a fairly well-developed public digital infrastructure and a “pro-innovation” regulatory policy (not in all cases like cryptocurrencies). Indian businesses have been shifting to digital-first operating models, the report confirmed.

Indian Fintech sector participants also have access to capital and funding through a “well-developed” PE/VC ecosystem that has made substantial investments in financial technology initiatives ($2 billion in FY19), the report claims. It also mentioned that the “dependence on PE/VC funding continues to remain high, given India’s nascent corporate bond and securitization markets.”

The report further noted that the impact of the Coronavirus crisis on Indian Fintechs has varied depending on the segment or type of products and services they offer.

The McKinsey report revealed:

“Lending Fintechs (Significant disruption) – Dramatic drop in disbursal volumes (down by 80-90%), expected increase in NCLs  (60%+) and short term increase in borrowing cost (50-100 bps higher). While there are early signs of recovery, with improvement in disbursal volumes, collections efficiency, the post-moratorium impact on asset quality is yet to play out.” 

It added:

“Payments players (Medium disruption) – While transaction volumes dropped in the early periods of the lockdown (by 20-50%) and pace of new customer acquisitions reduced (lower by 5%), players have witnessed a rise in average transaction size (10%+)  and a recovery of volumes as economic activity begins to pick-up.”  

Indian insurance, wealth management and brokerage firms actually experienced “positive disruption,” the report claims. There was a noticeable shift or change in consumer behavior that resulted in an increase in the “active client transacting base (50+% higher), overall AUMs (28%+) and new policy issuances (25-50%),” the report noted.

(Note: You can access the full report here.)

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