Due to Square's massive acquisition of Afterpay and the release of one of the largest fintech IPOs, Nubank, the global fintech industry has been on a tear since 2021. The fact that the number of global fintech unicorns has more than doubled in the last year to 235 reflects the industry's growing appeal and acceptance. We have overwhelming evidence that India is not only riding this wave, but is also a major catalyst!
Indian fintech firms raised nearly $9 billion in total funding in 2021, nearly three times the amount raised in 2020, and this trend is expected to continue into 2022. With traditional financial institutions lagging far behind in terms of technology adoption, we saw fintech players swoop in with agile and innovative offerings to capture market share – whether in payments, lending, insurance, or wealth management. Businesses also caught up and quickly transitioned to tech-enabled workflows and financial services.
In light of these exciting new developments, here are our picks for the hottest fintech subsectors on Matrix's 2022 Idea Board:
1. Next-gen wealth management:
Wealth-tech continues to expand beyond 2021, with 34 million new client accounts in BSE, a 57 percent increase year on year. We predict that as wealth shifts from Generation X to Generation Y, millennials will increasingly rely on technology to manage their finances. In India, the market remains underutilized, accounting for 10% of GDP versus 70% in developed markets.
DIY investing platforms have flooded the markets, but portfolio management services are not casting a wide enough net. Significant AuM is available for PMS providers who create custom offerings for niche investor classes other than the currently underserved HNI/UHNI segment. Dezerv., for example, is a wealth management platform aimed at the 'emerging HNI' market in which we invested. We believe that the next 25-50 million investors will be able to access quality portfolio management at a lower cost thanks to robo/tech-enabled advisory.
Other intriguing plays on our radar include alternative assets and social investing. In a low-interest environment, investors are looking for alternatives to equities that offer higher yields. This paves the way for technologically enabled fractionalization of alternative assets. Investing has always been social and based on trust, but only through traditional channels. A platform for community-based collective decision making has the potential to increase AuM and retention if properly implemented.
2. SME-focused Fintechs:
Approximately 12 million GST-registered SMEs continue to use outdated accounting software. We see a lack of mobile-first analytics and business workflow automation tools integrated with financing and payment solutions, and we're calling on Fintechs to step up.
There are significant issues with SME cross-border payments and credit flows as well. It is not seamless due to a combination of high fees, low transparency, long time frames, and regulatory compliance. We believe there are multiple go-to-market approaches, including AR/AP automation, corporate cards, cash flow and business reports, payment reminders, documentation tools, and cross-border transaction simplification. The ability to capture transaction data, build a proprietary risk scoring/underwriting engine for lending, and cross-sell value-added services will be critical. The pie is large and meaty, with a largely untapped TAM and potential profit pools in the SME space.
Furthermore, regulatory tailwinds such as GST laws and e-invoicing are increasingly supporting SME digitization, which is being bolstered by growth in exports - such as nearly $20 billion in Chinese manufacturing potentially shifting to India in the next 2-3 years. These tailwinds have the potential to enable a new wave of companies to fill the $200 billion credit gap in the SME market, and we believe this space is ripe for disruption.
In the face of rapidly increasing e-commerce and digital penetration, BNPL plays are proliferating in the Indian market. Lower ticket-size credit products that do not have high APRs or revolving debt appeal to a large segment of millennials and are on their way to becoming a seamless alternative to more anxiety-inducing credit. BNPL must capitalize on the rise of UPI in India in the same way that PayPal and Afterpay did. Here are two BNPL themes on which we are bullish:
Over and above the traditional BNPL functions of easy credit and convenient payment, we believe consumer-facing BNPL is even more beneficial to long-tail merchants because it facilitates discovery and leads to higher conversions and AOV. They, like pseudo lifestyle brands, assist merchants in increasing GTV by expanding their offerings to more customers.
Vertical BNPL plays, such as the Matrix-backed OTO (2W commerce and financing) and JODO, make deep inroads into industry-specific value chains and offer payment and credit products (education-focused payments and BNPL).
4. Fintech Infrastructure:
A recurring theme from last year, all fintechs and other non-financial services companies with a distribution advantage are looking to launch financial products quickly and affordably. As banks choose to partner/integrate, there is a greater opportunity than ever to build efficient middleware that connects financial institutions with customer-facing platforms at scale.
With more funded startups as potential customers, rapid expansion of public infrastructure (OCEN, AA, UPI), and proven business models evidenced by global value creation, the Indian market is becoming more conducive for new fintech infra companies to storm the market with inventive solutions to long-standing pain-points.
Most global insurtechs had a difficult year in 2021. We saw stocks like Lemonade and Hippo plummet by 50-70 percent from their IPO listing prices, with loss/combination ratios exceeding 100 percent.
However, we believe that lower penetration in India (3.5% Life, 1% General) and increased awareness caused by the pandemic are driving insurance to become a pull product. We are particularly interested in the following two topics:
Distribution costs have traditionally made up 30-50 percent of insurance companies' cost base. We believe that new-age players offering faster and assisted claims processing, enhanced CX, and novel benefits such as all-inclusive coverage encompassing OPD and medicine costs in a monthly subscription package could be on to something by adopting a lean D2C model and targeting customers digitally. To remain profitable, sophisticated underwriting, low CAC distribution, and technologically advanced processes will be essential.
We anticipate the development and distribution of new contextual insurance products with the rise of modular infrastructure. Insurance distribution by merchants at the point of sale increases cross-sell revenue and lowers CAC for manufacturers. Developing the right product portfolio with high attach rates and addressing seamless claims will drive success.
6. Crypto & DeFi:
Decentralized Finance (DeFi) saw explosive growth and adoption in 2021 as the dust settled on Bitcoin's new permissionless, democratized currency, which appears poised to fundamentally alter P2P finance. In October 2021, the number of Crypto investors in India surpassed 20 million, and total TVL surpassed $200 billion. We anticipate that convergence with traditional finance will broaden access to DeFi for both businesses and customers, spawning new use cases as well as opportunities to optimize existing ones. We anticipate that simplified UI/UX will demystify this intimidating decentralized technology, while also assisting users in governing custody of their assets, ushering in the next phase of retail adoption.
Cyber security in financial services, Neo-banks targeting specific TGs (creators, NRIs), and payroll management/EWA plays are also mentioned in this year's Ideaboard.
Contact us at firstname.lastname@example.org or via our social media handles. If you're starting a business in one of these emerging areas, we'd love to hear from you and learn more!