According to A16Z, every company will eventually be a fintech company.
A recent report by BCG and FICCI mentioned, 'Over the past five years, Indian FinTech companies have raised approximately USD 10 billion from investors all over the world, catapulting the sector’s total valuation to an estimated USD 50-60 billion. India is strongly poised to realize a FinTech sector valuation of USD 150-160 billion by 2025, translating to an incremental value-creation potential of approximately USD 100 billion.'
We saw a significant adoption last year in terms of customers using digital and new age methods either in the form of online broking ( Share of fintech brokers grew from 43 to 57%) or UPI adoption (increased 3x).
Fintech remains one sector that has been growing over the last 7-8 years and still there is a scope to do a lot more.
Why Fintech remains hot even after so many years?
Large addressable market with a lot of inefficiencies: Financial services sector is usually a laggard in terms of adoption of technology because of the conservative nature of banks- one of the most important stakeholders of the ecosystem. The market of financial services is ~$8 Tn and is growing. Fintech is still tiny as compared to that. Thus, there are a lot of opportunities to capture the segments which traditionally were ignored by financial institutions (like MSMEs, individuals, unbanked, etc.) or improve efficiencies (by making processes digital, etc.) for the existing products.
The advent of technology and FOMO:
Technology is constantly evolving. Financial services companies were the last ones to adopt the cloud which was a buzzword till a few years back. Blockchain is a buzzword now and they don't want to be left behind this time. Thus, with emerging technologies, banks need to keep adapting and it is difficult for them to do it themselves due to their traditional infra. This is where fintech companies come into the picture- helping banks thus, leading to the growth of the industry.
With the new age companies capturing some share of the market which banks ignored previously, banks are also realizing how much they are losing out on by not being part of the trends. For e.g. banks have traditionally ignored freelancers for cross-border payments but with the increasing adoption of flexible work, banks are realizing it is important to capture that segment and are thus, tying up with fintech companies. Some of these segments don't make economic sense for the bank if they go directly but with fintech companies, it is a win-win situation for all the parties- banks, freelancers, and fintech startups.
Evolving regulatory infrastructure
Raghuram Rajan in a conversation with Ripple said that sometimes they provide licenses to startups to wake up the sleeping financial services industry (They provided a license to Paytm to initiate disruption). This is ironic because banks have become so conservative due to the central bank rules over time (more on this some other time). But the point is that RBI is also encouraging innovation, especially with their sandbox. A few other banks have also come up with their own sandboxes which have expedited the process for fintech companies to start working and avoid some level of uncertainty.
Inefficiencies remain, why?
'Till the time regulation catches up with innovation, inefficiencies will remain.'
Though a lot of sub-sectors are being transformed, it is still difficult to innovate the entire financial services sector because of its regulatory nature. There is a constant statement that you hear from people in the sector that till the time you are small, no one will bother you(which also means no one will provide you answers) but once you become big, they can shut you down in a day.
Also with the recent scams (Yes Bank, DHFL, etc.), the trust in the financial system has become weak leading to stricter regulations which is not always great in terms of customer experience.
Having said this, there are still a lot of low-hanging fruits in the industry which can be addressed, one thing to realize though is that it is a long game but one filled with moat and real impact.