Why Fintech Funding Witnessed a Decline Of 63% In 2023 And the Way Forward According to the report by Tracxn, India still ranked 3rd globally in 2023 in terms of fintech startup funding
By S Shanthi
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India's fintech sector received funding of $2 bn in 2023, a decline of 63% and 76% compared to previous years - $5.4bn raised in 2022 and $8.4bn in 2021, respectively, says a report by market intelligence platform Tracxn. "Despite the challenges posed by factors including increasing borrowing costs and macroeconomic conditions, among others, India has become one of the world's top-funded countries. India ranked 3rd globally in 2023 in terms of fintech startup funding, strengthening its position as a significant player on the global stage," it said.
The report anticipates that the sector will witness long-term significant growth owing to factors such as the young tech-savvy population, a larger consumer base, its dependency on informal financial and commercial systems, and multiple initiatives by the government towards digitalization.
"Fintech companies with lending books are being compared to Five Star Finance (although it has a high PBV ratio). Expecting later-stage private companies in the future will be evaluated on models like Rule of 200 used in the US for public tech companies - A rule for fintech companies that suggests they target net retention rate, revenue growth, gross margin, and operating margin above 200," said Manoj Kumar Agarwal, co-founder and managing partner, SEAFund.
Top-performing segments
Alternative Lending, Payments, and BankingTech were the top-performing segments, said the report with the following details.
Alternative Lending: The segment received funding of $835 million in 2023, down from $2.28bn in 2022. The BNPL segment saw significant growth due to its adoption within the country, which contributed to the growth of the sector. The digital lending space, which increasingly relies on customer data for its product marketing and development, is also likely to grow owing to the government's recently launched Digital Personal Data Protection Act, which will ensure more transparency and customer trust in the sector.
Payments: India has topped the list for digital payments and recorded transactions higher than the top 4 leading countries combined, recording 89.5 million transactions in 2022, with experts predicting the payments landscape in India to reach $100 trillion in transaction numbers by 2030.
Banking Tech: The segment received funding of $331Mn in 2023, dropping more than 50% compared to the $671Mn funding received in 2022. This segment has substantially benefited from digitalization, and digital banking has seen widespread adoption due to rising internet and mobile device penetration in cities as well as rural areas. Additionally, the Indian government has recently allocated about $16.7bn towards the BharatNet project to increase broadband connectivity within rural areas, which will help widen the reach and potentially attract more investments into the sector.
Peak XV Partners, Y Combinator, and LetsVenture were the top investors in the space. In this, We Founder Circle, Y Combinator, and 100X.VC led the seed investments; Accel, Omidyar Network India, and Elevation were prominent investors in early-stage investments, and OP Finnfund Global Impact Fund was the leading late-stage investor in 2023, according to the report.
Future of fintech
Focus on the path to profitability, resilience, regulatory changes are some of the favourable factors for fintech. "In response to market changes, fintechs are concentrating on profitability and developing sustainable business models. Their strategies include fostering long-term customer relationships and channeling investments into revenue-enhancing innovations. Fintechs that strategically build competitive moats, nimbly adjust to regulatory changes, and effectively tap into India's extensive unbanked market, all while limiting their dependency on external capital, are expected to emerge as winners in 2024," said Bikram Mahajan, partner, Unicorn India Ventures.
Driven by innovation, the rise of advanced technologies, digital adoption on the back of coronavirus pandemic, and other global events, there is an irreversible shift towards digital transactions across industries.
"In the dynamic world of fintech, India's resilience shines through the funding challenges of 2023. Despite a 63% decline, our sector stands strong as the third-highest funded ecosystem globally, affirming its position as a hub of innovation. The implementation of regulatory measures and the government's commitment to digitalization have set the stage for a promising future," said Speaking on the launch of the report, Neha Singh, Co-Founder at Tracxn, said
Summing up, Lakshmi Narayanan, managing partner, Patel Family Office, said, "Looking forward, the sector's market opportunity in the country is estimated to reach $2.1 trillion by 2030, on the back of positive factors such as the India stack, increasing smartphone and internet penetration, favorable demographics and robust financial inclusion initiatives."
