Despite decreased fund flows, tightened regulations and reduced valuations, fintechs are still attracting entrepreneurs in the start-up ecosystem with diverse business models that are disrupting different segments in the sector.

In FY24 so far, fintechs have received over 15 per cent of the total equity funding into start-ups, according to data provided by Tracxn. Of the total $4.1 billion received by start-ups in India from January to May this year, fintechs have got over $630 million in 62 rounds, the data showed.

There are currently 7,768 active fintechs in India with a combined valuation of over $155 billion. Nearly a third of the soonicorn universe comprises fintechs.

Not restricted

Fintechs are no longer just restricted to digital lending and payments but are offering a gamut of services and solutions revolving around alternative lending, robo advisory, investment tech, insurtech, regtech and banktech. Apart from these major themes, there are other niche areas they are entering into such as crop loan risk management, supply chain financing and debt management.

Some interesting start-ups are Satsure which provides satellite imagery-based location intelligence for crop loan risk management, Tutelar which provides  online fraud detection and prevention, Debt Nirvana which provides efficiency in debt management and FidyPay that is a banking-as-a-service platform.

Among existing fintechs those that have become high profile are Paytm, PB Fintech, Walmart-backed Phone Pe, Zerodha, Bharat Pe, among others. “Financial services in India have always represented a very large addressable market opportunity and also offered attractive valuations from investors, start-up founders in India have gravitated towards the fintech sector,” said Saurabh Sinha, Partner, Financial Services, BDO India.

He pointed out that incumbents are yet to digitise their product lines, processes, underlying legacy systems and have needed fintech partners, which has further created pull for this sector amongst start-up founders. “This has led to the disproportionately higher growth of the fintech segment versus other start-up segments and also the VC investor attention and funding it has garnered.”

Lower deal sizes

Compared to what it was about three years ago, the valuations of fintechs have fallen while deal sizes are also much lower than what they were. The funds flow data so far shows that funds raised have halved compared to the amounts raised in 2021 and 2022. “While deals are happening, they have moved from early stage high risk bets to late-stage deals in proven scaled entities that are usually existing portfolio firms who are doing a follow-on fundraise,” said Sinha.

Part of this is due to the evolving regulatory climate making prospective investors cautious. The Reserve Bank of India recently released a framework for a self-regulatory organisation governing fintechs, that mandated systems that would manage ‘user harm.’

Sinha said there may be some more quarters of slow VC funding but, “large conglomerate brands are also waking up to this opportunity and we have seen them announce their own fintech forays recently riding on the government’s DPI initiatives. Large spaces that are expected to open up for digital disruption in SME lending, supply chain financing and agritech, will define the next chapter of India’s fintech story.”