Making financial services relevant to people’s lives

There are a few things that are working really well in India’s favour as far as start-ups in the financial services and financial technology are concerned, says Smita Aggarwal, Director, Investments, Omidyar Network India Advisors. In the last five years, nearly $2 billion of equity investments have come into this sector, which is quite significant.

There are three factors that are promoting it, says Smita. Number one, the digital rails that have been built by the government – Aadhaar, India stack, eKYC, UPI – are making it easy for new ventures. The barriers to entry have been lowered and start-ups can plug into the UPI, have a partnership with a bank and are ready to go. They no longer need to be financial services provider with a licence to get started, she points out.

“The old world thinking of a universal bank, which would do everything from customer origination to managing the risk to compliance and do it for all segments of customers may no longer be the model of the future,” says Smita. The “neo banks,” as she calls them, can tie up with financial institutions, bundle and unbundle their products to suit customer needs, take advantage of eKYC and merely focus on customer engagement. According to her, the regulatory environment has been supportive. The third aspect is the talent of entrepreneurs and technology in India.

‘Made for India’ models

A combination of these three has led to the emergence of some interesting models. An exciting trend that is beginning to emerge is that fintech start-ups are innovating and building ‘Made for India’ business models; they are no longer copying global models. “There is a real opportunity for India to become an innovation hub or pioneer for business models that are small ticket, low cost and high scale. That again is unique to India,” says Smita.

“Our demographies are such that you need to have small ticket and you need to have large scale. I believe that India could potentially be a hub for those kinds of business models that can then be replicated in other emerging markets as well,” she adds.

Will Omidyar help the companies it has invested in to tap global opportunities? Almost 40 per cent of Omidyar’s investment is in companies that are global and they are operating in multiple emerging markets, says Smita. “We do believe there is an opportunity for cross-learning and replication. A lot of replication from the US is happening in Latin America and Africa,” she says, adding that, “right now, the Indian market itself is so big that it doesn’t make sense for most of the entrepreneurs to start focussing on a multi-country strategy rightaway. They will be spreading themselves too thin. The relative size of the market is much smaller compared to the Indian market. But I do see that happening in future.” It could happen once the companies have been able to capture a large share of the Indian market.

Globally, Omidyar Network has invested about $1.3 billion in different sectors; 20-25 per cent of its investments is in the financial services. Omidyar’s investment in financial services start-ups in India will account for 20-25 per cent of its fintech/financial services portfolio. It invests about $50 million per year in India, depending on the opportunities available.

“Our focus has a lot to do with how do we make financial services usage relevant to the lives of the people,” says Smita. Opening an account is not an end by itself; it is a means to an end. “What is the end we would like to see? We would like to see how customers can have better control over their financial lives. How can they build better financial resilience. How can they tap opportunities to improve their lives,” explains Smita.

What it does

Omidyar, she says, believes in backing entrepreneurs and business models that provide customer-centric solutions, which are contextual to their lives, help them build financial resilience, are more affordable and improve their outcomes. Omidyar’s first lens for investing would be what problem is the business solving and what impact will it have. Financial viability of a business, explains Smita, is a necessary condition for the firm, but not the sufficient condition. That is how it differentiates itself from a commercial venture capital firm. “We follow this dual lens that we need to solve a problem and create impact, at the same time be financially sustainable so that it can scale and create greater impact.”

According to her, Omidyar invests in a venture at the seed stage or the Series A stage. Its first cheque would be anywhere between $500,000 and $5 million. It invests in subsequent rounds, at times on a pro rata basis and at other times, putting in a little extra if needed. In all, Omidyar’s investments in a venture could be $10-15 million. Its exit would typically come in at the Series C or Series D stages, when it will sell its stake to larger PE funds.

Smita says Omidyar is a provider of patient capital and it is not a fixed duration fund. Which means it will not be under pressure like mainstream VCs or private equity funds to look for an exit at a specific time of the fund lifecycle. “We believe that the model has been proven and we have been able to play a catalytic role that we started with in establishing the model, in supporting the entrepreneur and in proving the thesis.

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