Bajaj, Razorpay, Zerodha carry the Indian fintech torch

There’s always a sector that’s the apple of the investor’s eye. In the first half of the last decade, that position was held by e-commerce in India. In the second half, fintechs became all the rage, attracting millions of dollars. Among the top 100 global companies by market capitalisation, financial services are worth $3.7 trillion in market capitalisation. That makes for 17.6% of the $21 trillion that the top 100 companies are valued at, says a report by consultancy firm PricewaterhouseCoopers.

With that kind of billing, venture capitalists believe fintech challengers like lending startup Capital Float, payments firm PhonePe, and mutual fund distributor Paytm Money can face off with traditional firms—banks like HDFC, or payments companies like Visa.

Nearly $10 billion has been invested in fintech in the last decade. That’s nearly as much funding as has gone into food tech, hyperlocal delivery companies, and ride-hailing put together in the same duration, according to venture capital data tracker Tracxn.

Less Success Ratio

But very few viable business models have come out of this fintech hype machine.

“The hype sets in when investment dollars take over reality, and that leads to business running ahead of fundamentals,” says Kunal Walia, partner at Khetal advisors, a boutique investment bank. Over the last 15 months, the real picture behind fintechs’ hyped growth has been emerging.

Fintech apps—like payments apps, wealth tech apps—spend Rs 150-300 ($2-$4) to get one app install in India, but 59% of those apps are uninstalled in a day, says AppsFlyer, an app analytics firm. Fintechs aren’t any closer to cracking their core businesses. For example, payments companies like Paytm*, PhonePe, Google Pay, BharatPe bank on the richness of transaction data to then monetise that data through ads or credit. But ironically, fintechs solely focused on credit—like Capital Float—are struggling.

Still, hype has its uses. “It is only when there is enough hype in a sector does it get a lot of dollars and only then those dollars reach those few worthy companies that otherwise may not have got the money,” says Walia.

Besides, it also brings the focus on who’s bringing value to users. And who isn’t.

Should, say, a Paytm, which grew to 140 million users by offering cashbacks to get people to choose its app, really be more valuable than traditional credit card payments company SBI Cards? SBI Cards has an 18% market share with 9.4 million cards but profits worth Rs 863 crore ($121 million). Paytm, on the other hand, saw losses double to Rs 3,960 crore ($555 million) in the year ended March 2019. And yet, Paytm has a $15-billion valuation while SBI Cards, at best, hopes to record a $8.4 billion valuation in its upcoming IPO in the year ended March 2020.

So, while the hype draws attention to the sector, lift the veil and the imminent future of (and threats to) fintechs becomes clearer.

Bajaj’s offline gameplay

The financial sector is reeling from a $200-billion bad loan nightmare. It began with infrastructure lender IL&FS running out of money to pay its dues in 2018. That along with bad loans that Yes Bank and public sector banks made to corporates has choked the supply of capital to fintech lenders, sparking a liquidity crisis.

“No one expected to have a down cycle this quickly [after the financial crisis of 2008]. So a lot of investment went chasing lending companies and that’s why lending till now was loan book led. We are in a down cycle and it will go down further in 2020,” said the founder of a lending fintech.

While the public sector banks mostly face the heat for the extent of bad loans, fintechs’ bad loan skeletons are not fully out of the closet. Yet. A prime example of bubbling bad loans among fintech lenders is Capital Float. The company, which personified fintech lending, saw its gross NPAs (non-performing assets) double to 6.8% in the year ended March 2019 from the previous year. (Gross NPA as a % of AUM was 4.8%), according to ratings firm ICRA. It also wrote off 1.8% of its assets under management, as of September 2019. This, while its loan book grew 2.5X in just two years to Rs 1,403 crore ($196.5 million).

The liquidity crisis should have sent fintech lenders into conservation mode. But fintechs that relied on external capital didn’t want to sacrifice growth. So those like Capital Float wrote loans to users of edtech companies like Byju’s, but suffered defaults thanks to the sales tactics of the company (we wrote about it here. Capital Float itself wrote about what went wrong here). This has left Capital Float with far-from-desirable asset quality.