Matrix Partners India launches the '˜State of India Fin+Tech Union' report

1st October 2020. Bengaluru: Matrix Partners India released the '˜State of India Fin+Tech Union' report today. The report outlines the impact of the Covid-19 pandemic on the financial services and fintech sectors, and the recovery mechanisms being implemented by various players. McKinsey & Company is the Knowledge Partner for this initiative.

The report includes results from a survey of ~70 fintech founders & CXOs and insights from a series of virtual fireside chats held with industry thought leaders in August 2020. You can review the report here.

"With this initiative we're trying to answer the question '“ how are other fintechs doing and What can I learn from other founders/CEOs? We're truly grateful for the responses from and in-depth interviews with all stakeholders in the ecosystem. Inspiring to see how young companies have tackled a once-in-a-lifetime crisis with swift decisive actions and speaks to the resilience of the fintech ecosystem. Over the last year, we have seen an acceleration towards fintech products and we're long term believers', said Vikram Vaidyanathan, Managing Director at Matrix India.

"FinTechs in India have transformed the financial services sector. This report highlights how players are responding to recent disruptions, perspectives on the future of key sub-segments and as a result, the journey ahead for FinTechs. In addition, we touch upon what's needed from stakeholders to further enable the impact that FinTechs could have on the ecosystem' , said Peeyush Dalmia, Partner, McKinsey & Company.

Highlights of the survey include:

While the short-term FinTech Confidence Index is marred by uncertainty with a score of only 5 (scaled between -100 and 100), majority of respondents are optimistic about long-term outlook - Confidence Index score of 79

·Fintechs across segments have seen mild-to-major disruptions - lending is the most severely impacted (Confidence Index score of -25) while insurance & wealth management have seen tailwinds (Confidence Index score of 63)

· Majority of Fintechs expect volume recovery in 3-6 months; for ~30% of Fintechs time-to-profitability extended by +6 months

Segment specific highlights include:

1. Payments: While short-term confidence in payments is neutral (confidence index score of 0), 100% of respondents are bullish about long-term outlook (confidence index score of 100)

• Digital payments is witnessing a second growth spurt (after Demonetization in 2016) driven by digitization of traditionally offline channels (FMCG, govt. payments) and growth of new online segments(gaming, edtech, OTT apps) etc.
• Despite lockdown in many parts of the country, digital payments players reached ~82% of pre-Covid volumes in June with average transaction size 1.1X vs. pre-Covid levels
• 30% of respondents had achieved pre-Covid volumes by July and ~60% expect to reach those by September
• While many payment companies have achieved scale, path to sustainable profitability is uncertain. Most players plan to expand into adjacent value pools, especially lending - 93% players expect to launch credit product within next 3 months

1. Lending has been significantly impacted by the pandemic (short-term confidence index of -25). However, most respondents remain bullish in their long-term outlook with a confidence index score of 65

• As of June-20, disbursal volumes were down by ~80% vs pre-Covid levels with ~50% lenders stopping disbursals altogether
• Short-term profit expectations subdued with ~60% higher credit losses. Further, 61% of lenders indicated that limited or no availability of additional debt
• However, we are seeing some green shoots with a ~20% improvement in collections efficiency in April to June period. Bounce rates have also decreased from 34% in April to 26% in June
• Secured lending products (gold loans, LAP etc.) have performed much better than unsecured loans. Many fintech lenders are betting on embedded finance and context-specific lending products (e.g. BNPL, invoice financing) to drive growth

1. Neobanks
2. While pandemic has accelerated Indian customers' adoption of digital financial products (new account openings for NeoBanks already above pre-Covid levels), it has delayed product launch plans for 50% of the players

• 70-90% respondents believe pandemic would have a positive or neutral impact on Gross margins, CAC and commissions; ~90% of respondents feel that banks are much open to neobank partnerships
• Neobanks will focus on large & underserved segments/niches (e.g. SMBs, millennials) and have similar revenue lines as traditional banks.
• While virtual/digital bank licenses are still a few years away, clarity on bank-fintech partnerships will be welcome step and reduce confusion amongst all stakeholders

The report highlights that fintechs are a critical constituent of the financial services in India, having pioneered several innovations that have boosted access and penetration of financial products. It further underscores the importance of supporting infrastructure & regulations, access of capital, and partnerships with incumbent players to expand the relevance of fintechs in India.

About Matrix Partners India:
Matrix Partners India is an investment firm with approximately $1 billion under management. Founded in 2006, the firm invests in companies targeting the Indian consumer and enterprise market at the seed, early and early growth stages. Matrix India has invested in several market leading financial services companies, such as, Five Star Business Finance (SME lending), OfBusiness (credit led B2B marketplace), Razorpay (payments), Mswipe (mobile POS), Ola Financial Services (digital-first financial products), Jupiter (consumer Neobank), OneCard (mobile-first credit card), ZipLoan (SME lending), CreditVidya (consumer lending platform), Avail Finance (Neobank focused on the blue-collared segment), LiquiLoans (peer to peer lending), YeLo (mobile-first Neobank), goDutch (group payments platform).

Other marquee investments include Ola (mobility), Quikr (online classifieds), Practo (digital health platform), Dailyhunt (mobile local language platform), Treebo (digital hotel chain), Limeroad (social e-commerce platform), Ola Electric (electric vehicles), Stanza Living (tech enabled student housing platform), Country Delight (direct-to-home, mass premium milk brand), Camp K12 (global online school for 21st century skills), Vogo (scooter sharing), and Cloudnine Hospitals (leading chain of maternity hospitals), among others. Matrix India has advisory offices in Bangalore, Delhi and Mumbai. Matrix Partners has a global network of funds investing in the US, China and India, with approximately $5 billion under management. Further information is available at www.matrixpartners.in. To know more about our investment philosophy & ideologies, check out the #MatrixMoments podcast series.