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Watching brief: India’s fintech funding fizzles out as regulatory grip tightens

Fresh funding into India’s financial technology sector has dried up following a record haul in 2021, as investors adopt a ‘watch and wait’ approach amid a tightening regulatory environment.

In the first eight months of 2022, fintech start-ups netted USD 2.6bn across 49 deals, slumping 75% from an all-time high of USD 10.2bn from 65 deals in 2021, according to Dealogic data.

The steep fall in fintech investment this year is largely because investors are taking a calibrated approach in light of an evolving regulatory landscape, global macro headwinds, and a high base effect compared with last year, explains Sanjay Doshi, partner and head, financial services advisory at KPMG India.

Not helping matters have been restrictions implemented by the Reserve Bank of India (RBI), which have caused disruption in the fintech sector.

The banking regulator has released two sets of guidelines this year, including barring non-bank pre-paid payment instrument (PPI) issuers from offering credit lines over digital wallets and pre-paid cards in June, in addition to its digital lending guidelines in August.

The RBI action, per a June report by broking firm Macquarie Research, indicates further regulatory tightening in the future, which may lead to a “slowdown in growth and/or profitability prospects for the fintech sector in India.”

Following the move, Accel Partners and Lightspeed India Partners-backed fintech start-up Uni suspended card services on some of its products, citing RBI guidelines on digital lending in August, reports local media.

Similarly, other start-ups, including Tiger Global and Sequoia Capital India-backed neobank Jupiter, Tiger Global and Insight Partners-backed Slice, and PremjiInvest and NewQuest Capital Partners-backed Kreditbee, also halted credit-linked card services.

Slice, which became a fintech unicorn in November 2021, put its ongoing Series C fundraising on hold citing regulatory uncertainty.

Regulatory tightening is also prompting Indian fintech and e-commerce companies, such as Amazon [NASDAQ: AMZN] and Walmart [NYSE: WMT]-owned Flipkart, to chart a lobbying pushback, according to a media report.

The entire fintech segment, especially some fintech credit firms and those with business models based around PPIs, is seeing a funding pause, which could continue for the remainder of this year as companies try to work through the current regulatory turbulence, said Siddarth Pai, founding partner at venture capital firm 3one4 Capital.

Model behaviour

Regulatory changes have prompted many fintech firms to tweak their business models to stay compliant.

A number have proactively started re-working their strategies, putting growth on the back burner for the time being, says Pritish Kandoi, senior vice president and head - BFSI at investment banking firm ICICI Securities.

Aside from a funding pause, valuations of fintech companies have also taken a major hit. Firms that were being valued at “eyewatering” enterprise value/revenue (EV/R) multiples, have seen valuations cool 40-70%, says Pai.

“A lot of this correction is here to stay, as 2021 was an exceptional year for fintech investment in India,” he adds.

Widening the net

As funding slows and business pivots become imperative for regulatory compliance, the fintech sector is likely to see greater consolidation over the remaining part of the fiscal year, opines Doshi.

In August, Singapore’s sovereign wealth fund GIC, Tiger Global, and Alpha Wave Global-backed CRED
announced plans to acquire Bengaluru-based wealth management firm Smallcase for USD 400m.

In the same month, this news service reported that Sequoia India-backed neobank Freo is planning to use a portion of its upcoming Series C funding to make acquisitions in the insurance and wealth management space.

Despite this, present funding constraints may mean that most M&A activity is either stock swaps, technology-led acquisitions, or acqui-hires, says Pai.

Doshi expects M&A in the space to be led by fintech companies looking to diversify their offerings to wealth management, broking, insurance technology, attain regulatory licences, broaden customer acquisition channels, or expand reach via online/offline models.