What does the future hold for FinTech companies in India?

India's FinTech ecosystem is fast maturing, yet grappling with falling VC funding and concerns over valuations

A central bank advertisment in Mumbai. The pandemic helped to boost the acceptance of many FinTech platforms in India. Getty Images

Payments companies in India are leading the pack when it comes to valuations of financial technology entities, as a growing economy and the rise of online transactions drive investor appetite for the segment, industry experts say.

“India is going through a massive shift from physical to digital payments and the volume of digital transactions is increasing exponentially,” says Mukul Gulati, managing partner at private equity fund Zephyr Peacock India. “Payment companies are benefiting from this.”

The five most valuable FinTech firms in India are in the payments space, figures compiled by CB Insights show.

These are led by digital wallet and online payments app PhonePe, with a valuation of $12.9 billion, and followed by Razorpay at $7.9 billion, which allows businesses to accept, process and disburse payments.

CRED, a credit card bill payment platform, has a valuation of $6.4 billion. Digital payments company Paytm is the only listed entity in the top five, with a market cap of $5.6 billion, while Pine Labs, which provides payments solutions to merchants, is valued at $5 billion, according to CB Insights.

“With a population of over 1.4 billion people and strong economic tailwinds despite the global slowdown, India’s FinTech ecosystem could be poised for growth,” it said.

Prashant Narang, co-founder of Agility Ventures, says “the combination of market potential, revenue growth and technological innovation has contributed to the high valuations of payment companies in India's FinTech landscape”.

The move towards digital payments in India, which only gathered pace during the Covid-19 pandemic, is drawing in investors and entrepreneurs in the FinTech space.

India carried out 89.5 billion digital transactions last year, making it the top country in the world in terms of the number of digital payments, according to figures from MyGov.

The Indian government has also been pushing for citizens to become less dependent on cash in order to improve transparency and reduce tax avoidance.

Initiatives including India's Unified Payments Interface are boosting digital payments. Launched in 2016, UPI allows people to make instant payments through their mobile phones, with their number linked directly to their bank account.

These payments can be made through digital payments platforms including Paytm and Walmart-owned PhonePe.

Digital payments are only expected to surge over the coming years, as more and more Indians own smartphones and get access to the internet and as middle-class incomes rise in the world's most populous country.

“The majority of unicorns in the Indian FinTech space are in the payment sector and have received substantial valuations from investors,” says Neha Singh, co-founder of Tracxn, a global start-up data platform.

“The reason for this can be mainly attributed to the implementation of the Unified Payments Interface, which has revolutionised the payments sector in India and led to the widespread adoption of digital payment modes.”

She says several government policies such as Digital India “have supported in nurturing this sector”.

“Other factors include the rapid growth of internet penetration within the country, especially in tier two and three cities, and growth of income of India's middle class,” she adds.

This presents an opportunity that many investors believe is too big to ignore – not only for the payments segment, but other areas of FinTech, too.

“We have a keen interest in investing in the FinTech segment of start-ups in India,” says Mr Narang.

“India's financial ecosystem has seen a significant shift towards digital payments, lending, and other FinTech services. This demand is driven by the need for convenient, accessible, and efficient financial solutions. Investors recognise the value proposition of FinTech companies that cater to this evolving market demand.”

Bhaskar Majumdar, managing partner at Unicorn India Ventures, says his venture capital firm is “actively investing” in FinTech.

“We are looking at various business models that can address the credit-starved Indian market [and] investing in lending tech, as well as in other companies providing credit across sectors both to enterprises and consumers,” says Mr Majumdar.

Despite the recent surge in the number of FinTech firms, the Indian FinTech space is grappling with several challenges.

First, there has been a slowdown in venture capital funding in the country, which recorded a 46.1 per cent decline in the volume of deals and an almost 75 per cent plunge in the value of funding in the first five months of this year over the previous year, according to GlobalData.

There were 459 deals worth $3.4 billion between January and May. Data from Tracxn shows that funding in the Indian FinTech space peaked in 2021 with $10.4 billion raised, but then declined by 44 per cent in 2022.

However, despite global headwinds, FinTech has been the most funded sector in India in the past year, according to Tracxn, which expects it to continue to attract robust investment going forward.

Secondly, concerns remain about the valuations of some companies in the FinTech sector.

“Some of these [FinTech] companies indeed have raised capital at high multiples,” says Mr Gulati. “The high quality businesses will grow their valuations while businesses with lack of profitability and lack of differentiation will likely experience an erosion in value.”

The issue of overvaluation of FinTech companies came into sharp focus when Paytm listed on the stock exchanges in November 2021, in what was the biggest IPO at that time.

The company's shares plummeted from their issue price, and they still remain down at 842.50 Indian rupees ($10.2) a share, compared with the company's issue price of 2,150 rupees a share.

Analysts say that valuations of private FinTech firms are often higher than publicly listed ones.

“The valuation multiples of private FinTechs are typically higher than those of their public equivalents,” says Ms Singh.

“The strong potential of fintech businesses in India is primarily responsible for this. India is a huge market, and investors are prepared to invest considerable amounts of funds to support these companies.”

She says because “they are not required to reach quarterly earnings targets and have greater control over their operations, private FinTechs have a lot more flexibility in decision-making than their public competitors and can focus on more innovative growth prospects which can be one of the reasons for their higher valuation.”

There are also fewer publicly traded FinTechs in India and investors in private FinTech firms often have a higher risk appetite, which can drive up valuations, industry insiders say.

The most valuable FinTech PhonePe in February managed to raise $100 million from Tiger Global, California-based Ribbit Capital and Chennai-based TVS Capital Funds, with the funding round valuing it at $12 billion.

That brought the total investment PhonePe has raised this year to $450 million, after it secured $350 million from General Atlantic in January.

Sameer Nigam, chief executive and founder of PhonePe, said after the fund raising was announced, “We are privileged to have a great set of leading global investors, both existing and new, who believe in our mission of building massive technology platforms to bring at-scale financial and digital inclusion in India.”

Such opportunities are attracting investors, as they believe that FinTech is a sector that is only going to throw up new opportunities.

“This remains one of the most dynamic sectors in India,” says Mr Gulati.

“Financial services is a large part of the economy and there are many opportunities to disrupt traditional institutions.”