Recently, Slice, a payment app, acquired a 5 per cent stake in North East Small Finance (NESF) for $3.42 million — the first such deal by a fintech in a small finance bank.
Slice (valued at $1.5 billion, and backed by Tiger Global, Blume Ventures and Axis Bank) will technically get a toehold in a scheduled commercial bank if NESF were to get a licence to morph into one down the line
Such a transition is well within the banking regulator’s declared framework.
The transaction has to be seen in a larger context.
According to Tracxn, which tracks start-up data, fund-raises by fintechs slowed in calendar 2022 to $5.65 billion, a drop of 47 per cent from the preceding year.
Late-stage funding fell 56 per cent to $3.7 billion.
Funding saw a drop of more than 30 per cent each quarter in 2022, and the number of $100-million-plus rounds fell by half to 13.
The Reserve Bank of India (RBI) has also tightened the regulatory framework for fintechs after the Report of the Working Group on Digital Lending Including Lending through Online Platforms and Mobile Apps in November 2021.
This saw many finechs revisit their strategies and enter into fresh dialogues with their private equity (PE) backers.
More funding pain may be round the corner.
A cue was on offer last week. RBI executive director Ajay Kumar Choudhary reiterated that “Regulators need to keep a watchful eye on the risks by fintechs and bigtechs.
"The risk posed by [them] is different.”
He added that the “framework for the fintech lending ecosystem is being worked upon by RBI.” Choudhury’s portfolio includes the RBI’s FinTech department, which was set up in January 2022, signalling the mainstreaming of the sector.
RBI Deputy Governor Rabi Sankar said last year that fintechs need to change their attitude.
He referred to an “unexpected regulatory challenge which one may characterise as compliance-aversion.”
Financial entities traditionally subject to regulation understand that it serves the larger objective of systemic stability and development.
But entities outside the financial space are still learning to adapt to a regulated environment, and so their initial reaction to a regulation is to object.
Now step back and look at a few transactions.
In mid-February, InsuranceDekho raised $150 million in a series-A funding round — the largest by an insurtech — which saw participation by Goldman Sachs Asset Management and TVS Capital Funds.
And Mintoak, which links banks with small enterprises by enabling merchants to accept all types of payment forms, raised $20 million in a series-A funding round led by PayPal Ventures, British International Investment, the start-up’s existing investors HDFC Bank and Pravega Ventures, and White Whale Venture Fund.
(In December 2022, HDFC Bank had raised its stake in the firm from 5 per cent to 7.5 per cent.)
And right after the release of the RBI’s discussion paper on digital lending, Indifi Technologies, a digital lending platform, raised Rs 340 crore in a series-D equity and debt funding.
The equity component of Rs 140 crore was subscribed to by CX Partners and O P Finnfund Global Impact Fund I (the maiden Finnish emerging markets fund) along with existing investors CDC Group, Omidyar Network, Flourish Ventures and Accel.
Read along with Slice picking up a 5 per cent stake in NESF, it would suggest that from here on, there could be a marked shift of flow of PE interest towards fintechs that can navigate the regulatory terrain, and not display what Sankar termed “compliance-aversion.” It would be reasonable to assume that with so much at stake, fintechs will abide by Mint Road’s pointers.
Fintechs have established roots in the country.
As Naveen Surya (chairman of the Fintech Convergence Council, and chairman, emeritus, of the Payments Council of India), and Nilesh Naker (partner in financial services technology at EY India) wrote in Report on Trends Shaping India’s Fintech Sector in September 2022, it is imperative for fintechs to closely monitor regulatory, compliance, and governance risks, because “compliance is costly, but non-compliance is costlier.”
What is one to make of the response of investors? Will the Traxcn data trendline hold?
A closer reading of the data shows that the 47 per cent fall in fund-raise by fintechs in calendar 2022 (to $5.65 billion) came on the back of a blockbuster year when inflows topped $10.7 billion.
In the preceding calendars, the run-rate had been $2 billion, $4.4 2 billion, $2.2 billion and $3.9 billion.
Clearly, there’s no pattern. Poor inflows in 2022 were perhaps an indicator of a climatic blip, and a thaw may be in the offing.