2022: The year of FinTech’s coming-of-age
The week between Christmas and New Year can be one of two things – either everyone’s in a subdued state of celebration and no work gets done, or they’re deeply introspective, taking stock of the year gone by.
I’m the second type.
There was lots to celebrate this year – FinBox grew into a company that my co-founders and I are proud of, thanks to the addition of incredible talent and a funding boost. There was lots to learn as well.
One of the joys I found this year was chronicling the biggest events and trends in FinTech in my newsletters. So in the spirit of soul-searching, let’s hark back to the year that FinTech had in 2022.
#1 RBI shows its hand
After years of uncertainty, the Reserve Bank of India finally undertook the task of beating into shape an industry that thrived on the margins of regulation. It closed a loophole that was critical to the survival of several FinTechs – loading of prepaid instruments with credit lines to issue challenger ‘credit cards’.
The directive forced many companies in the space like Slice and Uni Cards to reimagine entire business models. In my opinion, though, the step signaled that the RBI was on the path to lay down the overall scope of FinTech – an essential step in the right direction. I wrote about it in this piece:
Regulation vs innovation: why did RBI close a billion-dollar loophole?
The RBI also allowed NBFCs to issue credit cards after securing special permission. But since the credit card business is as expensive as it is lucrative, NBFCs contemplating entering this space must reassess their business models, technology stacks and partnerships before taking the leap.
NBFCs can now issue credit cards. But should they?
The PPI event was just a teaser to what the RBI had in store. In September, it released its digital lending guidelines aimed at protecting digital loan borrowers. The guidelines, in particular, focused on data security of borrowers. I wrote about the importance of data laws last month for Financial Express. Read it here:
Why the fintech ecosystem needs clear data laws to thrive
Another issue of note was the distancing of FinTechs from the first loss default guarantee (FLDG) partnership model. We put together a lowdown of the guidelines in this piece:
Digital lending guidelines: Has the RBI set in place a pecking order
#2 Institutional initiative
Where RBI reined in misuse of licenses and proceeded to put it house in order, government institutions sought ways to keep industry players on their toes through innovation.
Though the Account Aggregator framework was introduced in November 2021, it truly gathered steam this year. It is poised to revolutionize data sharing by smoothening user experience, eliminating fraud and bringing unprecedented data security safeguards into digital lending. We were among the first to document its efficacy and impact in this report drawn from proprietary insights:
How Account Aggregator doubled conversions and eliminated fraud for lenders
Another development that invited countless opinions was the announcement that credit cards will be linked to UPI soon. The conversation turned to how UPI enabled small merchants to accept payments without having to pay MDR on each transaction. There’s still confusion about whether credit cards on UPI will continue to charge MDR, upending - to an extent - the financial inclusion gains made by the NPCI. You can read more about my thoughts on and expectations from the move here:
Will linking credit cards break UPI?
#3 Funding dries up
Investors turned more discerning about pouring money into FinTech this year, especially in later-stage companies. Tracxn research showed that only $5.7 billion was invested in FinTech as of December 2022, compared to $10.3 billion in 2021.
Investors are now prioritizing robust business models and profitability, given that we’re barreling towards a period of economic uncertainty. This has ushered in a ‘survival-of-the-fittest’ moment where only those who have built businesses that are both unassailable and profitable will remain standing. The pull of short-term scalability is rapidly waning. Read more about the growth imperative for FinTech funding here:
No profit, no funding - FinTech and high-growth businesses' hunt for profitability
#4 Lending models were in flux
As FLDG was shown the door, players warmed up to the co-lending model. FinTechs and lenders shared the loan amount disbursed in a 20:80 ratio, with the former earning a commensurate margin of the profits.
We also published a deeper guide to Co-lending for banks and FinTechs. You can access that here.
A comprehensive guide to co-lending
Consolidation and collaboration in general are becoming popular. Tightening regulation, investor caution, and overall inflation are responsible. Companies with stronger financials will branch out to diversify their product portfolio, leading to an uptick in acquisitions.
BNPL also had a moment of reckoning – faced by a high-interest regime, rising inflation and decline in consumer spending (trends on the rise in 2022), BNPL providers were threatened by a dip in its adoption. However, BNPL FinTechs continued to rally, mostly because of their willingness to adapt. Pure-play BNPLs are building entire financial service ecosystems around their core product.
Come rain or shine, BNPL is here to stay
B2C BNPL used widely by us today isn’t the only form in which this credit product is available. It cuts across several business models based on distribution channels, user type and the merchant’s ecosystem. However, given its zero-interest feature, it is not a revenue-generating business model.
Moreover, it has the potential to be used as a gateway product to cross-sell other financial services. This would open the BNPL provider to several revenue streams like activation, subscription and convenience fees, late fees, and EMI financing. You can read more about changes in the BNPL business models here:
Can BNPL the challenger turn into a champion?
#5 FinTech infrastructure gets a new look
CIBIL data revealed that private banks, despite their historic aversion to MSMEs, were best equipped to meet their burgeoning credit demand. This segment was long considered to be NBFCs’ turf, but private banks are now acing credit disbursement here because of their superior digital infrastructure.
Are Private banks getting MSME lending right?
The repercussions of FinTech’s unbundling were felt sharply. Fragmentation of SaaS flooded the market with plug-and-play solutions for every aspect of the value chain. However, the bleak economic outlook has forced players to separate mission critical SaaS solutions from expendable ones. I’ve been preoccupied with how every company can prioritize software purchasing decisions.
Are you getting financial SaaS wrong?
Conclusion
What did we learn from these eventful 12 months? For anyone at the helm of a FinTech like me, it was about how to build better. I jotted down my lessons from building a credit infrastructure company here.
Before I say goodbye one last time this year, I’d like to leave you with a few things that piqued our interest, here at FinBox:
Growing concerns: The risk, innovation and regulation trilemma facing fintech
Why Zero MDR isn’t the solution to payment digitization that we think it is
Have a wonderful New Year. I’ll see you in 2023!
Cheers,
Rajat