Elusive Lending Unicorns | Fintech Inside - Edition #56 - 28th Feb, 2021
Searching for illusive lending unicorns with details on fintech user growth, embedded finance taking off and SEA round up!
Hi Insiders, Osborne here.
Welcome to the 56th edition of Fintech Inside. Fintech Inside is the front page of Fintech in emerging markets.
90+ unicorns have been minted in India, of which 20+ are fintech unicorns. How many of those 20+ are lending unicorns? This week, I explored the reasons behind the elusive lending unicorns in India.
There's also details on user growth among fintech startups, embedded finance taking off and SEA round up!
If you're building in fintech or have an idea that you'd like to riff on, I'd love to speak with you. Write to me at firstname.lastname@example.org.
Enjoy another week in fintech!
If you’re an early-stage fintech startup founder raising funding, I'd love to speak to you - reach out to me at email@example.com
🤔 One Big Thought
In Pursuit of Illusive Lending Unicorns
A unicorn is a mythical, horse-like animal with a single, spiraled horn on its forehead. Us startup folks know a Unicorn to be a privately-held company valued at or above one billion dollars. In 2013, Aileen Lee, an angel investor used and popularised the term Unicorn in the context of startups because of the "statistical rarity" of such a valuation. That was just about 9 years back. Today, per CBInsights, there are over a thousand unicorns globally! Talk about statistical rarity!
India's first ever unicorn - InMobi, was minted in 2011. Since then, Indian startups have been on a tear. There have been 94-96 unicorns minted in India till Feb, 2022. Of those, some 64 are still "active" unicorns - some were acquired, others went public.
Fintech startups have dominated this unicorn list - of the 64 active unicorns, 20-21 are fintech startups! 1 in 3 unicorns in India are fintech startups! Honestly, this is no surprise to me. Financial services in India is a massive opportunity no matter which sector you look at. Find a sector in financial services and I'll tell you exactly why there is an opportunity and what is that opportunity.
By now you've probably heard that India is a "credit starved nation", meaning Indians are under-served when it comes to credit. There are only 68-69mm credit cards outstanding in the country with 30-35mm unique cardholders, 200mm unique individuals have a credit score with a bureau, there is a 37.3% household debt to GDP (China - 61%, US - 78%, South Korea - 104%), SMB's have a $380bn credit gap. There are tons of statistics around credit starvation - any way you slice it.
But one look at the fintech unicorn list above and you'll notice a glaring void - that of lending unicorns. There's just one lending unicorn on that list of 20 - slice*. One would imagine there is more than just one lending unicorn in a credit starved country. In fact, lending startups have raised a ton of funding over the years. There were a lot of promising one's on both consumer and SMB side.
It seems that lending unicorns are the real unicorns because of the "statistical rarity" of achieving that billion dollar valuation.
Where are these lending unicorns? The answer to this question is not so straight forward. There are several reasons why that didn't happen, IMO, including lending is a tough business. An unhealthy concoction of innovations not working out, implosion of the broader market, investor appetite and the business just being tough to build led to the dearth of lending unicorns.
The promise of alternate data based underwriting didn't deliver: The rise of smartphone's allowed one to access previously inaccessible data - smartphone data, social data, geo-location data, call logs, messages and much more. All that data, unfortunately, didn't stand a chance to the good ol' credit score. Even today, credit scores account for 60-80% of some fintech lenders' underwriting. This led to "new to credit" borrowers becoming a small portion of the overall borrower base.
Slow implosion of the NBFC market since 2018: The fall of IL&FS in 2018, the pandemic and the moratorium that was instituted in 2020, the Chinese loan app situation in 2020 and more - all these macro events led to a very unstable environment for fintech lending startups. The startups performing well had to taper their growth. Bulk lenders became wary of the macro situation and asked for more stringent downside risk protection, they limited their book even to startups that had strong book performance and more. Three years of tapering has sort of undone a lot of their growth from the previous years.
Lending is a tough business: As with any marketplace, managing both demand (borrowers) and supply (debt capital providers) can be challenging and they're not easily solvable with tech - especially the collections side. How do you solve for a government mandated moratorium when you have real interest payments to meet? How do you solve for a capital provider not honoring their agreements to lend because they've got the jitters?
Global investors don't invest in lending businesses: Fintech startups in India could not have scaled without the large sums of capital poured in by global investors. Unfortunately, there are home-country limitations on investments these funds can make in global financial companies and there are RBI's limitations as well. There's a reason why "what we think" as lending unicorns in the above list don't think of themselves as lenders but as commerce platforms.
There are many more challenges, and some that I may be forgetting. Mr. Rajeev Jain, would probably be smirking at this post, if he reads it.
Basically, we should not build/invest in credit businesses then - got it. Not so soon. The overall opportunity for lending still exists and it's only growing. The market is not going anywhere. A lending business of the future may not look like a lending business of the past. Think new products e.g. BNPL - it's effectively a lending product but it's contextual and therefore relatively easier for risk management. Another nascent product is wage streaming - earned wage access with direct integrations to HRMS'. Think customer segment focused lending - e.g. CRED, lending to high credit score users or slice, lending to GenZ. Credit products will increasingly start looking non-"credit-y", more contextual and more embedded. As that happens, we're likely to see more lending unicorns.
3️⃣ Fintech Top Three
1️⃣ Fintech startups show skyrocketing user growth
OneCard claimed to have 250K credit card customers with monthly spends of $60mm. OneCard's OneScore app has 12mm registered users and 2mm monthly active users. Fi, a neobank, claimed to have 1mm registered users within 10 months since launch. Paisabazaar claimed to have improved credit scores of 5.27mm users by more than 20 points. Akudo, a teen banking startup, claimed to have 1mm registered users. Niyo, a neo banking startup, claimed to have 4mm registered users, adding 10K users daily and 7K corporate users. Fleek, a subscription management startup, claimed to have 100K registered users.
Fintech startups are becoming mainstream: At this point, it's probably safe to say that Indian users are getting comfortable with trying non-brand, non-bank financial products. Millions of users a signing up across financial products of credit cards, neo banking, insurance and more.
Users are in search for better banking: Niyo's 4mm (multi-vertical) users, Fi's 1mm (general) users and Akudo's 1mm (teen) users shows there's demand for better banking products across user segments. Moreover, most of these neo banking startups work with the same bank at the backend, so it's safe to assume a low overlap in user.
Users are hungry for credit (cards): OneCard, a credit card startup known for its metal card, having 250K outstanding cards is good. But 2mm users checking their credit score monthly on OneScore, a free credit score app by OneCard, is impressive. Not only does that app serve as a customer acquisition tool, but it's also providing OneCard with credit data to improve it's own models. Smart move.
2️⃣ Contextual finance is taking off
TripMoney, MakeMyTrip's fintech vertical, launched a TripMoney Global Card, a credit card. Leverage, a study abroad startup, launched Leverage Finance, it's fintech arm for international remittances, loans and banking. Zomato to set up a wholly owned subsidiary for an NBFC platform. Pagarbook, a staff management startup, launched neobanking and credit services.
embeddedcontextual finance thesis is becoming a reality: As recent as early 2021, most folks couldn't fathom why a non-fintech company would want to embedded finance solutions within the user journey. That's thankfully changing. These large brands i.e. MakeMyTrip, Leverage, Swiggy, Zomato and more, are embedding finance in the right way, IMO, which should result in better conversions for them. Everything is fintech, yes!
License ownership will hopefully become commodity in the embedded future: When financial services is non-core to a brand, license ownership through embedded finance will become a commodity, as it should be. Financial services are transitioning from being about "no other option" to "quality of experience and pricing" for the user.
Full stack servicing: India's regulations might be a hindrance to the "commodity license" play and that might drive some brands (e.g. Zomato) to own licenses as finance starts becoming core to their product journey. I don't see this becoming mainstream though as dealing with regulation and compliance in India is tougher than being a public company.
3️⃣Southeast Asia round up
Nepal will adopt India's UPI system to digitise payments in the nation. Mitsubishi UFJ shut down it's blockchain-based payments network, GO-NET Japan, citing the "recent hard business environment" for payments. Modalku, the Indonesian SMB finance arm of Funding Societies, and Carro, a used car startup, invested in Indonesia's Bank Index for a minority shareholding. ZA Bank and Mox Bank in Hong Kong have reportedly cornered two thirds of the deposits among eight digital banks in the country. China's supreme court ruled that crypto transactions constitute "illegal fund raising" with punishment of up to 10 years in prison. Southeast Asian fintech startups raised $267mm in funding.
UPI goes international: NPCI has done a lot of work over the years to get other countries to adopt UPI. Most countries have developed it in house inspired by UPI's specifications. It's awesome that Nepal will now adopt UPI. Most other countries have announced that they will integrate with UPI to enable seamless, cross border transfers.
Headwinds for crypto: The Japanese bank MUFG shutting down GO-NET Japan, a blockchain-based payments network, is rough. The surprisingly innovative experiment by the bank was intended to be used for micropayments for IoT devices. China's Supreme Court ruling was expected and it seems the world, including Chinese crypto companies, have moved on to more favourable countries.
Fund Raises continue to surge: Amber Group (Singapore, Crypto trading) raised $200mm. PayMongo, (Philippines, Payments) raised $31mm, Dowsure (China, cross-border payments) raised $20mm, NayaPay (Pakistan, messaging and payments) raised $13mm - Pakistan's largest seed round, Broom (Indonesia, auto financing) raised $3mm and StockViva (Hong Kong, stock investment) raised $3mm.
Ukraine's government amended its crypto law to regulate digital assets. Berkshire Hathaway sold $3bn of stock in Visa and Mastercard and bought $1bn of stock in Nubank. GoDaddy introduced QR-code based payments for on-the-go payments. Tingo, a Nigerian payments startup, which processes $4bn in ecommerce payments and is valued at $6.3bn, is raising $500mm. Scalapay, an European BNPL startup, raised $500mm. OpenSea's seven-day trading volume is down 37%, as active traders dropped 19% to ~227K, after a hacker used a phishing attack to steal 254 NFTs. Stablecoin market cap reached $180bn up from 38bn a year ago.
Looking for the news digest? Read all the week’s fintech news and updates in India and SEA over at This Week in Fintech - India and SEA Edition.
🏷️ Other Notable Nuggets
🎵 Song on loop
Fintech updates can get boring, so here's an earworm: Really needed a “pick me up” this past week. All I do is win by DJ Khaled (Youtube / Spotify) was on loop and how! Hope this helps you get into the winner mindset.
👋🏾 That's all Folks
If you’ve made it this far - thanks! As always, you can always reach me at firstname.lastname@example.org. I’d genuinely appreciate any and all feedback. If you liked what you read, please consider sharing or subscribing.
See you in the next edition.