Fintech Inside - Edition #62 - 23rd May, 2022
In this edition: Navi's banking license rejection, wealth tech startup acquisitions and cash withdrawal via UPI
Hi Insiders, Osborne here.
Welcome to the 62nd edition of Fintech Inside. Fintech Inside is the front page of Fintech in emerging markets.
This week I've been traveling a bit and haven't had bandwidth to write my usual "One Big Thought" section. Will be back to writing that in the next edition.
You've been a loyal and supportive reader, so I cannot let you go empty handed. In this week's edition, I cover three important developments from the past week:
Sachin Bansal's universal banking license rejection
The future of wealth tech startups
A new feature RBI launched for cash withdrawals
Note: There will be no edition of Fintech Inside next week i.e. 23rd May, 2022. Will resume regular programming on 06th June, 2022.
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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 connect@osborne.vc.
Enjoy another week in fintech!
3️⃣ Fintech Top Three
1️⃣ Navi's banking dream put on hold
The universal banking license application of Navi, a financial company founded by Sachin Bansal, cofounder of Flipkart, was rejected by the Indian central bank earlier this week. A total of six applications, along with that of Navi's, was rejected.
Takeaways:
Sachin's unusual approach to the banking license: Among the first things that Sachin Bansal did after selling Flipkart to Walmart was acquire Chaitanya India Fin Credit, a West Bengal based micro lender, in Sept-2019. The sole purpose was to apply for the banking license because of RBI's applicant requirements. This is unusual because firstly, no universal banking license has been granted to an acquired company and secondly, a universal banking license has been granted only once before to a micro lender i.e. Bandhan Bank. All other micro lenders that applied, applied for small finance bank licenses.
RBI seems to still have some scar tissues from previous banking license: RBI has usually stayed away from individual promoter driven banking applications. YES Bank was potentially the only, IIRC, banking license awarded to individuals. All other banking licenses were awarded to financial firms that were later converted to banks. The YES Bank situation from 2020 is still fresh in the minds of RBI.
Cleaning up India's banking system: The Indian central bank has solely been focused on cleaning up India's banking system since 2017 (IL&FS). It's stance on banking has been ultra-conservative and rightly so. The only time it allowed a startup to acquire a bank was BharatPe and Centrum's joint venture to form a small finance bank to then acquire PMC Bank. But, we've also seen what happened with BharatPe. None of this instills confidence with RBI.
Banking is a core part of Sachin Bansal's second innings: Sachin has known that the banking license is not going to come easy. Wasting no time, he's gone and started business lines in every other vertical. He's even tried to acquire entities that hold those licenses for an AMC, life insurance, non-life insurance, lending and others. But banking still remains core to his plans - that sweet, sweet CASA account! He's definitely not stopping despite the RBI road bump of rejection. Navi's filed it's draft IPO prospectus for a public listing and will separately list its bonds to raise $80mm. Here's hoping building in public (literally) will help Navi!
2️⃣ Wealthtech startups have acquisition in their future
PhonePe acquired WealthDesk, a Smallcase-like, thematic investing startup, for $50mm and acquired OpenQ, a wealth management startup, for $25mm.
On similar lines, in the past, Sqrrl was acquired by Cashe, Moneyfront was acquired by Niyogin, Smallcase is being acquired by CRED and many more such examples. If you look deep enough, you will find more such examples of wealth-tech startups being acquired.
Hat tip to Amit Goel for pointing out this observation on Twitter.
Takeaways:
Wealth management market has been about expansion: Ever since the digitisation and robo-advisory boom and bust of 2015/2016, the investing/wealth management market has been about market expansion, not market depth. We need to find ways to get more users to invest. Instead, all innovation so far, has been around digitisation and offering better services to existing investors. I've said this before, the bull run of 2021 has done more for market expansion than any wealth tech startup has.
Wealth management has too many intermediaries: The entire wealth management market has a slew of intermediaries - RIA, Broker, RA and many more (35 as per SEBI), each with a narrow scope of work as per regulation. Once you're licensed, you cannot stray from doing that single, narrow line of business and you cannot have subsidiaries that have other licenses. The securities regulator also limits the revenue potential from this narrow scope of work which can be backended. This probably limits the overall scope of business and therefore limits the potential to build a large business.
Wealth management is about trust: Of course everyone knows that to get someone to part with their wealth, they need to be able to trust you. As a startup, you can throw all the money you want at advertising or building fancy charts, but none of that builds trust in an investor. Us Indians are a "do it for me" bunch who will rather pay a person to do it for us than do it ourselves. We trust our neighbourhood paanwala more than a mobile app. Most wealth startups haven't been around long enough to build that trust. Since trust takes time to build, VC money will be limited, which means, you run out of money sooner and hence the need to get acquired.
This is my crude, generalised interpretation of what's happening in the wealth tech sector. What's your take on wealth tech start
3️⃣ You will soon be able to withdraw cash from an ATM with just your UPI handle
India's central bank introduced Interoperable Card-less Cash Withdrawal from ATM's with UPI integration. ATM's integrated with UPI will have the ability to dish out cash without requiring a card to be present.
Takeaways:
India is UPI country: UPI is a true global-first innovation. Other countries have seen India's success with instant bank transfer and built their own interpretations of UPI or imported UPI directly. The past half decade of UPI was about digitising India's payments, this next half decade of UPI will be about making UPI accessible to the 400mm-odd Indians that are still excluded from India's banking system. This UPI-based cash withdrawal will be an interesting step in that direction.
But India is also cash country: As of March, 2022, $41bn of cash was withdrawn from ATM's across India. $41bn, though reducing compared to UPI's growth to $128bn in value/month, is still high. Most people still prefer to use cash for their daily lives for various reasons including convenience, privacy, no need for network - take your pick. Total cash in circulation as well has only grown to $377bn as of Dec, 2021.
New use cases will emerge: The simplicity of UPI and the benefits of cash is a great combination. New use cases around cash withdrawal will emerge. As Deepak Shenoy pointed out, one use case is that of daily wage labourers depositing their wages in the bank or transfering it to their families back home without the family member needing a card for withdrawal - just a phone.
UPI will not be free for withdrawals: RBI has mandated that UPI-based withdrawals will have similar costs structures to card-based withdrawals. Will this be the precursor to getting users used to paying for UPI's convenience?
🌏 International
$7.6bn of stablecoin Tether was withdrawn since Thursday, nearly twice its cash reserves at the end of 2021; Tether also holds $60bn+ in “cash-like” assets. Sam Bankman-Fried, FTX's cofounder, said that Bitcoin will fail as a payment network. The average subscriber in US has canceled 1 or 5 subscriptions. FTX.US launched FTX Stocks, offering zero-commission stock trading of US-listed companies and ETFs. Klarna claimed to have reached 150mm users milestone.
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: As it was by Harry Styles (Youtube / Spotify)
👋🏾 That's all Folks
If you’ve made it this far - thanks! As always, you can always reach me at connect@osborne.vc. I’d genuinely appreciate any and all feedback. If you liked what you read, please consider sharing or subscribing.
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See you in the next edition.
I know a start-up who digitalizing for new investors. Only focuses on building/digitalizing for whitespaces in WM. :)