What's Slowing Down India's Fintech Sector Here are five key challenges faced by fintech startups in India that need to be resolved soon for the growth of the sector

The fintech market has seen tremendous growth over the last decade. According to Tracxn data, there are 8112 fintech startups in India and companies like Paytm, Razorpay, Pine Labs, PhonePe, BharatPe, Policy Bazaar, CRED and Pine Labs are some of the fastest-growing companies in the space.

The Indian central government and state governments have also been taking various efforts to give a push to the sector. A recent case in point is the Tamil Nadu government recently laying the foundation stone for the development of Fintech City and Fintech Tower in Nandambakkam, Tamil Nadu. It has allocated INR 116 Cr and INR 254 Cr respectively for the projects and expects the Fintech City to attract an investment of about INR 12,000 Cr and create employment opportunities for 80,000 people.

Fintech startups have also been scaling and receiving funds despite the global economic turmoil. For instance, Australian fintech business Pepper Group announced an investment of $150 Mn over the next four years to establish Pepper Money, a fintech startup, in India. Indifi, which operates an online lending platform that offers business loans to micro, small and medium enterprises, raising Series D funding recently. Cloudbankin (formerly known as Habile Technologies), an end-to-end digital lending software company also raised $400K in funding from angel investors recently.

However, the sector is not devoid of challenges. One of the biggest hurdles that hit the sector was the uncertainties that came with the Covid-19 pandemic. It led to a decline in consumer spending, leaving many startups in lurch. However, even though the pandemic is behind us, other challenges continue.

Here are five such challenges that are crippling the sector.

Regulatory challenges

Regulatory scrutiny, which is getting more severe and complex by the day, is one of the biggest roadblocks faced by these startups. Even though experts agree that it is indeed a sector that needs regulation, clarity and fast disposal of compliance are the need of the hour. The delay and the complexity of regulation and compliance requirements are leading to added costs for businesses. This poses a huge challenge for startups that are already competing with huge legacy financial institutions.

Competition

The fintech market in India was valued at INR 2.30 Trillion in 2020 and expected to reach around INR 8.35 trillion by 2026 at a compounded annual growth rate of 25%. This has led to everybody eyeing a piece of fintech pie, thereby increasing the competition. Further, they also have to compete with legacy players. Overall, they face stiff competition from peers as well as large financial institutions, who are ramping up their digital offerings.

Conservative approach

"In the Indian scenario, the conservative approach of Indians poses a challenge, as it has only been in the past few years that digital transactions have become the preferred mode for most individuals, while traditionally cash has been trusted for transactions," said Vinay Bansal, Partner, Physis Capital.

Cybersecurity

Alongside regulatory challenges, startups in the lending tech space face hurdles such as risk management, establishing trust, customer acquisition, and scalability. "Overcoming these challenges requires leveraging technological advancements and data-driven decision-making," said Teja Ramineni, co-founder, Avenue holdings.

"Infrastructure related to cybersecurity has been a weak point for the Indian markets. Fintech companies are dealing with highly sensitive customer data. Cybersecurity threats result in massive monetary losses during online transactions and crush the trust of customers. Expectedly, money matters are also associated with trust in the right partner, and while older financial institutions have a long legacy, new-age startups are not well recognized and suffer from a lack of brand awareness as compared to their bigger peers, even if they possess a superior product," added Bansal.

Constant innovation

Over the last few years, fintechs have been on a continuous cycle of innovation around monetization models, digital credit underwriting, collection mechanisms, and overall customer journey. "This is both an opportunity as well as a challenge to the industry. Innovative models entail significant expenditure on R&D, increased cost of infrastructure and operations, competition in customer acquisition, and data privacy concerns," said Richard Pinto, principal, 3one4 Capital.