Fintech Landscape

Ashish Fafadia Kartikeya Shekhar [email protected] | [email protected] Sujay Choubey Contents

1. 2010s Sensemaking 3-7

2. Fintech Landscape 8-16

3. Areas of Interest 18-22

2 2010s Sensemaking

3 Evolution of Indian Fintech: 1.0, 2.0, 3.0? Valuation*

$1B

$100M

Phase 1: Payments Phase 2: Lending Phase 3: Platforms & Enablers Largely Payments companies formed. Some other Lending startups emerged most prominently. Payment startups hyperscaled. Incumbents pressured to modernize through models in investments and financial product listing Adoption across wealth tech & insurance tech increased. enablers. Tech adoption by new segments. 2000 2014 2018

Banks expand online products in Ecommerce Jio, GST, eKYC, UPI Account Aggregators, 1990s e.g. trading, lending Boom Demonetization Jan Dhan Yojana CF Data pipes, PDP Bill, NACH Tailwinds

Wave of epayment Wave of Online Formalization Onboarding Free Data Sharing solutions, aggregators vendor finance Market Expansion cost lowered Cost of Financial Services decreases Impact

* Not to scale 4 Evolution of Indian Fintech: Strong Macro Tailwinds

Unbanked Population Low insurance penetration Suboptimal Portfolio Demographic Dividend 2nd largest – 19 Cr1 – 3.69% vs global average Skewed towards real estate Large millennial base, 6.13%2 and gold (88%). Only 5% in Increasing tech-savviness led Financial markets3 by vernacular content/social

Data Explosion Public Infra (JAM Trinity++) Financial Inclusion Led by cheap data and Unprecedented creation of public rails accelerated by various mobile adoption creates Aadhaar, UPI, Digisign, eMandates, government initiatives – DBT, PM scope for new tech models AePS, OCEN Bima Yojanas

5 Evolution of Indian Fintech: Learnings from the last decade

Payments Insurance Lending

• Prepaid Instrument growth plateued. • Direct online distribution picked up but still • Ability to maintain good quality book at Merchant acquisition new battleground. very small piece of overall market. controlled growth rate reaffirmed as the key • Regulatory risk played out. Interoperable • Share of agents in distribution has been success factor. UPI decelerated PayTM’s rise, zero MDR falling. Still will continuen to be most • No significant success seen from • But proven as most high-touch segment significant for at least a couple of decades alternative lending. with largest distribution. • Strong regulatory oversight makes govt. • Sticky relationship with customers • Payment Banks model hasn’t succeeded. lliaison important (Platforms) increasing in importance with easier data sharing (AAs)

Wealth Regulatory • Small market of retail financial investors made • eKYC brought down cost of customer onboarding, but its monetization a challenge beyond a scale. rollback led to uncertainty. Security breaches unsolved. • Big successes in brokerage and MF investment • Aadhaar, UPI infrastructure created massive tailwind for • Promise of large company catering to top tier creation of fintech startups. Launch of regulatory sandbox consumers yet to be proven will accelerate innovation in fintech. • Next on the radar are cash flow based lending, data 6 governance. Fintech Exits: IPO is the only viable exit option

Major exits over 2010s Acquirer PE consortium Snapdeal ($340M) BNP Paribas PayU Ebix Exit Size $930M Axis Bank ($60M) $320M $130M $124M (80% stake)

Banks Cash rich entrants

There are two broad categories of incumbents: 1. Traditional Banks: Potential synergies from startup acquisitions are high (new offerings, modernization). However, opportunity cost of deploying capital on acquisitions is large, since it reduces their lending ability and hurts their CAR. It does not help that pre-IPO startups are valued at very expensive multiples. No large acquisition has been done till date and the most common route of realizing synergies is through partnerships. 2. Cash Rich Entrants: Synergies for companies trying to enter Indian market or trying to enter a new vertical within the Indian market are high. Common candidates for such acquisitions would be companies that have achieved good distribution. However, there are limited number of such deeply funded incumbents and the fintech acquisition market is still in very early days.

Even in Europe, which is the most mature fintech market, incumbent financial institutions accounted for <5% exits value since 2013. 75%+ of the exits value came from IPO and acquisitions by larger fintechs (45% & 30% respectively).

Takeaway: IPO is the only viable exit option in India 7 Fintech Landscape

8 How Blume thinks about Fintech startups

• Since IPO is the only viable exit route, delving on vanity metrics is criminal. • Evaluate from a public markets lens. E.g. lending companies should be valued at 1x the book value. Metrics • Health metrics should be prioritized over growth metrics because with scale, stress increases. • Founder mindset should reflect the focus on metrics.

• A healthy fintech company will not be able to grow non-linearly. Returns may be capped ~25% IRR.

Portfolio • Fintech companies are suited for larger reserve ratios (1:3) so that early set of investors can keep Growth doubling down into the company till it reaches IPO scale, without depending much on new investors.

• The regulator will keep making infrastructure available to bring down the cost of banking services and

Regulatory advance financial inclusion. Intervention • This further decreases the liklihood of banks acquiring first-mover startups to build expertise in new areas.

9 Monetization Models

Model Spreads-based (*) SaaS-based (#) NIMs-based (^)

Earn APR on assets or Earn fees – transaction or Earn differential between cost of Monetization transactions subscription saas funds and return on funds

Acquire Volume with some capital Wedge of a narrow usecase to Maintain healthy underwriting efficiency advantages (stickiness, land. Gumption to expand from while sustaining decent growth Way to Win network effects). there on. Metrics: LTV, CAC Metrics: ARPU, Market Size Metrics: NIM, Book Value, Delinquency Payments, Wealth, Neobanks Antifraud, KYC, Enabler APIs, Lending Plays & Intermediaries Sectors Insurance

Examples From Blume Portfolio

10 Fintech Landscape 2x2

How to navigate the chart • Some markets large enough for 1. We have mapped fintech landscape along two axes: market size (Y-axis) and crowded-ness (X-axis). multiple large winners • Ideal sectors to deep dive in • Market Size (Y-axis): How large is the problem? • Room for platforms meaningfully Estimate of the size of the opportunity • Watch out for regulatory risk Large Market bundling products in crowded • Crowding (X-axis):How crowded is the space? If a space has several series A+ startups, it can be spaces (e.g. sahamati+lending) considered crowded. A non-crowded space would have either few seed-funded startups or none at all. Not Crowded Crowded 2. We have added additional layer of information • Large market if building from • Business Model (*/#/^): Whether the revenue model • Mature sector is (i) Spreads-based* (ii) SaaS-based# or (iii) India for the world (eg. saas) • Consolidation wave NIMs-based^. Each model has different implication for • Some markets may expand the business (next page). • If crowding is by incumbents, either due to high growth, • Category (color): Depicts larger category of the potential of disrupting business and helps to see high-level sectoral patterns product or tailwinds e.g. all lending-sector plays or insurance-sector plays

Small Market • Risk (Border): Dotted border for models which have relatively high risk of regulatory intervention.

11 B2C Fintech Landscape (1/3) UPI / Wallet*

POS Lending^ Personal Loans ^ Large Market*

Gold Loans^ Payday Loans^ D2C Insurance # MF Investment* Education Finance^ P2P Loans^ Brokerage # Bottom Of Pyramid Neobank * $1B Not Crowded Crowded Millenial Neobank * Robo Adviser* HNI Portfolio #

International Remittance* Credit Bureau# Tax Assistant* Domestic Remittance* Insurance Aggregator * * High-level estimates in Appendix Small Market* Regulatory Legend # Risk SaaS Revenue * Spreads Revenue ^ NIMs Revenue Lending Insurance Wealth Payments Banking 12 B2C Fintech Landscape (2/3) No/Early stage Players Saturated Space

P2P Lending Personal Loan Education Loan Gold Loan Payday Loan POS Credit Lending

Wealth Manager Brokerage Robo Adviser Portfolio Mgmt for HNI Wealth

Insurance (D2C) Insurance (Fullstack) Insurance

Wallet/UPI Payment AEPS Remittance Remittance Payments

Tax Assistant Credit Score Regulatory

Quote Comparison Neobanks for BOP Neobanks for Professionals Neobanks for Teens Platforms

13 B2C Fintech Landscape (3/3)

Category Trends • Size: Formal outstanding credit was $287B (2017). Informal credit 65% of formal credit (~$180B). 70% of formal credit is taken by 9% of most affluent hosueholds (2.4Cr). Share of loans purchased online expected to reach 50% by 2025. Lending • What’s Interesting?: (i) less-crowded areas where incumbents have been slow in distribution (ii) high-tech enablers which will plug into underwriting models of next decade (iii) focus on conventional metrics (NIM, delinquency, book size) • Size: Non life insurance premium $21B, 30% of total premium (global average 50%). Density $18 (vs global $297); Penetration 0.9% (vs global 2.8%). Online premium collection miniscule - $450M. Only 35% populations has health Insurance insurance (largely driven by recent government push). • What’s Interesting?: (i) innovative insurance products in large areas underexplored by incumbents • Size: Market size is largest but payment instrument sector has matured. Leading startups are in phase 2 of monetizing their user base, which is non-sticky. Domestic remittance by rural emigrants is $10B. 60% occurs Payments through risky traditional modes. Foreign remittance $18B – Travel ($6B), Studies ($4.5B), Family ($3B) • What’s Interesting?: (i) Fullstack solutions making foreign remittance cheaper and convenient • Size: 6Cr people filed ITR. 2.8Cr retail investor base. Massive inefficiencies and frictions exist among the longtail population. Wealth • What’s Interesting?: (i) HNIs operational portfolio management (ii) 360 degree wealth advisor products for middle class (iii) simplifying investments for longtail segment (India 2&3) (iv) holistic solutions bundling wealth with lending & insurance for longtail segment (India 2&3)

14 B2B Fintech Landscape (1/3)

SME Secured^ Trade Finance^ Invoice Discounting^ Large Market* Channel Finance^ SME Unsecured^

POS Payments* B2B Payments* Lending Enablers # Agent Enabler# Accounting, Core Banking OS # Antifraud# Compliance, Taxation # $1B Not Crowded Crowded TRMS # SME Group Broker*

Data Pipes # Underwriting OS # Credit Bureau #

Collections # Capital Market Tech #

Account Aggregator#

* High-level estimates in Appendix Small Market* Regulatory Legend # 15 Risk SaaS Revenue * Spreads Revenue ^ NIMs Revenue Lending Insurance Treasury Payments Banking B2B Fintech Landscape (2/3) No/Early stage Players Saturated Space

Invoice Discounting SME(Secured/Unsecured) Channel Finance Collections Credit Scoring Lending Platform Lending

HRMS++ Treasury Capital Market Wealth

SMB/Freelancer SME Group Insurance HRMS-linked Employee OS for Underwriting, CRM, Agent enabler Insurance Broker Plan Management Recommendation etc. Insurance

B2B Payment POS POS Antifraud Payments

Accounting & Reconciliation eKYC Regulatory

Card Enablers Lending Enablers Data Pipes Neobank Platforms

16 B2B Fintech Landscape (3/3)

Category Trends • Size: SME credit demand is $650B – 45% met informally at high interest. 60% SMEs borrow informally. Digital lending expected to reach $80-100B by ‘23. Between large corporations and PSUs, $13B receivables locked at Lending any time. • What’s Interesting?: (i) SME Lending interplay with upcoming infrastructure • Size: Agents continue to be largest distribution channel (30%), Corporate Agents (10%) – b2b sales. Insurance • What’s Interesting?: (i) payroll-linked offerings for group insurance sales (ii) software stack for agents or insurers (B2B/B2B2C) • Size: GS says global opportunity in invoice processing is of $950B. 10M+ registered base of MSMEs on GSTN. Tally Payments/ market of 7-8M SMEs (60% pirated). Accounting • What’s Interesting?: (i) Enterprise/Mid-market CFO suite: AR/AP automation coupled with strong offerings Compliance (supply chain finance, compliance) (ii) Accounting and reconciliation for SMEs (iii) Solutions around Merchant POS Taxation (a la square) or cheaper better POS models • Size: Indian Treasury market is $20B. Market for Treasury applications would be <5% i.e. $1B. Treasury • What’s Interesting?: (i) agile tech companies helping CFO realize better rates in international payments and cash flow / risk management. • Size: BFSI spend on IT: $11B. Banking • What’s Interesting?: (i) Secure Data pipes for BFSI to access softwares and to provide access to other companies (ii) Fullstack Antifraud solutions for various functions, esp. payments (iii) Core banking software stack

17 Areas of Interest

18 SME Lending & Embedded Finance

Market Landscape

1. 60% Indian MSME borrow informally. 45% of $640B credit demand met informally. 2. Alibaba ecosystem pioneered cash-flow based lending for marketplace participants at tremendous service level (e.g. 30 second loans) based on phenomenal data-savviness. 3. Some SME marketplaces in India achieved early success in financing SMEs. The first implementation of OCEN-driven is being rolled out with Government e-marketplace (GeM).

Companies we would like to see more of Early stage companies

1. Platforms: With the launch of OCEN rails, high quality sticky platforms/networks catering to credit starved segments will have unprecedented wherewithal to provide credit.

2. Enablers: New lending regime will create room for new entities who enable various parts of the reformed cash-flow lending value chain. Account Aggregators are the most well known. Derived Data Providers, Underwriting Modelers, Governance Models will come up. 19 Consumer Lending

Market Landscape 1. $ 180B+ informal credit market. ~60% of formal market. Massive section of the population with no or thin credit file. Deprived for formal channels due to collateral demand or plan complication. 2. 9% of most affluent households (24M) account for 70% of formal credit. Clutter of companies in this segment. Large longtail (India 2&3) still unserved/underserved. 3. Size of formal credit is expected to grow to $1.2 Tr by 2025. Online share will be 50%+ (23% in 2018).

Companies we would like to see more of Early stage companies 1. Blue Collar Finance: 92% of the 450M blue collar workers are employed in unorganized sector. 1% have access to formal credit.

2. Gold based Finance: 65% household gold is in rural areas. Total Gold Loan market is $60-70B (30% organized).

3. Bottom of Pyramid Neobanks: Holistic high-touch solutions with nudges to enhance adoption. Building file of new-to-credit customers, bundling with insurance and wealth goals 20 Insurance

Market Landscape 1. In 2019, Gross Premium collected was $82B out of which 70% was Life Insurance. Online Premium was $450M. 2. Insurance Penetration in India is 3.69% and Insurance Density is $74 (Global average $650). 3. The key segments of non-life insurance market: Motor (39%), Health (25%), Crop (17%). Health has grown the fastest. 4. Distribution pattern has changed rapidly in the past decade. In 2018, share of individual Agents is 32% (54% in 2010) and Direct Selling is 43% (27% in 2010). Only 34% population has health insurance. Govt schemes have provided large push. Early stage companies Companies we would like to see more of 1. Insurer SaaS: Platforms modernizing legacy systems and workflows used by incumbents for managing the life cycle and user experience of insurance products, improving underwriting, turnaround time etc.

2. New Products: Facilitating better underwriting or claims assessment of new risks in highly vulnerable segments through tech (e.g. sachetized insurance, parametric insurance, image processing & satellite imagery in agri calamities) 21 CFO Suite: Accounting, Compliance, Taxation (ACT) Software

Market Landscape 1. GST led to step increase in adoption of accounting software. 2. Market Size: 12.5M GST Payers. ~3 M Tally licensed users 5M pirated user base. ~70% SMEs use Tally. Thus, MSME customer universe of ~10-11M customers. For the longtail customers, ARPU < $200 (since Tally @ Rs 20K/Y) 3. Treasury Risk Management Software is a concentrated $5B global market, top 10 make up 60% of market. 1M+ Indian SMEs export. 6200+ Indian cos. with turnover $74M+, all depend on excel/legacy ERP. India Treasury Ops $15-20B.

Companies we would like to see more of Early stage companies 1. Land & Expand: Powerful ACT product that significantly impacts bottom line. Use it as a wedge to solve adjacent frictions. The primary usecase should be laser-focused – reconciliation, automated accounting, receivables, payables file, or taxes.

2. Procure-to-Pay in Offline Industries: Digitizing the flow on money and documents(contracts, invoices) in high turnover industries.

22 Core Banking & Open Banking

Market Landscape

1. Banking & Securities sector IT spend in 2020: $11B [Gartner]. In the Indian banking sector, 23% of IT spend will be on digitization of internal services. 2. While banks are catching up on front-end experience, middle- and back-office processes are built on legacy systems making them slower, more prone to errors and harder to scale. 3. Banks need secure data pipes to expose their internal setup to external entities for data sharing in the open banking regime.

Companies we would like to see more of Early stage companies 1. Core OS: Cloud native API-based offerings for banks to deploy in parts or as a whole in their workflows. E.g. Vault by Thought Machine. MX allows banks to build data pipes among various silos of data.

2. Function OS: Modern white label apps for life cycle management of the customer across various business functions internally or improving the UX of customer externally (lending, card issuance). E.g. Agile Financial for Insurance

23 Please write to us at:

Sujay Choubey | [email protected] Kartikeya Shekhar| [email protected] APPENDIX

25 Broad Estimates of Markets

Model Market Size Comments D2C/Online Insurance <$10B Online premium collection: $450M. $70B premium (30% non-life). $37B by ‘25 (JMFin). 30% margin. Insurance Aggregator <$500M Agent commission 5-10%. Online Premium $450M, Online premium needs to be $5B for $500M market. Insurance OS <$1.5B 57 Insurers. 16 Cr policies. Opex 20%, Saving20%, Value created $2.8B, Price 50% of value. Brokerage <$5B Current Market $3B. Registered Investor base 2.78 Cr. Annual Active 70L (cash), 14L (F&O) Mutual Funds <$5B Rs 25 Tr AUM currently. Commission ~1% HNI Portfolio >$500M 1Cr+ Investable Wealth: 10L. $1.5B market @ARPU ~Rs 1L (1% AUM) Robo Adviser <$1B US Robo Advisor AUM 0.2% of MF AUM. India 0.2% = $700M Lending >$50B Formal Credit outstanding $287B. Informal $180B+. P2P Lending $5B ET article Gold Loans $10B+ Gold Loan market $65B (30% organized). ~20% interest (Muthoot). Education Finance ~$2.5B 260M school students. Avg fees Rs 7K in ’14, 5% yoy rise. Say,20% want financing. >$6B demand, 30% interest Collections <$500M ~10K banks&NBFCs. @ARPU $50K. ~Rs 4Tr stressed receivables, 20% conversion, 20% commission, over 4 years Credit Bureau <$500M Current total revenue of the 4 credit bureaus < $200M @ ~50% coverage Account Aggregator <$500M 1 B API pings @ ~ Rs 20. Perfios revenue in ‘20 <$15M. Subset of overall $2B BFSI data mgmt. spend Digital Payments <$1B $65B Digital Payments ($123B in ‘23). Earnings only on bill payment etc. @ 1-2% 26 Broad Estimates of Markets

Model Market Size Comments Foreign Remittance ~$500M LRS Remittance $18B. 37% Travel, 26% Studies, 18% Relatives. Transferwise fees ~3% Domestic Remittance <$100M $13B value. 77% rural contribution. 40% via formal channels. $6B to be tapped. 0.5% commission ACT for SMB <$3B MSME customer universe of ~11-12M customers (Tally user base 7-8M, 5M pirated base). Conservative ARPU $200 (Tally @$300/Y) Tax compliance <$1B 6.7 Cr file taxes. ARPU ~Rs 1000 TRMS <$1B Conc. $5B global market, top 10 make up 60% of market. 1M+ Indian SMEs export. $20B treasury ops. Neobank <$500M Top 15-20M customers, LTV of $70 over 5 years, ARPU $15-20 Payday Loans ~$10B ET article Capital Markets Tech >$1B Global trading platform market size is $15B growing @ 5%. India has 2% of global market cap. global Trade Finance >$10B $330B merchandise export. $100B disbursed in Dec’18 (~$133B annualized). Unmet trade fin gap $1.5Tr (global), $692B (Developing Asian part). Say 60% financed (global avg 80-90%): $198B. Still >$50B unmet Supply Chain/ <$10B Consultantsreview Interview Channel Finance Group Insurance $3B 10% Non Life Premium via Corporate Brokers. Total <15%. Banking Antifraud >$1B Global market $30B Bottom Of Pyramid >$1B 26Cr people w/o credit file. 60 Cr w/o access to fin services. Neobank

POS $1.5B 5M POS terminals deployed. 40M merchants. Retail $2Tr opportunity. Low CAC in QR. Mkt $200M in27 ‘18.