This is a Bubble No One Expects Will Burst but...

It's a lazy Sunday afternoon. You order your favourite pizza on Zomato.

You look forward to a relaxed day with some hot pizzas, a cup of cappuccino, a nice movie, a good book, and some siesta.

Within minutes your phone gets flooded with a barrage of messages and mails from Zomato.

You are offered premium plans for restaurant booking along with zero interest loans. If that doesn't appeal to you, Zomato has some mutual fund recommendations for you.

Opening a zero brokerage demat account is the least that you could do.

There is also an offer for quick insurance if nothing else appeals to you. Zomato promises to take care of everything through its all-in-one payment app!

This is neither a joke nor fiction.

If not Zomato, you would have already experienced this through some other apps that had nothing to do with finance until recently.

Fintech is a space everyone and their uncle wants to get into. And why not? Its where cheap money is going.

Now don't get me wrong. It's not just startups. Even well-established banks and financial institutions in India have realised the importance of technology innovation. They have been using technology to build novel financial products and solutions for their customers.

India is one of the pioneers of the global fintech trend with over 2,000 startups. Reported investments in this space as of 2021 was more than US$ 20 bn.

A large talent pool, favorable regulatory climate, growing customer base, smartphone penetration, access to funding etc have aided the rapid growth of fintech companies in India.

And despite a slowdown in economic activity due to the pandemic in 2020, the fintech industry continued to gather steam.

The fintech services allowed users to fulfil all their financial needs through digital, contactless, and remote channels. This was not imaginable about a decade ago. Most banking and financial services required at least some personal interface for fulfilment.

But India is a unique market where customers do not like to pay for banking services. Yet the opportunity to creatively find revenue streams is very alluring for fintech firms.

This is how the fintech ecosystem works...

We have payment companies getting into digital invoicing, white-labelling, card networks, and payment security.

We have NBFCs offering home loans, gold loans, and education loans. But they're now getting into platforms for peer to peer lending, credit scoring, collection management, etc.

We had retail and SME neobanks for a while. Neobanks are basically small service banks that offer basic services free of service charges. When the customer wishes to upgrade to higher value products, the bank charges fee-based income.

There are the neobanks now offering sophisticated credit linked products.

And then of course there are scores of players in different segments of insurance tech and wealth tech.

In insurance tech, you have specialists in claim management and underwriting management.

In wealth tech, apart from broking and robo advisory, you also have portfolio management tools, foreign investing, expense management, and the like.

So, as you can see, the opportunities are so wide that no business wants to miss out on a share of the fintech pie.

Now, isn't that a good thing?

After all, India has always been a country underserved when it comes to financial services. We have barely managed to ensure every household has at least one bank account.

And the rate of penetration of insurance and mutual funds remains low compared to even developing economies.

Well, the problem is that in the fintech space there can be too much growth too soon. This is especially true in an era of cheap money.

The growth should be calibrated with targeted risk control measures. Else it could blow up in the faces of entrepreneurs and investors alike.

I believe the VCs are aware of this issue. When looking for huge wealth creators of the future, they're careful when investing in fintech businesses.

For instance, data is the backbone of fintech firms. In case there is any regulatory oversight on data security, there can be a huge downside risk to the business.

Also, as fintechs mature with a strong user base, they find more opportunities to diversify their revenue. This gives rise to what are called Super apps.

Paytm is a good Indian example of a fintech's route to becoming a Super app. Paytm brought in variety of payment, loan, investment, and insurance offerings on the same platform.

Super apps no doubt have a huge headroom for growth given the interoperability of services. But they could also, over time, invite the government's security concerns.

The Chinese (WeChat, Alipay, and Baidu) and American (Amazon, Google) Super apps have already had their share of challenges.

India has a massive middle-class base. So, the existing 60 million credit cards are not enough to address consumer credit demand. Microfinance business exploit this gap with very high interest credit.

So, there is a huge demand for such credit. But if offered without credit risk control, such unsecured loans can blow up into a systemic bubble.

Similarly, the insurance policies are relatively easy to sell digitally. But offering cheap insurance may not a great business model for investors to tap into. Over time, when claims come up, overselling cheap insurance may not be worthwhile.

And finally, there's commission led advisory. Now we are all aware of banks going overboard while offering investment advice for a commission. Fintech businesses focussed on wealth advisory should strictly adhere to regulations. Else there could be high chances of mis-selling and eventually, financial frauds.

So, if you wish to capture VC like gains in fintech business, be mindful of these risks. Also, do a careful evaluation of the risk-reward equation in such stocks.

Stay tuned for more on creating wealth in fintech stocks.

Warm regards,


Tanushree Banerjee
Editor, StockSelect
Equitymaster Agora Research Private Limited (Research Analyst)

PS: Are you looking for fundamentally strong FinTech stocks? Investing in Indian FinTech could go horribly wrong unless you understand the ecosystem. To know more watch my YouTube video on the massive opportunity in FinTech stocks.