NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Friday, October 23, 2015

Venture capital (VC) investments in fintech, or start-ups in the financial technology area, have seen a threefold increase over the last year as investors seek to cash in on potentially disruptive technologies shaping a cashless economy.

Globally and in India, the financial services sector is rapidly moving towards digital payments and transactions, creating an opportunity for those who offer services such as mobile wallets, online lending platforms and alternative credit rating techniques, among others.

Earlier this year, the Reserve Bank of India issued 11 payments bank licences to telcos, payment services (electronic wallet) companies and others. According to an August report by the Boston Consulting Group (BCG), 13% of India’s total banked population is now using digital banking. This number is growing at 20-25% per annum, estimates BCG.

Online retail sales could touch anywhere between $48 billion and $60 billion by 2020 from $4.47 billion last year, according to a report by UBS Group AG in April this year. Customers are increasingly using electronic wallets to pay for their online purchases. And they are increasingly making their purchases through apps on their smartphones (and paying for them through other apps on their smartphones).

Investors are trying to capitalize on these trends.

Till 30 September, investors had pumped $153 million into 20 deals in the fintech space (roughly the same they have in food-tech, the other flavour of the month), according to data from Venture Intelligence, a research service focused on private company financials. Last year, they invested $42 million across 15 deals. The amount invested in this sector this year is also the highest in the last five years for which the data is available.

The data includes investments in fintech involved in SME (small and medium enterprises) lending, mobile value-added services and payment processing firms. It excludes online marketplaces for financial products and services. The final tally for 2015 will be higher.