2020 was a watershed year for most sectors but none more so than for FinTech. Optimism and greed quickly turned into extreme pessimism and fear as the pandemic hit in March, and the last few months have been of cautious optimism. We covered some of this in our previous post- we think India’s fintech journey is just beginning and will continue to invest consistently. As we write this, we are in the middle of closing our first investment in 2021 in the fin-tech space (more on that in a future post!).

As we start a new decade, we wanted to share some of the themes that we are spending time on and looking to invest in. Some themes are continuing from past years but are still relevant, while others have seen tailwinds from the accelerated digitization post-Covid.

1. SME Neobanks: 2020 saw technology adoption at an unprecedented scale by SMEs – whether they were small manufacturers, traders, teachers, or other service providers. For e.g., 3 million online stores have been created on Dukaan in the last 9 months alone! As more SMEs become “digitally accessible and organized” for the first time, there is a massive opportunity to serve their financial needs.

A differentiated Go-To-Market strategy will be imperative to the success of SME focused start-ups. Eg: Razorpay started with payment products & now RazorpayX (its neobanking platform) contributes ~15% to its topline which is expected to be 30% by end of 2021. A potential SME neobank could, for example, simplify GST filing & reporting, invoicing, daily workflows and in-process, capture rich data to offer contextual, unique and micro financial products.

Our investments in the SME space, namely Five Star Finance, Mswipe, Ziploan have taught us that SMEs are not homogenous and similarly we believe multiple SME Neobanks targeting different segments will coexist.

2. OfBusiness for X: Credit is important in every supply chain in India. SIDBI estimates the credit gap for MSMEs in India to be INR 25 trillion, a majority of which is working capital. Despite such a large market, we haven’t invested in standalone supply chain financing companies largely due to low margin profiles.

However, we’ve also seen how OfBusiness has disrupted supply chains such as steel, cement etc. by playing the dual role of market maker and financier. The combined business has growth characteristics of e-commerce and profitability characteristics of a good lending business. We continue to scout for founders who are looking to build “OfBusiness for X” (credit enabled B2B marketplace in other sectors).

3. Wealth Management 3.0: Wealth-tech saw massive tailwinds in 2020 with 17M new savers/investors entering the market (new Demat accounts + new MF investors). This trend will only accelerate in the coming years. However, two problems remain unsolved:

a. For early investors – what to invest in, when & how much?

b. For affluent customer/ HNIs – what does smart money do, what else can I invest in?

Scaled-up players could take the AMC route to solve for (a) with easier licensing norms. As wealth-tech CACs soar, social investing (Stock Fantasy Games and Follow other Traders) could be an interesting option for upstarts – creating a regulatory compliant product will unlock a massive opportunity.

Solving for (b) is also a very interesting opportunity, especially in the current low-interest rate environment. We’ve seen early signs of P2P lending companies such as Liquiloans shape some of this opportunity. Platforms that can help affluent investors access new products (e.g., private companies, corporate bonds, high yield products) in a “personalized” way have the potential to disrupt impersonal private banking offerings.

4. Global Fintech 1.0: While global commerce took a backseat in 2020, it will be back with a vengeance in 2021. As India becomes a global manufacturing hub, more Indians go abroad to study/work, Indian teachers start teaching global students at scale and more Indian investors start investing in global markets, need for cross border financial services will explode – ranging from basic things like accepting international credit cards (which is still a challenge in 2021!), cost-effective forex transfer for SMEs, access to dollar-denominated loans to full-blown multi-currency accounts. Two segments we are spending time on are:

a. SMEs that need to transfer and accept forex

b. Affluent individuals looking for international bank accounts & global investments

5. Insurtech melting pot: Perfect storm brewing in insurance with heightened awareness and urgency post-Covid, National Health Stack (NHS), the rise of embedded finance, easier API availability and FLDG like insurtech models.

We believe this is a perfect melting pot for insurtech innovation. Trojan horse distribution, targeted underwriting to lower combined ratio (COR) are some of the ideas we are excited about and are continuously exploring more!

6. Fintech Infrastructure: Although the number of fintechs hasexploded, integration with underlying licensed financial institutions remains a challenge for companies of all sizes. Legacy banking systems, compliance/security issues, min. volume guarantees are some of the reasons that make integration a 3–12-month long process. Hence, we need a backend overhaul to keep driving forward.

We recognize that the addressable market in India might not seem large today but we see a clear trendline – the rise of embedded finance as non-fintech companies start offering financial products. Further, the right product/solutions could potentially be relevant in other markets such as the Middle East and South East Asia.

We would love to get your feedback and thoughts on what other interesting themes and macro trends (video-driven, GenZ focused financial services, etc.) that could emerge - please give us a shout on fintech@matrixpartners.in or any of the social handles below. We would love to get a (virtual) coffee and brainstorm on any of the ones above (and others we might have missed)

Twitter: @matrixindiavc @avnish @VikramV23 @RajatAgarwal167 @sarthakone @Akshatj17

LinkedIn: Matrix Partners India, Avnish Bajaj, Vikram Vaidyanathan, Rajat Agarwal, Sarthak Malhotra, Akshat Jain