Between Square’s mammoth acquisition of Afterpay, and the release of one of the largest Fintech IPOs, Nubank, the global Fintech industry has been on a dream run since 2021. The number of global Fintech unicorns more than doubling to 235 over the past year symbolizes the space's burgeoning appeal and acceptance. The numbers indicate we have overwhelming evidence to believe that india is not simply riding this wave, but has emerged as a major catalyst!

in 2021, Indian Fintech companies cumulatively raised close to $9B, which is three times that in 2020, and this momentum is expected to continue into 2022. With traditional financial institutions trailing significantly in leveraging technology, we saw Fintech players swoop in with agile and innovative offerings to grab market share - be it in payments, lending, insurance or wealth management. We also witnessed businesses catching up and swiftly transitioning to tech-enabled workflows and financial services.

in the backdrop of these exciting new developments, here are our picks for the hottest Fintech subsectors that have scaled their way into Matrix’s idea Board for 2022:

         1. Next-gen wealth management:

Wealth-tech continues to swell beyond 2021, with 34 million new client accounts in BSE, clocking 57% YoY growth. As wealth transfer from Gen X to Gen Y is underway, we predict that millennials will increasingly turn to tech to manage their finances. The market remains under-exploited in india, constituting 10% of the GDP as opposed to 70% in developed markets.

DiY investing platforms have flooded the markets, but we don’t see portfolio management services spreading their nets wide enough. Significant AuM is on offer for PMS players building custom offerings for niche investor classes beyond the currently tapped HNi/UHNi segment. For instance, a startup we invested in, dezerv., is a wealth management platform designed to serve the ‘emerging HNi’ niche. With robo/tech-enabled advisory, we believe that the next 25-50 million investors can get access to quality portfolio management at lower costs.

Other interesting plays on our radar are alternative assets and social investing. investors are seeking new avenues beyond equities, with better yields in a low-interest environment. This presents an opportunity for tech-enabled fractionalization of alternative assets. investing has inherently been social and trust-based, but through offline channels. A platform for community-based collective decision making, if executed well, has the potential to drive higher AuM and retention.

         2. SME-focused Fintechs:

Close to 12 million GST registered SMEs are still using primitive accounting softwares. We see a dearth of mobile-first tools for analytics and business workflow automation integrated with financing and payment solutions, and we’re calling on Fintechs to rise to the occasion.

Significant problems exist in SME cross-border payments and credit flows as well. A combination of high fees, low transparency, high TAT and regulatory compliance prevent it from being seamless. We believe there are multiple go to market approaches - solving for AR/AP automation, corporate cards, cash flow and business reports, payment reminders, documentation tools and simplification of cross-border transactions. Capturing transaction data, building a proprietary risk scoring/underwriting engine for lending and ability to cross-sell value-added services will be key. With a largely untapped TAM and potential profit pools in the SME space, the pie is large and meaty.

What’s more, SME digitization is being increasingly supported by regulatory tailwinds like GST laws and e-invoicing, further bolstered by growth in exports - like nearly $20 billion worth of China’s manufacturing potentially moving to india in the next 2-3 years. These tailwinds can enable a new wave of companies to plug the $200 billion credit gap in the SME market, and we think this space is ripe for disruption.

         3. BNPL:

in the face of exponentially growing e-commerce and digital penetration, we are witnessing BNPL plays proliferate in the indian market. Lower ticket-size credit products, without high APR and revolving debt appeal to a large segment of millennials and are on the path to becoming a seamless alternative to relatively more anxiety-inducing credit. The way PayPal and Afterpay rose on the back of universal card rails, BNPL must leverage the rise of UPi in india. Here are two BNPL themes we are bullish on:

• Consumer-first BNPL plays:

Over and above the classic BNPL functions of providing easy credit and convenient payment, we find consumer-facing BNPL plays even more advantageous to long-tail merchants as they facilitate discovery and lead to higher conversions and AOV. Like pseudo lifestyle brands, they help merchants increase GTV by amplifying their offerings to more customers.

• Vertical BNPL plays

Vertical BNPL plays make deep inroads into industry specific value-chains and offer payment and credit products, like the Matrix-backed OTO (2W commerce and financing) and JODO (education-focused payments and BNPL).

         4. Fintech infrastructure:

A continuing theme we are seeing from last year, all Fintechs and other non-financial services companies with a distribution edge are looking to launch financial products quickly at low costs. As banks will choose to partner/integrate, now more than ever, there exists a large opportunity to build efficient middleware that connects financial institutions with customer-facing platforms at scale.

The increasing depth of the indian market - with more funded Startups as potential customers, rapid expansion of public infrastructure (OCEN, AA, UPi) and proven business models evidenced by global value creation - makes it conducive for new Fintech infra companies to storm the market with ingenious solutions to longstanding pain-points.

         5. Insurtech:

2021 was a difficult year for most global Insurtechs. We saw the stocks of companies like Lemonade and Hippo crash by 50-70% from iPO listing prices, with loss/combination ratios higher than 100%.

However, we believe lower penetration in india (~3.5% Life, 1% General) and a heightened awareness induced by the pandemic are leading insurance on the path to becoming a pull product. We’re interested in the following two themes:

• D2C insurance/insurance as a subscription-

Traditionally, distribution costs form 30-50% of the cost base of insurance companies. By adopting a lean D2C model and targeting customers digitally, we think new-age players offering faster and assisted claims processing, enhanced CX, novel benefits like all-inclusive coverage encompassing OPD and medicine costs in a monthly subscription package could be on to something. Nuanced underwriting, low CAC distribution and tech-led processes will be key to remaining profitable

• Insurance as API or Embedded insurance

With the emergence of modular infrastructure, we expect the creation and distribution of new contextual insurance products. Distribution of insurance by merchants during check-out helps generate cross-sell revenue and reduces CAC for manufacturers. Creating the right product portfolio with high attach rates and solving for seamless claims will drive success

         6. Crypto & DeFi:

As the dust finally settled on Bitcoin’s new permissionless, democratized currency which looks poised to fundamentally alter P2P finance, Decentralized Finance (DeFi) saw explosive growth and adoption in 2021. The number of Crypto investors in india crossed the 20 million mark, and total TVL surpassed $200B in October 2021. We predict that convergence with traditional finance will increase access to DeFi for both businesses and customers, creating new use cases and an opportunity to optimize existing ones. We’re expecting simplified Ui/UX to demystify this intimidating decentralized tech - while helping users govern custody of their assets - to usher in the next phase of retail adoption.

Few other mentions in this year's ideaboard are cyber security in financial services, Neo-banks targeting specific TGs (creators, NRis) and payroll management/EWA plays

Write to us at Fintech@matrixpartners.in or reach out on our social media handles if you’re building a company in any of these emerging areas, we would love to hear from you and know more!

Twitter: @matrixindiavc  

Linkedin: Matrix Partners india

Authors: Vikram Vaidyanathan, Anish Patil & Anand Khetan