Pivoting Business Models in Indian Fintech

“When it comes to the financial services industry in 2023, one thing is clear: what worked well in the past (1-2 years) no longer applies today.”

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India’s economic and financial environment is ever-evolving. Well, it is not only the case with India but across the world. Lately, striking a fine balance between innovation, scale, and stability has been the task for all major players in this space.

Indian Fintech Used to Be Marked by Optimism

Indian fintech was once filled with soaring optimism, backed by massive investments and growth in the user base, evident in companies like Paytm, PhonePe, PolicyBazaar, and Razorpay. Venture capitalists poured billions into this industry, propelling these companies into the unicorn realm with valuations over a billion. Scaling up was the primary focus, with a strong belief in technology's efficacy in finance.

From Optimism to Realism: Evolving Concerns in Fintech

The exuberance has given way to a more cautious outlook. Fintech giants are pivoting and adjusting strategies, acknowledging the market's challenges.

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Companies like Instamojo, which previously focused on payment gateways, pivoted to a profitable SaaS model for e-commerce. Niyo expanded into travel tech, recognizing the limitations of its core products. Digital lending, initially seen as promising, faced setbacks due to regulations and market realities.

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ZestMoney attempted to sell itself but faced challenges in securing a deal, leading to layoffs and a shift towards a SaaS model. Ultimately, Zestmoney closed down its operations recently.

The Industry is Currently At a Crossroads

The examples of ZestMoney reflect the broader struggles of fintech players. The number of deals and the size of investments in the fintech sector fell by over 50% in 2022. VC investments dropped by over 70% in the first half of 2023. While companies were fighting for talent during the height of the pandemic, there have since been hiring freezes and even layoffs. At least 650 people were fired last year from fintechs, according to a Longhouse Consulting analysis for The Economic Times.

Pivoting Business Models

Recently, many of the fintech players have pivoted or evolved their business models. Here are few examples:

• Paytm: One of the largest fintech companies in India, Paytm, expanded its services from digital payments to a broader financial services platform. It diversified its offerings to include e-commerce, digital wallets, and financial products such as loans, insurance, and wealth management.
• PhonePe: Initially a digital payments app, PhonePe diversified its services by integrating with various platforms, enabling users to book travel tickets, make investments, access mutual funds and insurance, and now enter merchant finance.
• PolicyBazaar: Known for its online insurance comparison platform, PolicyBazaar expanded its services to provide more comprehensive financial solutions, including loans, credit cards, and investments.
• Razorpay: Initially focused on providing payment solutions to businesses, Razorpay expanded its offerings to include lending and financial management solutions for businesses.
• MobiKwik: A digital wallet company, expanded its services to include digital lending, insurance, and wealth management, providing a more comprehensive suite of financial products to its users.

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It may look easy to pivot from the top, but deep down many days goes in deciding when to pivot and to what to pivot. Let’s look at when and what.

When to Pivot?

For fintechs, the major signs to pivot include mismatch between regulatory rules and products, declining sales or increased competition.

Balancing Regulator Objectives and Startup Ambitions in Fintech

Recently, the RBI announced an increase in the risk weight of unsecured lending. This weighed heavily on the fintech, which was in the lending domain.

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Another examples are allowing pre-approved loans on UPI, and an interchange fee of 1.1 percent by NPCI. Though regulators had noble thinking behind this, which were safeguarding depositors money, financial inclusion, and earning income from fees, but this led to disruption.

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Risk-Weighted Change by RBI for Unsecured Lending

By elevating risk weights, such as from 100% to 125% for consumer loans, the RBI aims to reinforce prudential norms and enhance the resilience of financial institutions against potential losses from defaults in unsecured lending.

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It also means that banks have to now park higher amount with RBI as cash reserves for unsecured lending limiting their capacity to lend more. Hence this will result in:

• Lower income for banks
• Limited capital allocation for unsecured lending by lenders
• Lending fintech players will find difficulties in partnership
• Lower gross lending value on fintech platforms resulting in lower income

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Double Whammy for Paytm

Recently, Paytm had its small ticket loan business curtailed post RBI announcement of increasing risk weight by 25 basis point on unsecured lending. Shares of One97 Communications, the parent entity of digital payment app Paytm, tumbled on 7th December, hitting the lower circuit limit of 20%, reaching ₹650.45 apiece.

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This move was significant for Paytm, considering that this particular segment constituted 50% of its total business, alongside B2B lending.

Despite the short-term implications of this strategic shift affecting their bottom line, Paytm's executives took this step with the foresight that it would likely result in lower Non-Performing Assets (NPAs) in the long run, distinguishing it from the situation faced by ZestMoney. This decision aimed to ensure a more sustainable and stable financial position for Paytm in the future.

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Slice Existential Crisis

Slice, a fintech unicorn, has pivoted from offering credit lines to real-time term loans following the RBI's restrictions on loading credit lines on prepaid payment instruments. The CEO, Rajan Bajaj, introduced this change as a feature update named "Purchase Power."

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Additionally, Slice revised its tagline to 'the simplest way to pay' from its previous 'credit card challenger' identity and started presenting loan agreements and sanction letters to users.

Competition Leads to Change

Mobikwik, initially a mobile wallet company faced fierce competition from Paytm losing its grounds to the deep pocketed homegrown rival. It tried to unsuccessfully secure payments bank license.

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Later it had to pivot to UPI payments. However it was late to adjust its strategy losing to PhonePe, Google Pay apart from Paytm.

Handling Business Direction Shifts Effectively

Business changes can be tricky and have their own difficulties. Employees might resist the change, existing processes might get disrupted, and there could be a risk of losing customers.

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To manage these challenges, it's important to communicate effectively, involve everyone in the decision-making, and explain clearly why the change is happening. Also, having a solid plan, realistic goals, and enough resources are crucial to overcoming these issues.

Setting up Effective Communication Channels

When telling people about a business change, being open and clear is really important. For employees, explaining why the change is happening, how it fits with the company's future plans, and addressing their worries can help them understand and support it.

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Customers need to know about the changes and the good things coming from it. Investors should get detailed information about why the change is being made, what impact it might have, and what's expected to happen next.

Assessing Impact: Evaluating Business Changes on Products, Services, and Partnerships

Before making a big business change, it's smart to look at how it might affect what the company already does. This includes checking how it might change current products, services, and partnerships.

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Some partnerships might need to be changed or even ended because of the new direction. Checking and adjusting things to make sure the change happens smoothly is really important.

Indicators of Successful Business Transformation

Knowing if a business change is successful means looking at the right things that match the goals of the change. Some things to watch include:

• How much users are using the product after the change?
• If it costs less to get new customers
• How many users start paying for the service?
• If fewer customers are leaving, showing they like it more
• If the company is making more money
• If the company is getting a bigger share of its target market
• If customers are happier after the change

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"The shape of fintech's future depends on three factors: a) its partnership with established players; b) its willingness and ability to look beyond technology; and c) its relationship with regulators."