Fintech as a digital business segment has evolved exponentially, disrupting the traditional approach towards financial transactions, and drawing interfaces much closer to the customer. Last year alone, fintech witnessed more than 5000 deals and over USD 200 Bn. in aggregate deal value globally. This was accelerated by a COVID-19 fostered contactless economy, which has made this space consistently log double digit growth rates. The same can be said for India, which is expected to be over 1/5th of the global fintech market size by 2025. Now, this was the good part! .

A significant proportion of these fintech firms while reaping high valuations remain unprofitable, distant from even a break even. Strong scepticism therefore arises in terms of the future of these fintech set ups, especially in the backdrop of the imminent global economic slowdown which is expected to stick around in the near future. In this context, a question that becomes even more relevant is, "what will it take for fintech businesses to sustain themselves?". In my view, there are seven strategic themes, which can aid fintech entities think through survival strategies in this challenging macro-economic scenario.

While being a global business domain, fintech is an extremely "local" playing field, influenced by the manner in which people transact. It is also impacted directly by region-specific regulatory policy frameworks. In India,UPI, a government initiative for real time payment settlement, slashed the merchant discount rate to zero, in turn making payments business non-lucrative for new age digital payment solution providers. A leading European neo-bank, had to pull out of the US market as it faced difficulty in obtaining necessary approvals. This was exacerbated with its perception of being a "foreign" bank, that had to face stiff competition from local challenger banks.

2. Build a distinct value proposition coupled with a strategic hook

A unique value proposition along with a "strategic hook", aids in securing customer stickiness. Empirically speaking, fintechs which have lost value over time, are primarily the ones where the value propositions while fresh, fell short of this very hook. A credit provider focused on working capital loans to SMEs, also provides a supply demand matching platform for raw material commodities for their manufacturing businesses. By eliminating intermediaries, the provider is able to pass on considerable discounts to the SMEs. Customers defaulting on credit instalments are withdrawn from any future transactions on the portal (hence blocked from availing discounts any further). The entire business model is based on a strategic hook that helps build and retain the right profile of non-defaulting customers.

I believe the relevance of elevating beyond competition increases multi fold in times such as these. Rather than formulating customer poaching strategies, it may be worth for fintechs to explore collaborative strategies to make the business part of a larger ecosystem. Embedding finance solutions as a transaction gateway in a larger one-stop-shop solution is one way of addressing the same. A prominent insuretech player has embedded its insurance offerings on online travel booking portals and e-commerce platforms. There is also an instance of a leading credit card payment service provider that is offering interface to non-financial products on its own platform by partnering with e-commerce marketplaces. This can also be considered an "asset light" scale up approach to rapidly move from a functional specialist to full stack play.

Fintechs adopting a truly customer centric approach, have built solutions around specific customer pain points that have unlocked new categories and segments, thereby increasing the total addressable market. A new age credit card challenger, leveraged Buy-Now-Pay-Later offering to load it onto a pre-paid card targeted towards new to credit/ underbanked customers. Similarly, new wealthtech solutions are penetrating non-HNI whitespaces and new insurance categories are offering bite sized insurance products. These market making moves are linked with mass play as opposed to niche play which are relatively more immune to slowdowns.

In slowdown periods, it becomes even more important to explore complementary avenues for revenue generation. In an evolving open banking regime, there are several instances where extending specialized APIs as an offering to other ecosystem players has proved value accretive for fintechs. A cross border money transfer platform, was one of the first players to take a dual approach to scale up. It has a popular B2B and B2C product i.e., virtual bank accounts with low-cost cross-border money transfers. It also offers a BaaS partnership vector, renting out its APIs to digital-first banks, other fintechs and e-commerce platforms.

There is a conscientious effort across sectors towards aligning the business models with best-in-class ESG frameworks, spanning both decarbonization and circular economy agendas. It is likely that fintechs which are based on robust ESG based products and services and financial inclusion, would attract relatively higher investor/ community interest from an impact investing standpoint. A US based neo-bank, offers fossil-fuel-free deposits that refrain from putting customer money into fossil fuel projects such as pipelines and oil drilling.

Investors may look beyond valuation and customer base during slowdown. A popular online discount brokerage firm, has a very low customer acquisition cost versus an industry average of INR 3000–5000 per customer. This has been one of the sustained profitability drivers for it since inception. Going forward, fintechs will require a razor-sharp eye indexed on customer profitability (and its underlying drivers) to ensure they are not betting blindly on marketing dollars led market share buyout which may prove value erosive in the long term.

What lies ahead is a challenging period where fintech companies, not just in India but across the world will have to go through a "stress test" of their value propositions, business models and execution strategies. Those that get past the hump, would emerge stronger than before and future ready to macroeconomic externalities. The survivors would most likely be the ones that adopt a dynamic business strategy which is adaptive and continuously revisits itself, taking into account the seven secular themes discussed above.

Courtesy: ET BFSI.