Early-stage startups such as credit card management platform 42 Card Solutions; banking service platform Falcon; and credit management platform Knight Fintech have held talks with investors to raise fresh equity capital, said two industry executives, requesting anonymity.
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Most of these companies, which were founded between 2020 and 2022, are currently in the market to raise $5 million to $15 million, as a part of their next round of funding, the executives added.
Fintech software providers Lentra and Perfios raised over $27 million and $70 million, respectively, in equity funding earlier this year. Lentra had also picked up $60 million in equity funding last November.
Companies in the infrastructure (or banking-as-a-service) space sit between banks, fintechs and unregulated entities. They provide technology to help regulated entities refine digital processes and expedite the launch of newer digital financial products.
For instance, Lentra provides its lending software platform or loan management system to over 50 banks and financial institutions, further digitising their processes around know-your-customer (KYC) compliance, servicing and collections. It also carries out portfolio checks to determine the health of a loan portfolio.
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Perfios also operates in a similar domain and analyses thousands of data sets to help financial institutions take credit decisions in real time. Vegapay’s technology stack helps banks and fintechs manage their credit card programmes, while providing easy customisation. 42 Card Solutions, on the other hand, provides end-to-end credit card management to banks, right from onboarding and authorisation to fraud detection and dispute resolution.
With consumer facing tech companies looking to offer financial services, the target client base for this sector has expanded.
Additionally, with a pay-per-transaction model, as fintechs see a rise in business volumes, infrastructure providers are seeing much better revenue generating opportunities.
A recent report from research firm Tracxn, analysing investment trends from the third quarter of FY23, ended September 30, showed that banking tech emerged as one of the top sectors in Indian fintech after lending, attracting $282 million in funding for the three-month period. This is almost five-fold growth quarter on quarter.
“The element of predictability is far higher in B2B, and that’s what makes this segment lucrative. Every cycle when rates go up you see a shift (in investing) towards driving better predictability on future forecasts. And again, whenever we see a slightly better flow of money, the risk appetite will go up,” said Aakash Kumar, managing director, Matrix Partners India.
In August, Matrix had led a $4 million round in regtech platform Emtech Solutions, which allows central banks to digitise supervisory processes for new financial participants such as fintechs. The central banks of Ghana, Nigeria and the Bahamas are on board, and it helps these regulators digitise application review, regulatory sandboxes, licensing, and compliance processes.
“There are a lot of players outside the regulated space (across ecommerce etc.) that have become big distribution channels for credit and other financial services. They are now relying on infra providers to launch their fintech plays,” said Nishit Garg, partner, RTP Global, a technology focused venture fund.
A newer business model
The industry-wide acceptance of a pay-per-transaction model, compared to the flat annual fee a few years back, is helping the fledgling industry too. “With newer non-banking finance companies and unregulated entities coming in, these infrastructure companies are getting a take rate (commission) on each transaction. And the confidence in this model is increasing as macros grow and (credit) transactions take off,” added Garg.
Kumar added that with more consumer fintechs proliferating in the space, the fintech infrastructure (or B2B) opportunity is “becoming more meaningful with dollar-value pools expanding and the total addressable market starting to increase”.
“Brands in India with strong retail and SME customer bases are keen to boost user engagement, loyalty, and revenue by embedding digital financial services like fixed deposits, credit cards, and loans. Partnering with infrastructure platforms allows for a quicker market entry, lower upfront costs, and ensures compliance,” said Priyanka Kanwar, cofounder and chief executive of Falcon, which offers tech stacks to help banks and fintechs expedite the launch of fianncial products.
Kanwar added that this base of non-fintechs looking to embed financial services will continue to be a key part of their revenue for the next 2-3 years.
“Several second-time entrepreneurs are also preferring to start in the B2B fintech space over consumer because of uncertainty with Indian regulators and painstaking gestation periods to acquire new licences,” said another investor at an early-stage venture fund, who didn’t want to be named.
“The next phase of what B2B fintech infrastructure companies like us and others are solving is (credit card) programme management and embedded finance, helping banks launch these programmes and manage APIs, with lowered credit risks,” said Aishwarya Jaishankar, cofounder, credit card management firm, Hyperface, which has raised over $10 million till date. “Companies that have gotten traction in this space … the VC gunpowder for fintech can definitely come to them.”
Entry barriers
While investors might be excited it continues to be a tough space to crack for new entrants. It is critical for infrastructure players to work with large enterprises or big banks if they need to show a strong moat to investors.
Industry experts believe that it is reasonably hard for new-age fintechs to crack partnerships with these institutions, especially if they already have an existing fintech partner.
Mridul Arora, partner at Elevation Capital, points out that investors need to be ready for long tedious product buildouts, demanding enterprise clients and others.
“Companies might have to meander around until they find the right niche,” Arora said.