Ashish FafadiaKartikeya Shekhar

Sujay Choubey

Fintech Landscape

sujay@blume.vc | kshekhar@blume.vc

Contents

2

1. 2010s Sensemaking

2. Fintech Landscape

3. Areas of Interest

3-7

8-16

18-22

2010s Sensemaking

3

Evolution of Indian Fintech: 1.0, 2.0, 3.0?

Phase 1: PaymentsLargely Payments companies formed. Some other models in investments and financial product listing

Ecommerce Boom

Account Aggregators,CF Data pipes, PDP Bill, NACH

Banks expand online products in 1990s e.g. trading, lending

2018

Wave of epayment solutions, aggregators

Jio, GST,Demonetization

Wave of Online vendor finance

Onboardingcost lowered

FormalizationMarket Expansion

eKYC, UPIJan Dhan Yojana

Free Data SharingCost of Financial Services decreases

Tailw

inds

2000

Impa

ct$1

B$1

00M

2014

Phase 2: LendingLending startups emerged most prominently. Payment startups hyperscaled.

Adoption across wealth tech & insurance tech increased.

Phase 3: Platforms & EnablersIncumbents pressured to modernize through enablers. Tech adoption by new segments.

Valuation*

4* Not to scale

Evolution of Indian Fintech: Strong Macro Tailwinds

5

Unbanked Population 2nd largest – 19 Cr1

Low insurance penetration – 3.69% vs global average

6.13%2

Suboptimal PortfolioSkewed towards real estate and gold (88%). Only 5% in

Financial markets3

Demographic DividendLarge millennial base,

Increasing tech-savviness led by vernacular content/social

Data ExplosionLed by cheap data and mobile adoption creates

scope for new tech models

Public Infra (JAM Trinity++)Unprecedented creation of public railsAadhaar, UPI, Digisign, eMandates,

AePS, OCEN

Financial Inclusionaccelerated by various

government initiatives – DBT, PM Bima Yojanas

Evolution of Indian Fintech: Learnings from the last decade

6

• Prepaid Instrument growth plateued. Merchant acquisition new battleground.

• Regulatory risk played out. Interoperable UPI decelerated PayTM’s rise, zero MDR

• But proven as most high-touch segment with largest distribution.

• Payment Banks model hasn’t succeeded.

• Ability to maintain good quality book at controlled growth rate reaffirmed as the key success factor.

• No significant success seen from alternative lending.

• Sticky relationship with customers (Platforms) increasing in importance with easier data sharing (AAs)

• Direct online distribution picked up but still very small piece of overall market.

• Share of agents in distribution has been falling. Still will continuen to be most significant for at least a couple of decades

• Strong regulatory oversight makes govt. lliaison important

• Small market of retail financial investors made monetization a challenge beyond a scale.

• Big successes in brokerage and MF investment• Promise of large company catering to top tier

consumers yet to be proven

• eKYC brought down cost of customer onboarding, but its rollback led to uncertainty. Security breaches unsolved.

• Aadhaar, UPI infrastructure created massive tailwind for creation of fintech startups. Launch of regulatory sandbox will accelerate innovation in fintech.

• Next on the radar are cash flow based lending, data governance.

Wealth Regulatory

LendingPayments Insurance

Fintech Exits: IPO is the only viable exit option

Major exits over 2010s

AcquirerExit Size

PE consortium$930M

Snapdeal ($340M)Axis Bank ($60M)

BNP Paribas$320M

PayU$130M

Ebix$124M (80% stake)

There are two broad categories of incumbents:1. Traditional Banks: Potential synergies from startup acquisitions are high (new offerings, modernization). However,

opportunity cost of deploying capital on acquisitions is large, since it reduces their lending ability and hurts their CAR. It does not help that pre-IPO startups are valued at very expensive multiples. No large acquisition has been done till date and the most common route of realizing synergies is through partnerships.

2. Cash Rich Entrants: Synergies for companies trying to enter Indian market or trying to enter a new vertical within the Indian market are high. Common candidates for such acquisitions would be companies that have achieved good distribution. However, there are limited number of such deeply funded incumbents and the fintech acquisition market is still in very early days.

Even in Europe, which is the most mature fintech market, incumbent financial institutions accounted for <5% exits value since 2013. 75%+ of the exits value came from IPO and acquisitions by larger fintechs (45% & 30% respectively).

Banks Cash rich entrants

Takeaway: IPO is the only viable exit option in India7

Fintech Landscape

8

How Blume thinks about Fintech startups

• Since IPO is the only viable exit route, delving on vanity metrics is criminal.

• Evaluate from a public markets lens. E.g. lending companies should be valued at 1x the book value.

• Health metrics should be prioritized over growth metrics because with scale, stress increases.

• Founder mindset should reflect the focus on metrics.

• A healthy fintech company will not be able to grow non-linearly. Returns may be capped ~25% IRR.

• Fintech companies are suited for larger reserve ratios (1:3) so that early set of investors can keep

doubling down into the company till it reaches IPO scale, without depending much on new

investors.

• The regulator will keep making infrastructure available to bring down the cost of banking services and

advance financial inclusion.

• This further decreases the liklihood of banks acquiring first-mover startups to build expertise in new

areas.

9

Metrics

PortfolioGrowth

RegulatoryIntervention

Model Spreads-based (*) SaaS-based (#) NIMs-based (^)

MonetizationEarn APR on assets or transactions

Earn fees – transaction or subscription saas

Earn differential between cost of funds and return on funds

Way to Win

Acquire Volume with some capital efficiency advantages (stickiness, network effects). Metrics: LTV, CAC

Wedge of a narrow usecase to land. Gumption to expand from there on. Metrics: ARPU, Market Size

Maintain healthy underwriting while sustaining decent growth

Metrics: NIM, Book Value, Delinquency

SectorsPayments, Wealth, Neobanks Antifraud, KYC, Enabler APIs,

InsuranceLending Plays & Intermediaries

ExamplesFrom

BlumePortfolio

10

Monetization Models

Sm

all M

arke

t

Crowded

Larg

e M

arke

t

Not Crowded

1. We have mapped fintech landscape along two axes: market size (Y-axis) and crowded-ness (X-axis). • Market Size (Y-axis): How large is the problem?

Estimate of the size of the opportunity

• Crowding (X-axis):How crowded is the space? If a space has several series A+ startups, it can be considered crowded. A non-crowded space would have either few seed-funded startups or none at all.

2. We have added additional layer of information • Business Model (*/#/^): Whether the revenue model

is (i) Spreads-based* (ii) SaaS-based# or (iii) NIMs-based^. Each model has different implication for the business (next page).

• Category (color): Depicts larger category of the business and helps to see high-level sectoral patterns e.g. all lending-sector plays or insurance-sector plays

• Risk (Border): Dotted border for models which have relatively high risk of regulatory intervention.

How to navigate the chart• Some markets large enough for

multiple large winners

• Room for platforms meaningfully

bundling products in crowded

spaces (e.g. sahamati+lending)

• Ideal sectors to deep dive in

• Watch out for regulatory risk

• Large market if building from

India for the world (eg. saas)

• Some markets may expand

either due to high growth,

product or tailwinds

• Mature sector

• Consolidation wave

• If crowding is by incumbents,

potential of disrupting

11

Fintech Landscape 2x2

Gold Loans^

Sm

all M

arke

t*

Crowded

Larg

e M

arke

t*

Not Crowded

Education Finance^

Payday Loans^

POS Lending^ Personal Loans ^

P2P Loans^

Tax Assistant*

Brokerage #

Domestic Remittance*

HNI Portfolio # Robo Adviser*

International Remittance*

D2C Insurance #

Millenial Neobank *

Insurance Aggregator *

Bottom Of Pyramid Neobank *

UPI / Wallet*

MF Investment*

Credit Bureau#

Lending Insurance Wealth Payments Banking# SaaS Revenue * Spreads Revenue ^ NIMs RevenueLegend

$1B

Regulatory Risk 12

B2C Fintech Landscape (1/3)

* High-level estimates in Appendix

Wealth Manager

P2P Lending

Lending

Wealth

Insurance

Payments

Regulatory

Platforms

Insurance (D2C)

Personal Loan Education Loan

Quote Comparison Neobanks for BOP Neobanks for Professionals

Brokerage

Gold Loan

Robo Adviser Portfolio Mgmt for HNI

Wallet/UPI Payment RemittanceAEPS Remittance

Tax Assistant Credit Score

Neobanks for Teens

Payday Loan POS Credit

Insurance (Fullstack)

13

B2C Fintech Landscape (2/3) No/Early stage Players Saturated Space

Category Trends

Lending

• Size: Formal outstanding credit was $287B (2017). Informal credit 65% of formal credit (~$180B). 70% of formal credit is taken by 9% of most affluent hosueholds (2.4Cr). Share of loans purchased online expected to reach 50% by 2025.

• What’s Interesting?: (i) less-crowded areas where incumbents have been slow in distribution (ii) high-tech enablers which will plug into underwriting models of next decade (iii) focus on conventional metrics (NIM, delinquency, book size)

Insurance

• Size: Non life insurance premium $21B, 30% of total premium (global average 50%). Density $18 (vs global $297); Penetration 0.9% (vs global 2.8%). Online premium collection miniscule - $450M. Only 35% populations has health insurance (largely driven by recent government push).

• What’s Interesting?: (i) innovative insurance products in large areas underexplored by incumbents

Payments

• Size: Market size is largest but payment instrument sector has matured. Leading startups are in phase 2 of monetizing their user base, which is non-sticky. Domestic remittance by rural emigrants is $10B. 60% occurs through risky traditional modes. Foreign remittance $18B – Travel ($6B), Studies ($4.5B), Family ($3B)

• What’s Interesting?: (i) Fullstack solutions making foreign remittance cheaper and convenient

Wealth

• Size: 6Cr people filed ITR. 2.8Cr retail investor base. Massive inefficiencies and frictions exist among the longtail population.

• What’s Interesting?: (i) HNIs operational portfolio management (ii) 360 degree wealth advisor products for middle class (iii) simplifying investments for longtail segment (India 2&3) (iv) holistic solutions bundling wealth with lending & insurance for longtail segment (India 2&3)

14

B2C Fintech Landscape (3/3)

Sm

all M

arke

t*

Crowded

Larg

e M

arke

t*

Not Crowded

Lending Insurance Treasury Payments Banking

Agent Enabler#

Data Pipes #

Core Banking OS #

Credit Bureau #

Channel Finance^Invoice Discounting^

SME Secured^

B2B Payments*

SME Unsecured^

Capital Market Tech #

Accounting, Compliance, Taxation #

SME Group Broker*

Underwriting OS #

Collections #

Lending Enablers #POS Payments*

$1BAntifraud#

TRMS #

Legend Regulatory Risk

Account Aggregator#

Trade Finance^

15# SaaS Revenue * Spreads Revenue ^ NIMs Revenue

B2B Fintech Landscape (1/3)

* High-level estimates in Appendix

B2B Payment POS

HRMS++

Accounting & Reconciliation

Lending

Wealth

Insurance

Payments

Regulatory

Platforms

No/Early stage Players Saturated Space

Invoice Discounting Credit Scoring

Agent enabler

Channel FinanceSME(Secured/Unsecured)

eKYC

Collections Lending Platform

SME Group Insurance Broker

HRMS-linked Employee Plan Management

NeobankCard Enablers

POS Antifraud

Lending Enablers

Treasury

OS for Underwriting, CRM, Recommendation etc.

SMB/Freelancer Insurance

Data Pipes

Capital Market

16

B2B Fintech Landscape (2/3)

Category Trends

Lending

• Size: SME credit demand is $650B – 45% met informally at high interest. 60% SMEs borrow informally. Digital lending expected to reach $80-100B by ‘23. Between large corporations and PSUs, $13B receivables locked at any time.

• What’s Interesting?: (i) SME Lending interplay with upcoming infrastructure

Insurance• Size: Agents continue to be largest distribution channel (30%), Corporate Agents (10%) – b2b sales. • What’s Interesting?: (i) payroll-linked offerings for group insurance sales (ii) software stack for agents or insurers

(B2B/B2B2C)

Payments/AccountingCompliance

Taxation

• Size: GS says global opportunity in invoice processing is of $950B. 10M+ registered base of MSMEs on GSTN. Tally market of 7-8M SMEs (60% pirated).

• What’s Interesting?: (i) Enterprise/Mid-market CFO suite: AR/AP automation coupled with strong offerings (supply chain finance, compliance) (ii) Accounting and reconciliation for SMEs (iii) Solutions around Merchant POS (a la square) or cheaper better POS models

Treasury• Size: Indian Treasury market is $20B. Market for Treasury applications would be <5% i.e. $1B.• What’s Interesting?: (i) agile tech companies helping CFO realize better rates in international payments and cash

flow / risk management.

Banking• Size: BFSI spend on IT: $11B. • What’s Interesting?: (i) Secure Data pipes for BFSI to access softwares and to provide access to other companies

(ii) Fullstack Antifraud solutions for various functions, esp. payments (iii) Core banking software stack

17

B2B Fintech Landscape (3/3)

Areas of Interest

18

1. 60% Indian MSME borrow informally. 45% of $640B credit demand met informally.

2. Alibaba ecosystem pioneered cash-flow based lending for marketplace participants at tremendous service level (e.g. 30 second loans) based on phenomenal data-savviness.

3. Some SME marketplaces in India achieved early success in financing SMEs. The first implementation of OCEN-driven is being rolled out with Government e-marketplace (GeM).

1. Platforms: With the launch of OCEN rails, high quality sticky platforms/networks catering to credit starved segments will have unprecedented wherewithal to provide credit.

2. Enablers: New lending regime will create room for new entities who enable various parts of the reformed cash-flow lending value chain. Account Aggregators are the most well known. Derived Data Providers, Underwriting Modelers, Governance Models will come up.

Market

Companies we would like to see more of

19

Landscape

Early stage companies

SME Lending & Embedded Finance

1. $ 180B+ informal credit market. ~60% of formal market. Massive section of the population with no or thin credit file. Deprived for formal channels due to collateral demand or plan complication.

2. 9% of most affluent households (24M) account for 70% of formal credit. Clutter of companies in this segment. Large longtail (India 2&3) still unserved/underserved.

3. Size of formal credit is expected to grow to $1.2 Tr by 2025. Online share will be 50%+ (23% in 2018).

1. Blue Collar Finance: 92% of the 450M blue collar workers are employed in unorganized sector. 1% have access to formal credit.

2. Gold based Finance: 65% household gold is in rural areas. Total Gold Loan market is $60-70B (30% organized).

3. Bottom of Pyramid Neobanks: Holistic high-touch solutions with nudges to enhance adoption. Building file of new-to-credit customers, bundling with insurance and wealth goals

Early stage companies

Market

Companies we would like to see more of

20

Landscape

Consumer Lending

1. In 2019, Gross Premium collected was $82B out of which 70% was Life Insurance. Online Premium was $450M.

2. Insurance Penetration in India is 3.69% and Insurance Density is $74 (Global average $650).

3. The key segments of non-life insurance market: Motor (39%), Health (25%), Crop (17%). Health has grown the fastest.

4. Distribution pattern has changed rapidly in the past decade. In 2018, share of individual Agents is 32% (54% in 2010) and Direct Selling is 43% (27% in 2010). Only 34% population has health insurance. Govt schemes have provided large push.

1. Insurer SaaS: Platforms modernizing legacy systems and workflows used by incumbents for managing the life cycle and user experience of insurance products, improving underwriting, turnaround time etc.

2. New Products: Facilitating better underwriting or claims assessment of new risks in highly vulnerable segments through tech (e.g. sachetized insurance, parametric insurance, image processing & satellite imagery in agri calamities)

Market

Companies we would like to see more of

21

Early stage companies

Landscape

Insurance

1. GST led to step increase in adoption of accounting software. 2. Market Size: 12.5M GST Payers. ~3 M Tally licensed users 5M

pirated user base. ~70% SMEs use Tally. Thus, MSME customer universe of ~10-11M customers. For the longtail customers, ARPU < $200 (since Tally @ Rs 20K/Y)

3. Treasury Risk Management Software is a concentrated $5B global market, top 10 make up 60% of market. 1M+ Indian SMEs export. 6200+ Indian cos. with turnover $74M+, all depend on excel/legacy ERP. India Treasury Ops $15-20B.

1. Land & Expand: Powerful ACT product that significantly impacts bottom line. Use it as a wedge to solve adjacent frictions. The primary usecase should be laser-focused – reconciliation, automated accounting, receivables, payables file, or taxes.

2. Procure-to-Pay in Offline Industries: Digitizing the flow on money and documents(contracts, invoices) in high turnover industries.

Market

Companies we would like to see more of

22

Early stage companies

Landscape

CFO Suite: Accounting, Compliance, Taxation (ACT) Software

1. Banking & Securities sector IT spend in 2020: $11B [Gartner]. In the Indian banking sector, 23% of IT spend will be on digitization of internal services.

2. While banks are catching up on front-end experience, middle- and back-office processes are built on legacy systems making them slower, more prone to errors and harder to scale.

3. Banks need secure data pipes to expose their internal setup to external entities for data sharing in the open banking regime.

1. Core OS: Cloud native API-based offerings for banks to deploy in parts or as a whole in their workflows. E.g. Vault by Thought Machine. MX allows banks to build data pipes among various silos of data.

2. Function OS: Modern white label apps for life cycle management of the customer across various business functions internally or improving the UX of customer externally (lending, card issuance). E.g. Agile Financial for Insurance

Market

Companies we would like to see more of

23

Early stage companies

Landscape

Core Banking & Open Banking

Please write to us at:

Sujay Choubey | sujay@blume.vcKartikeya Shekhar| kshekhar@blume.vc

APPENDIX

25

Model Market Size Comments

D2C/Online Insurance <$10B Online premium collection: $450M. $70B premium (30% non-life). $37B by ‘25 (JMFin). 30% margin.

Insurance Aggregator <$500M Agent commission 5-10%. Online Premium $450M, Online premium needs to be $5B for $500M market.

Insurance OS <$1.5B 57 Insurers. 16 Cr policies. Opex 20%, Saving20%, Value created $2.8B, Price 50% of value.

Brokerage <$5B Current Market $3B. Registered Investor base 2.78 Cr. Annual Active 70L (cash), 14L (F&O)

Mutual Funds <$5B Rs 25 Tr AUM currently. Commission ~1%

HNI Portfolio >$500M 1Cr+ Investable Wealth: 10L. $1.5B market @ARPU ~Rs 1L (1% AUM)

Robo Adviser <$1B US Robo Advisor AUM 0.2% of MF AUM. India 0.2% = $700M

Lending >$50B Formal Credit outstanding $287B. Informal $180B+.

P2P Lending $5B ET article

Gold Loans $10B+ Gold Loan market $65B (30% organized). ~20% interest (Muthoot).

Education Finance ~$2.5B 260M school students. Avg fees Rs 7K in ’14, 5% yoy rise. Say,20% want financing. >$6B demand, 30% interest

Collections <$500M ~10K banks&NBFCs. @ARPU $50K. ~Rs 4Tr stressed receivables, 20% conversion, 20% commission, over 4 years

Credit Bureau <$500M Current total revenue of the 4 credit bureaus < $200M @ ~50% coverage

Account Aggregator <$500M 1 B API pings @ ~ Rs 20. Perfios revenue in ‘20 <$15M. Subset of overall $2B BFSI data mgmt. spend

Digital Payments <$1B $65B Digital Payments ($123B in ‘23). Earnings only on bill payment etc. @ 1-2%26

Broad Estimates of Markets

Model Market Size Comments

Foreign Remittance ~$500M LRS Remittance $18B. 37% Travel, 26% Studies, 18% Relatives. Transferwise fees ~3%

Domestic Remittance <$100M $13B value. 77% rural contribution. 40% via formal channels. $6B to be tapped. 0.5% commission

ACT for SMB <$3B MSME customer universe of ~11-12M customers (Tally user base 7-8M, 5M pirated base). Conservative ARPU $200 (Tally @$300/Y)

Tax compliance <$1B 6.7 Cr file taxes. ARPU ~Rs 1000

TRMS <$1B Conc. $5B global market, top 10 make up 60% of market. 1M+ Indian SMEs export. $20B treasury ops.

Neobank <$500M Top 15-20M customers, LTV of $70 over 5 years, ARPU $15-20

Payday Loans ~$10B ET article

Capital Markets Tech >$1B global

Global trading platform market size is $15B growing @ 5%. India has 2% of global market cap.

Trade Finance >$10B $330B merchandise export. $100B disbursed in Dec’18 (~$133B annualized). Unmet trade fin gap $1.5Tr (global), $692B (Developing Asian part). Say 60% financed (global avg 80-90%): $198B. Still >$50B unmet

Supply Chain/Channel Finance

<$10B Consultantsreview Interview

Group Insurance $3B 10% Non Life Premium via Corporate Brokers. Total <15%.

Banking Antifraud >$1B Global market $30B

Bottom Of Pyramid Neobank

>$1B 26Cr people w/o credit file. 60 Cr w/o access to fin services.

POS $1.5B 5M POS terminals deployed. 40M merchants. Retail $2Tr opportunity. Low CAC in QR. Mkt $200M in ‘18.27

Broad Estimates of Markets