FINTECH INDIA: INNOVATION FOR THE NEXT 400M

September 2016 Kalaari Capital Advisors. All rights reserved

AUTHORS
Bala Srinivasa, Partner, Kalaari Capital (bala@kalaari.com)
Yash Jain, Analyst, Kalaari Capital (yash@kalaari.com)

For more information, write to us at info@kalaari.com or visit kalaari.com

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FINTECH INDIA: INNOVATION FOR THE NEXT 400M

FOREWORD................................................................... 5
BANKING IN THE TIME OF DISRUPTION ............... 6
BANKING IS NECESSARY. BANKS ARE NOT. ....11
KALAARI FINTECH SURVEY 2016 .........................14
CONCLUSION..............................................................26

FINTECH INDIA: INNOVATION FOR THE

Top: Former UIDAI chairman Nandan Nilekani addresses the audience

at Kalaari Capitals Fintech India: Innovation for the next 400M event
in Bengaluru in August 2016. Left: Co-founder and MD of Capital Float
Gaurav Hinduja shares the India Stack case study at the event. Above:
A member of the audience listens to his question being answered by a
panelist

Foreword
The promise of financial inclusion in India has been around for a long time
but has never materialised. The vast majority of a billion-strong country is
left out of the financial system, primarily due to lack of infrastructure and
the dismal economics of servicing these customers. There are three main
issues the cost of the transaction, the risk of the transaction, and the
cost of acquiring new customers. Balancing these variables while building
a profitable business at scale has been challenging so far.
However, for the first time there seems to be a genuine inflection point
based on a combination of technology-led infrastructure (India Stack),
favourable government policies, and entrepreneur-driven fintech
innovation.
At Kalaari, we believe that India is on the cusp of large-scale innovation in
financial services, which opens the door to creating massive markets for a
range of areas such as consumer lending, small business credit,
payments, trade finance, insurance, and health care financing, among
others. Over the past 18 months, we have engaged deeply with over 100
fintech startups, industry leaders, senior bank executives and industry
organisations to contribute, learn and be part of an industry-reshaping
wave of change.
This report features an in-depth survey of fintech startups in India. While
there are around 800 fintech startups in India, beyond high-level
numbers, not much is actually known about these companies. We are
grateful to the 350+ fintech founders and senior executives who
proactively responded to this survey. It provides, probably for the first
time, some granular data on founding teams, business models, customer
acquisition channels, technology stacks, usage of Aadhaar and eKYC,
funding needs, and much more.
We start with a terrific introductory piece by Nandan Nilekani (co-founder
of Infosys and former chairman of UIDAI) on 12 trends that he sees as
changing the trajectory of financial services in India. This is an abridged
version of his fantastic keynote speech at the Kalaari fintech event in
early August. In this report we also have a hard-hitting viewpoint by Ravi
Venkatesan (former Chairman of Microsoft India and current Chairman of
Bank of Baroda) on the strategic choices incumbent banks in India need
to be making in order to deal with the impending change.
This report is part of Kalaaris ongoing work in the fintech market in India.
We hope you find it useful and welcome your feedback and inputs.

BALA SRINIVASA
PARTNER
KALAARI CAPITAL

FINTECH INDIA: INNOVATION FOR THE NEXT 400M

Banking in the time of disruption

NANDAN NILEKANI
Nandan Nilekani is the co-founder of Infosys and the former chairman of the
Unique Identification Authority of India (UIDAI), which created Aadhaar. The
views expressed here are his own.

Banking and financial services are on the threshold of complete disruption in India, one of the
largest unbanked markets in the world. Technological innovation is being wrought and deployed
across the spectrum of financial services; there is no other sector that is set to change so much.
And powering this transformation is the 12-digit Aadhaar number, the worlds largest biometric
identification system. With over 1 billion unique identities issued, it is not only the largest
database of its kind, but also the foundation on which a cashless or at the very least, a lesscash society can be built.
The India Stack, a set of publicly available APIs the largest in the world uses Aadhaar for
authentication and builds layers on top of it to integrate mobile applications that enable a variety
of transactions, from eKYC to e-Sign and many more. As a paperless, cashless service delivery
system, it is Indias single-most important innovation to formalise the countrys domestic
economy through digital services.
I see 12 clear trends that will become the hallmark of the transformation in play within banking
and financial services:
#1. The nature of transactions will change from low volume, high value and high cost, to high
volume, low value and low cost. Electronic clearances such as National Electronic Clearing
Service (NECS), Immediate Payment Service (IMPS) and National Automated Clearing House
(NACH) already surpassed paper clearing in 2015, and are growing at 50% annually. IMPS alone
cleared more than the total value of transactions processed using debit cards. The move to a
less-cash, less-paper, and eventually an almost paper-less system, is already underway.

Former UIDAI chairman Nandan Nilekani speaks at the Fintech India: Innovation for the next 400M
event held in Bengaluru in August 2016

FINTECH INDIA: INNOVATION FOR THE NEXT 400M

#2. Credentials will go from being proprietary to open. Currently, two-factor authentication is
managed by individual providers of financial services. A credit card issuer, for instance, has to
send a customer a credit card, followed by a PIN that the customer must feed in to validate the
transaction. The process is clumsy and expensive. In contrast, under Aadhaar-based
authentication, phones with biometric recognition will replace cards; authentication will be done
by Aadhaar and not the bank. India is the only place in the world where service providers can get
one-click, two-factor authentication without getting into the business of identity management.
#3. The cost of switching will fall further. For example, there is no cost involved when a mobile
phone consumer ports to another provider. As a result, only 1 in 20 SIMs is sold to a new user;
the rest is churn. In a liquid market, people shop around. Similarly, in banking, when moving
assets is easy, churn goes up and costs (of onboarding, transacting and switching) come down.
#4. Risk will be individually priced based on digital footprints, and uniform lending rates will no
longer apply. In a services economy, companies dont necessarily have assets that they can
mortgage, but they do have cash flows. A risk assessment that is based on the transaction data
of a services company will be more accurate and transparent. It will also allow small companies
with informal assets to move into the formal economy.
#5. Financial services businesses will move to making money from data, rather than fees.
Companies like Google and Facebook already do this. A new class of service providers will
provide transactions for free as they will monetise the data from each of these transactions.
#6. PSU banks will quite likely see their market share shrink (like the telecom monopolies did
after the 1990s) to ~60% in a few years. Their market cap is already shrinking, making way for
de facto privatisation. They are yielding market share to private banks, NBFCs, and fintech
startups, and the government is losing an opportunity to make billions of dollars in market
capitalisation.

Ravi Shankar, CEO of fintech startup Active Intelligence, asks Nandan Nilekani a question

FINTECH INDIA: INNOVATION FOR THE NEXT 400M

Nandan Nilekani and Sanjay Jain (Chief Product Manager, UIDAI) demonstrating the completely
online Aadhaar-based customer onboarding process to a volunteer from the audience

#7. Merchant models will be completely disrupted, starting with credit/debit cards, high interest
rates on unpaid balances and eventually, MDR for merchants. Mobile payments will replace
card-based payments, while smartphones will replace point-of-sale (PoS) terminals and cards.
Transaction costs on merchant payments will end, effectively unbundling supplier credit and
accelerating the entry of a larger number of small merchants into the formal economy.
#8. Cashless will change everything. Bank branches and cash collection centres will become
more and more irrelevant as the smartphone itself becomes a bank. And because everyone
would eventually be an ATM, there will be no need for cash itself. Eventually, in theory, the
benefit of convenience of being in the formal system will outweigh the challenges involved. Oldstyle assets will be replaced by new ones (think phones, platforms, data, and algorithms).
#9. Interest rates will converge. The informal sector which is where a significant portion of the
population conducts its business pays very high interest rates. As financial services get more
digitised, the formal credit system will become more easily accessible. It will lower costs and
increase convenience and transparency, leading to the eventual elimination of the informal
lending sector.
#10. The digital desh is here to stay thanks to the three pillars of Jan Dhan, Aadhaar, and mobile,
which is enabling universal banking. Jan Dhan has already facilitated ~23 crore new bank
accounts. The Aadhaar system can today enable 100 million transactions per day in real time
and is designed for large-scale use. And mobile phone sales continue to explode, with 25 million
devices being sold per quarter. Underwriting this trinity is regulatory innovation in the first 50odd years since Independence, the country saw only 14 new banks come up. Since 2015,
however, 21 new banks have been established and banking licences are now available on tap.

FINTECH INDIA: INNOVATION FOR THE NEXT 400M

#11. The India Stack, built on these three pillars, is set to disrupt the financial services sector as
we know it. It allows for innovation, reduces onboarding and transaction costs, increases
transparency and trust, and is a broad-based, ubiquitous, and inclusive platform. It incentivises
citizens to maintain a good digital profile, building trust in the system. It also eliminates the need
to be physically present for any financial transaction. But most importantly, it aligns market goals
with social goals.
#12. India will become data rich. Most estimates say that by 2020, 50% of all Internet users in
India will be rural, as will 75% of new users. Simply put, the Internet is being adopted in spades
and is creating huge digital footprints. It has dramatically opened up data that is given by
consent. This electronic consent architecture, also a part of the India Stack, will boost the data
economy because every transaction will give the platform more data about a customer, allowing
him or her to be served better, thereby increasing stickiness.
Banks, therefore, are set to become new-age digital platforms where knowing your customer
will acquire a whole new meaning. Banks and financial service providers, backed by rich data
collected electronically, with consent, and analysed by fantastic algorithms, will be able to
provide a greater variety of products at significantly lower costs all without the need for physical
presence. The not-so-distant future will see the emergence of low-risk products that allow for
higher levels of liquidity and marked-to-market interest rates. The day is not far when we could
see gamified products grounded in digital behaviour, or goal-directed savings and hybrid,
customised products.
The crucial change, however, would be bridging the credit gap and getting finance across to
those who need it the most. Lending has grown 15% in the past seven years. A Credit Suisse
report titled House of Debt has predicted that lending will grow 5x in the next 10 years, going to
$3 trillion from $600 billion.

Nandan Nilekani in conversation with Freecharge CEO Govind Rajan and Vani Kola, MD, Kalaari
Capital
FINTECH INDIA: INNOVATION FOR THE NEXT 400M

The United Payments Interface (UPI), a key component of the India Stack, is set to unbundle
payments and enable merchants to use self-service systems. The low cost of onboarding and
transactions will mean that merchants with a UPI-enabled app can accept all customers with an
Aadhaar number and initiate both push and pull transactions using any transmission protocol that
they choose.
Up for grabs is an incremental market capitalisation opportunity in the vicinity of $400 billion.
There is no saying who will win the next round it could be banks (PSU or private), alternate
lenders, or fintech companies. Only one thing is certain banking and financial services will
undergo complete disruption and financial inclusion will become a reality.

Bala Srinivasa, Partner, Kalaari Capital, handing over a token of appreciation to Nandan Nilekani

FINTECH INDIA: INNOVATION FOR THE NEXT 400M

10

Banking is necessary. Banks are

not.
RAVI VENKATESAN
Ravi Venkatesan is the Chairman of the Bank of Baroda and former Chairman of
Microsoft India.

So said Bill Gates in 1994, predicting that technology would transform even this stodgy sector
protected by regulation and incumbency. However, globally, banks have proven to be
extraordinarily resilient institutions that have weathered many crises, nationalisation, regulatory
backlash, fraud and poor management. So Bills prescient quote has been forgotten until the
recent frenzy over fintech startups. The question now is whether they will be able to outmanoeuvre the latest threat to their existence.
A combination of technological advances, the pervasiveness of smartphones and venture capitalbacked entrepreneurs is finally beginning to threaten opaque, multi-layered and transaction costladen financial systems. In theory, depositors and borrowers will get more direct, more immediate
and cheaper access to each other, cutting into the margins of the banks that are today in the
middle. Just one digital settlement technology called Blockchain is estimated to save lenders
more than $20 billion a year in costs. The big risk for traditional banks is not erosion of margins
but customers fleeing from them, leaving them irrelevant and stranded with costly legacy
infrastructure.
In India the dynamics are even more interesting. The existence of foundational building blocks
like Aadhaar and eKYC, financial inclusion programmes like Jan Dhan Yojana, and tech-savvy
entrepreneurs like Nandan Nilekani who are determined to use technology and innovation to
bring about inclusion and eliminate corruption may cause India to once again leapfrog the rest
of the world to pole position. This poses a huge risk to Indias banking system, which is still
dominated by public sector banks.
Even the best private sector banks in the world are struggling with this disruption. This is
because banks are designed to be conservative and risk-averse, with cultures that are unsuited
to rapid change and unable to attract the best technological talent. In India, the challenge is
profoundly greater because our public sector banks are facing an existential crisis of weak
balance sheets and huge non-performing assets and are hamstrung by the limitations of
government ownership. Their only shield, which is regulation, is also coming down as the RBI is
permitting the entry of new competitors. The risk for our public sector banks is that they become
sitting ducks as new competitors nibble away at their best customers and the most lucrative part
of their business, leaving them with a declining and low-margin portfolio. This could severely
cripple the governments priority sector lending ability and the nations development.
However, banks should not be underestimated. Banks greatest strength is their customer
franchise and hard-won reputation for trustworthiness and stability. Banks also have
considerable expertise in regulatory compliance and risk management. Finally, banks have
capital. They have the capacity to invest and the staying power to weather intense competition.
It turns out that fintech startups and banks have exactly complementary strengths. These new
breed of companies are entrepreneurial, nimble and can attract the smartest minds, but they

FINTECH INDIA: INNOVATION FOR THE NEXT 400M

11

have a voracious appetite for capital as they grow, they have yet to build strong brands based on
trust, and they lack a sophisticated understanding of regulatory compliance and risk
management. Therefore, the most promising future scenario is partnerships and co-opetition
between the new disruptors and incumbent banks.
There are two broad responses to the new threat of disruption in the industry today. One
response is to shut ones eyes and hope the threat goes away, or at least materialises on
someone elses watch. The second is to blindly mimic what the startups are doing; witness the
number of banks who are offering mobile wallets, mobile apps, building concept digital branches
and so on. The latter are necessary learning experiments but far from sufficient. What might be
more successful is a more disciplined, three-pronged approach. First, use technology to radically
simplify the customer experience. Think Uber or Amazon and use them as benchmarks for
simplicity. Second, get teams to work on radically simplifying and speeding up internal
processes. Think about a 95% reduction in the time to approve a loan or open a new account.
When it comes to new business models, it is hard to predict what or who will succeed and the
best approach might be corporate venturing rather than in-house innovation where banks get into
strategic partnerships sometimes cemented by equity investments in promising startups, thereby
creating valuable options for the future.
It is famously said that culture trumps strategy and this is never more true than in the
conservative world of banking. So executing such strategies, while conceptually simple, poses a
severe cultural challenge. Banks will have to find a creative way to create an organisationally
distinct unit that has the ability to bring in outside talent where essential, free from the constraints
of the procurement process and which has the mindset and ability to partner with startups. For
this, strong personal leadership from the CEO and unambiguous support from the Board
becomes imperative. It is crucial that RBI and the Finance Ministry support the creation of such
ambidextrous structures by at least a few of the largest public sector banks.
The disruption posed by financial technologies is like a tidal wave. We overestimate the speed of
change in the short term, but we radically underestimate the magnitude of their impact in the long
term. Banks have a rapidly narrowing window of opportunity to position themselves to ride the
wave.

(This article was first published as an opinion piece in The Economic Times .)

FINTECH INDIA: INNOVATION FOR THE NEXT 400M

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Perspectives from industry thought leaders

For those entering the formal financial services system for the first time, the
India Stack will create a more trustworthy ecosystem where individuals will
work hard to keep their payments history clean. It will empower merchants to
build their own payment system, almost like bringing this facility as a self service.

Sanjay Jain Chief Product Manager, UIDAI

Rural households do a variety of jobs and businesses to diversify risk its a

very expensive way of doing so because the implication of not having the
right financial products is huge. We dont have ways for these customers to
manage concentrated risk that can eventually trigger bankruptcy.

Sucharita Mukherjee CEO, IFMR Holdings

When you unbundle things, disruption happens. In the case of Aadhaar , once
we unbundle the APIs, layer by layer, complete disruption happens. Layered
innovation has led to mass flourishing. Aadhaar has expanded because it is
being used.

Pramod Varma Chief Architect, Aadhaar

There is a lot of momentum for digital payments, and the government is taking
initiatives to address the challenges in this space. The major challenge is to
create acceptance of cashless or digital payments through point-of-sale
machines. These barriers can be dispensed with (by having) digital payments
on a reliable platform where cashless payments become frictionless.

Govind Rajan CEO, Freecharge

India has the dubious distinction of leading the charts when it comes to
accidents. More often than not, accidents have serious financial implications
for the victims family. Insurance is largely perceived as a commodity that is
useful in times of emergencies. But the need of the hour is awareness about
the importance of financial safety through insurance.

Yashish Dahiya CEO, PolicyBazaar

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Kalaari Fintech Survey 2016

There is a lot of interest in the fintech space in India. According to Tracxn, there are 800 fintech
startups in the country. Most of these companies were founded in the past three years as
entrepreneurs took on the challenge of trying to digitise Indian financial services. However,
beyond high-level numbers, not much is actually known about these startups. We wanted to know
more about founding teams, areas of focus, customer acquisition channels, the technology stack,
usage of Aadhaar and eKYC, funding needs and much more.
We rolled out the Kalaari fintech survey in late July and were gratified by the strong response.
Over 350 startups filled out the survey, making this the most comprehensive data set on Indian
fintech startups to date. Rather than make this a laundry list of questions and answers, we have
tried to combine questions into areas of relevance and also added some Kalaari viewpoints
based on the work we do in this space.

Bala Srinivasa, Partner, Kalaari Capital, talking about the India fintech opportunity

I.

Founder experience and fintech areas of focus

It is generally believed that a sector like fintech requires domain expertise. Understanding the
nuances of working with banks and other financial institutions is critical to the success of fintech
startups. However, the current set of fintech startups in India dont necessarily feel that way.
About 50% of founders have less than 2 years of financial services experience prior to starting
out on their own. Industry veterans, those with 10+ years of financial experience, account for
17%. Around a third of startups have founders with 2-10 years of financial services experience. It
will be interesting to observe which cohort makes the most impact.
Note: Numbers in the graphs in this section of the report have been rounded off.

FINTECH INDIA: INNOVATION FOR THE NEXT 400M

14

In terms of the areas that

fintech startups are going
after, it was no surprise to
see
Payments
and
Lending figure in the top
three, as both sectors
have
seen
massive
funding. More than a third
of VC funding over the
last five years has gone
into
Lending
and
Payments. (Refer to the
graph on total VC funding
on page 17).
What
was
more
interesting was Personal
Finance (for the survey
we
included
wealth
management,
expense
tracking,
tax
management) occupying
the second spot. While
this category has received
some funding, it has been
tepid relative to other
segments. Entrepreneurs,
however, think this is an
area ripe for change and
are ploughing right ahead.
There is a case to be
made that India fintech
trends Jan Dhan Yojana
accounts, Aadhaar, eKYC
and
smartphone
penetration do create a
new
environment
compared to prior efforts
in
this
area. Some
personal
finance
providers are showing
reasonably strong traction
that may support an
inflection point.

II. Challenges in building an India fintech startup

Raising capital, customer acquisition, and monetisation are identified as the top challenges by the
respondents. Capital is always a scarce commodity, and given the large numbers of new startups
and a somewhat tighter funding environment, its not surprising that it makes the list. Customer
acquisition is something every Indian fintech startup finds tough. The vast majority of addressable
customers are offline, and the cost and scale of operations required to bring them online is

FINTECH INDIA: INNOVATION FOR THE NEXT 400M

15

significant. Every startup has to have its own answer to this challenge. Subsequent questions drill
down in different approaches that seem to be coming into play.

Similarly, monetisation is a key issue that keeps founders up at night. A fintech startup either
achieves rapid scale and escape velocity that allows it time to figure out a monetisation model, or
it has to find a balance between gaining customers and also showing progress towards an
economic model that looks sustainable and eventually profitable.
In terms of relative spread of capital raised, our survey found that 13% of respondents have raised
more than $2 million, which is
not too bad given the large
number of startups that have
emerged and the fact that
they are still in the early
stages of their funding
lifecycle. In terms of capital
needed to build a successful
business over the next five
years, 70% believe they need
less than $25M. This is
interesting and seemingly
contradictory to responses in
terms of business model. As
shown in the business model
question (chart on page 19),
40% of these companies are
building a direct consumer
business that may end up
needing a lot more than
$25M to scale and build a
national brand. That said, we

FINTECH INDIA: INNOVATION FOR THE NEXT 400M

16

would not read too much into this dichotomy at this early stage of the Indian fintech ecosystem. It
will be interesting to see how this response evolves in future years as companies make more
progress and founders contemplate longer-term issues.
Finally, reflecting the reality of the current fundraising environment, only 6% of fintech founders
think it will be easy to raise the capital they need. Half of them believe it will be fairly difficult,
while 43% are somewhere in between.

Source: Tracxn, Kalaari estimates

FINTECH INDIA: INNOVATION FOR THE NEXT 400M

17

III. Fintech growth strategies that account for India realities

While the image of a fintech service conjures up smiling millennials transacting away on their
smartphones, the reality in India is quite different. There is a massive need for new financial
products and services that address large latent demand. However, unlike the West, it involves a
lot of consumer education, trust-building and market creation. Some fintech services such as
consumer and small business lending have a significant pull factor but still have to find ways to
been seen and heard by the customer. A pure digital customer acquisition strategy becomes risky
unless there is a viral component to the product or service that takes care of brand and customer
acquisition. It is therefore not surprising to see more than two-thirds of fintech startups surveyed
thinking of a hybrid online + offline strategy. Around 12% of startups surveyed are marketing
only through third-party channels like banks and NBFCs.
As the market matures and services such as eKYC, digital verifications, and digital payments take
hold, it is not hard to see a rapid shift to a pure online model. However, for the next couple of
years, it seems startups are very much in the camp of finding a hybrid strategy that can solve the
customer acquisition issue and also deliver a high-quality service given the infrastructure
bottlenecks in India.
Around 23% of startups have taken the B2B route. These are mainly companies who see a big
business opportunity in helping banks and other financial institutions upgrade their technology
(transaction management, customer interaction, digital verification, document management, etc.)
to compete in the new era. Around 38% are focused on a B2C model which is consistent with the
choice of focus areas such as personal finance, payments, and consumer lending discussed
earlier. Another 38% are targeting the consumer but are trying to do this via bank and NBFC
partnerships. The B2B2C component is a bit surprising in terms of its magnitude and needs
deeper analysis to get a sense of the actual drivers.

From left: Freecharge CEO Govind Rajan, PolicyBazaar CEO Yashish Dahiya, and Kalaari Capital MD
Vani Kola during a panel discussion on What are the keys to scale?

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18

Despite all the talk about mobile, only 16% of startups surveyed had a mobile-only mode of
service delivery. Over two-thirds (70%) said they deliver their services through both mobile and
web, while just 14% said they used only the web. This is an interesting insight. One way to look at
this is while 70% of the 350 startups surveyed are focused on the consumer, the fact that only
16% are mobile-only seems to indicate startups are primarily targeting the top 5% of the
population with both mobile and web access. It also shows the nascent state of the Indian fintech
ecosystem and the possibilities ahead in the very near future as it becomes economically viable
to address the hundreds of millions of Indians who need a range of mobile-first financial services
and products.

FINTECH INDIA: INNOVATION FOR THE NEXT 400M

19

Sucharita Mukherjee, CEO of IFMR Holdings, talks about the high risk that rural households face in
the absence of affordable financial solutions

IV. Current technologies and platforms being used

Fintech providers in India understand the role of technology to reduce the cost of transaction and
also increase on-boarding efficiency. This is the one area where a fintech provider should have
hands down advantages over incumbents. About 66% of those surveyed listed on-boarding
efficiency as their top priority. This is consistent with what we observe in our discussions with
founders. By on-boarding efficiency, we mean the entire process of activating and completing the
first transaction for a customer. This is a huge area of inefficiency in India which fintech startups
can immediately address, especially by leveraging India Stack components such as Aadhaar,
eKYC, UPI and the digital locker.
Almost half of those surveyed are leveraging machine learning and advanced analytics to support
the chosen financial services process they are attacking. This is easier said than done in India
where there is still a dearth of deep digital data that can be used to drive these analytics. This is a
top priority for Indian fintech startups, with the full recognition that its a long-term investment that
delivers returns as the underlying data quality and volumes increase. Leveraging social media
data, messaging-based interfaces, and secure infrastructure round out the top priorities.

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When it comes to service providers,

Amazon Web Services (AWS) continues
to dominate the fintech hosting solutions
space with a majority of respondents
(59%) saying they use AWS, closely
followed by Microsofts Azure (16%) and
IBM (4%). The remaining 21% claim to be
using other services including Google
Cloud Services, Linode, Digital Ocean
and Bluehost.
With all the talk on AI and machine
learning, we thought it may be interesting
to understand how fintech startups see
these technologies being deployed.
Around two-thirds (68%) believe AI will
play a key role in improving customer
experience (through apps, helpdesks, or
issue resolution). This was followed by
machine learning for improved marketing
and sales (55%),
As with most startups, finding and retaining top technology talent is the number one issue. Right
behind it is the lack of availability of data. This is more relevant for lending and a few other areas
where deep consumer or small business transaction data plays a big part in the quality of insights
and consequently the financing decision. The other issue for some startups (17%) is lack of
analytics to make sense of dark data (video, text, voice, etc.) which, while stored, is not easily
analysed for patterns like structured data.

Note: Respondents stack-ranked their choices, so the total is >100%

FINTECH INDIA: INNOVATION FOR THE NEXT 400M

21

Note: Respondents stack-ranked their choices, so the total is >100%

V. The India Stack is on track for rapid adoption

While there is a lot of buzz around the India Stack, we wanted to see how startups were using the
various components. Aadhaar is rapidly catching up on one-off identifiers such as mobile number
and email and name as the primary customer key. 43% of startups currently use Aadhaar for
customer identification, and this should easily double within the next 12 months.
eKYC was listed by 39% as the top India Stack component critical to fintech startups. With all five
regulatory bodies in India giving the nod to accept or consider accepting Aadhaar-based eKYC,
we should see a lot of progress in the digitisation of the eKYC process across all types of
financial services and other verticals.

Note: Respondents stack-ranked their choices, so the total is >100%

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22

Pramod Varma, Chief Architect, Aadhaar, talks about the potential of India Stack

Only 20% of respondents viewed UPI as being critical to their solution at this point. Given that
UPI as an API service just kicked off with a handful of banks, it is still early. It is definitely an area
of opportunity for a new generation of payment startups. Based on our analysis, we see UPI
being a major factor in helping broaden the use of financial services in India and expect to see its
usage increase significantly within the next 12 months.

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VI. Co-opetition with banks

A Goldman Sachs report estimates $470 billion of profits at risk for traditional financial services
institutions due to fintech invaders. While this may be true, banks should not be underestimated
either. There is a lot of synergy in startups and banks working together. Banks greatest strength
lies in their large customer franchise, trust and credibility, and it would take a significant amount
of time for a startup to build this on its own. Therefore, startups need not look at banks as their
direct competition but as their partners.
Our survey shows that 40% of
startups feel that they are not working
in competition with banks or traditional
financial
institutions,
while
a
significant 37% feel that they will
compete with banks in the future. 23%
say they are already competing with
banks.
There has been a lot of push from
banks to work with startups as well.
Global banks have been partnering
with, investing in, and incubating
fintech startups. Indian banks have
only just started to do so. Axis Bank
has launched an innovation lab called
Thought Factory to identify, mentor
and possibly invest in fintech startups
and also has a number of related
ongoing initiatives. State Bank of India
has inked a deal with IIT Bombays
business incubator SINE to promote innovations by fintech startups. Other banks such as ICICI
Bank, HDFC Bank, Kotak Mahindra and Yes Bank too have launched various programmes to
partner with or invest in fintech startups.

VII. Too small to be regulated just yet

Financial services remains one of the most tightly regulated industries in the world. From policymaking to licensing, regulators play a key role in shaping and monitoring the way the industry
operates. Globally, regulators are increasing their oversight of fintech startups. Our survey
findings showed that regulations impact fintech startups in various ways. More than half (54%) of
startups feel regulatory compliance is a burden during the customer on-boarding process. One
example would be the need for a field inspection of a loan applicant even after completing an
eKYC.
In terms of transactions, the vast majority (67%) feel that regulatory compliance requirements
today have some impact on the type of user experience they want to deliver. We feel a lot of this
is due to the current state of change in the financial services industry in India. There has been a
lot of simultaneous and rapid progress in a range of drivers such as bank accounts, India Stack,
use of alternative data and digitisation of processes. These strides are often against the backdrop
of regulations that were outlined in a different and much more paper-based era. It will take time to
get alignment where regulation catches up with new ways of delivering financial services. Fintech
startups, though, need to get used to working with regulatory processes as they are not about to
disappear anytime soon.

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Around half of the respondents also said

that regulatory requirements cause
challenges in leveraging SaaS and compel
them to move towards on-premise
solutions. At the same time, 75% feel a
local data centre could improve usage and
add stickiness to a SaaS model delivery.
Government policy and regulation has
actually been a net positive for Indian
fintech startups. The RBI, in particular, has
been at the forefront of encouraging
mobile and technology innovation that can
enable financial inclusion.

Chetan Naik, VP-Enterprise & Mid-Market, IBM India/South Asia, talks about how startups can work
with banks

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Conclusion
Overall, what is clear from the survey is that these entrepreneurs see a massive opportunity to
build upon the upcoming new financial infrastructure. We see the India Stack or even individual
layers such as Aadhaar, eKYC and UPI enabling the sachetisation of financial services in India.
This is required innovation to build segment-specific vertical products unique to India and the
needs of the next 400 million customers. We are seeing some early examples that include smallticket, unsecured loans, pre-paid plans for single medical procedures, instant point-of-sale credit,
pay-per- day insurance, and micro-investment products, among others. The same applies to the
SME market where there is a plethora of opportunities to satisfy strong demand for smallbusiness working capital, trade finance, and leasing.
There are several areas such as monetisation, target customer segments, service price points,
frequency of usage, cost of acquisition, and incumbent bank strategies, that were not covered in
this survey. We expect to continue researching and collating this data in subsequent studies.

The Kalaari and Kstart teams with Nandan Nilekani

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Resources
1. The parallel universe of Indian fintech
By Bala Srinivasa
http://bit.ly/2cmR02I
2. Banking is necessary. Banks are not.
By Ravi Venkatesan
http://bit.ly/2co3t9t
3. Indian Banking: In a time of change
By Nandan Nilekani
http://bit.ly/2cPiEuu
4. Towards presence-less, paperless, and cashless service delivery
The India Stack by iSpirit/Product Nation
http://bit.ly/2cPivr3
5. Fintech: Global and India perspectives
By Bala Srinivasa
http://bit.ly/2cjRJ6Y
6. Fintech India: Innovation for the next 400M
Nandan Nilekani Keynote address
http://bit.ly/2cWCmAM
Pramod Varma Understanding the India Stack
http://bit.ly/2crqqaf
Sanjay Jain & Gaurav Hinduja How does India Stack work?
http://bit.ly/2cWCHDg
Vani Kola in conversation with Govind Rajan and Yashish Dahiya
http://bit.ly/2cFmHJD
Chetan Naik How to partner with banks to make your startup successful
http://bit.ly/2crr6MQ

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ABOUT KALAARI CAPITAL

Kalaari Capital is an early-stage, technology-focused venture capital firm with $650 million in
assets under management. Since 2006, we have empowered visionary entrepreneurs
building unique solutions that reshape the way Indians live, work, consume and transact.
Along with capital, we focus on a long-term partnership with entrepreneurs to help unlock
large value through disruptive innovation.
For more information, write to us at info@kalaari.com or visit kalaari.com