It's a new year, and we have a large number of new readers - thank you for subscribing! And happy new year? I guess? I'm not going to lie, this past week was brutal, and some of those memes about wanting a refund on 2021 hit a bit too close to home. I think part of the problem was that I started this year on too optimistic a note. I've now made my peace with the fact that it's going to be drudgery for a while longer, so hopefully that will just allow me to hunker down and get on with it! On that cheery note, let's get on with our update.
To start off the year, I look at why we think this year will probably see fintech innovation in India expand beyond payments. We also cover some of the monster rounds that were announced last week in our news section (click on the links for our commentary), and wrap-up with stuff we've been reading.
💸 Embedded finance in 2021
To be honest, saying embedded finance will be big in India is not really crystal gazing. Embedded finance has been a big theme among start-ups for a while now, especially in the US - everything is fintech, after all – but as was the case with UPI and payments, India is charting a slightly different path here.
This past year was a big one for some of the building blocks that will enable embedded finance to really take off this year. Just like UPI, India has adopted a public infrastructure approach to other parts of the fintech puzzle.
First, this year the country rolled out its account aggregator framework and the first few account aggregators started operating. Account aggregators are technology intermediaries between companies seeking financial data of customers (financial information users) and those holding that data (financial information providers).
For example, an account aggregator can collect financial information from your bank and share it with a lender, if you are applying for a loan. India has a very paper-heavy and bureaucratic financial system. So, this easy access to a user’s financial information, whether it is bank statements, insurance policies, mutual fund / stock holdings, or tax returns by banks, wealth managers, lenders, etc. has the potential to be a massive game changer. The real benefit of the AA framework is that it puts in place regulated and standardized processes for this flow of data. Similar to UPI, the benefits of adoption can potentially scale very quickly.
The other piece of infrastructure that is in the works in OCEN, the Open Credit Enablement Network. The folks who built UPI to be the payment rails in the country are now working to build credit rails. OCEN really builds on top of the Account Aggregator framework, and will facilitate flow-based lending. The OCEN framework will allow a variety of businesses to act as loan service providers in partnership with banks. These entities have lower regulatory burden than banks and can act as a lead gen / distribution channel for regulated lenders.
Many start-ups are more likely to be better placed to reach out to customers traditional banks can’t, and can build better integrations and interfaces with account aggregators, etc. It should be a win-win. Banks benefit by reaching customers they have traditionally struggled to serve. Offering financial services through their platform can make a start-up more deeply entrenched with its users and create a fly-wheel (think what Square or Shopify Capital have done).
The first big use case of OCEN that is being talked about is cash-based lending for India’s ~63M Micro, Small and Medium enterprises. Many of these enterprises have been poorly served by traditional banks in the past. Most of them are not asset rich, and traditional banks don’t lend against future cash flows. But the AA framework can now allow for more creative ways of analyzing financial data, and underwriting loans. OCEN can, in theory, make the disbursement of these loans easier, and allow lenders to be more creative in collections as well.
How the different pieces of this puzzle fall into place and play out will be very interesting to see. I think 2021 will be a big year on this front. We’ve already seen a huge boom in start-ups catering to kirana stores and MSMEs in India. Incorporating embedded fintech solutions to more holistically serve this customer segment makes 100% sense, especially since they have been so poorly served historically. For example, I can definitely see Khatabook offering loans to its kirana store clients, Udaan to small traders, and Zomato to restaurants on their platforms, etc. Access to credit is one of the biggest bottlenecks to growth for small companies. If some of the ecosystem’s bigger start-ups can start facilitating the growth of their users it can easily lead to a virtuous cycle. I’m bullish on how this will play out!
🗞️ News of the week
Unacademy made its 5th acquisition of the year to round off 2020. Neostencil offers live online prep courses for competitive exams like the IIT-JEE, UPSC, etc.
Bharat Pe could become the country's next unicorn. The payments and lending company plans to raise up $150-$200M in a new round of funding along with $500M in debt financing.
B2B eCommerce company Udaan started off 2021 on a strong note, raising an additional $280M at a $3.1B valuation.
The insanely popular headphone and electronic accessories creator, boAt, announced it had raised $100M from Warburg Pincus, which values the company at around $300M
The new kit sponsor of the Indian cricket team, the popular mobile gaming platform MPL, counts Virat Kohli as one its investors. Conflict of interest?
Kyt, the online extracurricular edtech, has announced a $5M Series A led by Alpha Wave Incubation with participation from Surge, January Capital, Titan Capital, and several angel investors.
📰 What we've read and listened to this week
The Plague Year by Lawrence Wright
📚 Book of the week: From this week we will also be highlighting a book of the week. Our book this week is Vinay Sitapati's Jugalbandi: The BJP before Modi. The book's title refers to the relationship between Atal Bihari Vajpayee and Lal Krishna Advani, the two leaders who founded the party in 1980 and brought it to power in 1998 (for the first time). Recommended reading for anyone who wants to understand the history of the BJP, and particularly useful in understanding the India Shining years.