Matrix Partners India released the "State of India Fin+Tech Union" report on October 1 that outlines the impact of the COVID-19 pandemic on financial services and fintech sectors, and the recovery mechanisms being implemented by various players. McKinsey and Company was the Knowledge Partner for the initiative.

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The report includes results from a survey of around 70 fintech founders and CXOs and insights from a series of virtual fireside chats held with industry leaders in August 2020.

"With this initiative we're trying to answer the question – how are other fintechs doing and what can I learn from other founders/CEOs? We're truly grateful for the responses and in-depth interviews with all stakeholders in the ecosystem. Inspiring to see how young companies have tackled a once-in-a-lifetime crisis with swift decisive actions to the resilience of the fintech ecosystem. Over the last year, we have seen an acceleration towards fintech products and we're long term believers," said Vikram Vaidyanathan, Managing Director at Matrix Partners India.

"FinTechs in India have transformed the financial services sector. This report highlights how players are responding to recent disruptions, perspectives on the future of key sub-segments and as a result, the journey ahead for FinTechs. In addition, we touch upon what’s needed from stakeholders to further enable the impact that FinTechs could have on the ecosystem," said Peeyush Dalmia, Partner, McKinsey and Company.

Here are highlights from the survey:

While the short-term FinTech Confidence Index is marred by uncertainty with a score of only 5 (scaled between -100 and 100), majority of respondents are optimistic about long-term outlook - Confidence Index score of 79.

Fintechs across segments have seen mild-to-major disruptions -- lending is the most severely impacted (Confidence Index score of -25) while insurance and wealth management have seen tailwinds (Confidence Index score of 63).

Majority of Fintechs expect volume recovery in three to six months; for around 30 percent of Fintechs time-to-profitability is extended by over six months.

Segment specific highlights:

Payments

While short-term confidence in payments is neutral (confidence index score of 0), 100 percent of respondents are bullish about long-term outlook (confidence index score of 100).

Digital payments is witnessing a second growth spurt (after demonetisation in 2016) driven by digitisation of traditionally offline channels (FMCG, govt payments) and growth of new online segments (gaming, edtech, OTT apps).

Despite lockdown in many parts of the country, digital payments players reached ~82% of pre--Covid volumes in June with average transaction size 1.1X vs. pre-Covid levels.

30 percent of respondents had achieved pre-COVID volumes by July and ~60% expect to reach those by September.

While many payment companies have achieved scale, path to sustainable profitability is uncertain. Most players plan to expand into adjacent value pools, especially lending - 93% players expect to launch credit product within next 3 months

Lending

Lending has been significantly impacted by the pandemic (short-term confidence index of -25). However, most respondents remain bullish in their long-term outlook with a confidence index score of 65

As of June-20, disbursal volumes were down by around 80 percent vs pre-Covid levels with percent 50 percent lenders stopping disbursals altogether

Short-term profit expectations subdued with ~60% higher credit losses. Further, 61% of lenders indicated that limited or no availability of additional debt

However, we are seeing some green shoots with a ~20% improvement in collections efficiency in April to June period. Bounce rates have also decreased from 34% in April to 26% in June

Secured lending products (gold loans, LAP etc.) have performed much better than unsecured loans. Many fintech lenders are betting on embedded finance and context-specific lending products (e.g. BNPL, invoice financing) to drive growth

Neobanks

While pandemic has accelerated Indian customers’ adoption of digital financial products (new account openings for NeoBanks already above pre-Covid levels), it has delayed product launch plans for 50% of the players.

70-90% respondents believe pandemic would have a positive or neutral impact on Gross margins, CAC and commissions; ~90% of respondents feel that banks are much open to neobank partnerships.

Neobanks will focus on large and underserved segments/niches (e.g. SMBs, millennials) and have similar revenue lines as traditional banks.

While virtual/digital bank licenses are still a few years away, clarity on bank-fintech partnerships will be a welcome step and reduce confusion amongst all stakeholders.

The report highlights that fintechs are a critical constituent of the financial services in India, having pioneered several innovations that have boosted access and penetration of financial products. It further underscores the importance of supporting infrastructure & regulations, access of capital, and partnerships with incumbent players to expand the relevance of fintechs in India.