Warren Buffett and Goldman Sachs win India’s fintech gold rush

As online payments and digital loans in the second most populous country skyrocket at some of the fastest rates in the world, money is pouring into India’s fintech sector at an unprecedented rate. The industry’s strong rise will be seen this month as Indian payments firm Paytm – backed by foreign heavyweights such as Warren Buffett’s Berkshire Hathaway Inc., Alibaba Group Holding Ltd. of China and SoftBank Group Corp. of Masayoshi Son – is aiming for a valuation of around $ 20 billion which would be the largest public offering ever made by India.

Some foreign players in India are on the verge of seeing profits. Berkshire Hathaway, which invested $ 300 million in Paytm in 2018 for an almost 3% stake, could see the value of its stake rise by around 70% to a valuation of $ 20 billion, while other backers international funds from Paytm would also benefit. Investment banks, including Goldman Sachs Group Inc. – which is working on the Paytm IPO – have beefed up their teams in the country and are benefiting from the wave of transactions and the wave of fundraising.

Investor fervor is fueled by millions of Indian consumers like Nitu Gore, a housekeeper in Mumbai who earns around $ 2,700 a year and has not used her bank account for a decade. She embraced Google Pay and Paytm during the pandemic and now relies on apps for almost all of her purchases, a dramatic shift in a cash-dominated economy. Digital retail payments on India’s unified payments interface – the popular national fintech system that connects more than 230 banks and 20 third-party apps – has almost quintupled in the past two years to reach Rs 41 trillion ( $ 546 billion). Meanwhile, the continued crackdown on fintechs in China only adds to India’s appeal. Venture and private equity firms have so far invested $ 6.4 billion this year in Indian fintech companies, triple the amount their Chinese counterparts have withdrawn, according to researcher Traxcn.

Local fintechs like Paytm – created by small town entrepreneur Vijay Shekhar Sharma who learned English by listening to rock music – are joining Google Pay, Amazon Pay and PhonePe, owned by Walmart Inc., to go to the -beyond digital payments and challenge traditional banks by venturing into the lucrative business of offering loans, mutual funds and even collecting deposits. Fintech companies have certain restrictions: Local companies require them to partner with a lender or a regulated entity. However, armed with sophisticated cloud technology and customer data to assess risk profiles, fintechs are becoming the increasingly dominant partners of lenders in this 1.4 billion country, helping them reach new customers at a low cost. extremely low cost. “What the government has done with the common fintech network in the form of the UPI is phenomenal,” said Raghav Maliah, vice president of global investment banking at Goldman Sachs in an interview. ‘equivalent of the creation of the National Highway System in the United States and leads us to be very optimistic about the possible opportunities in India. “

The disproportionate growth of fintech in India worries some that consumers who are not financially savvy could borrow too much, leading to calls for more monitoring. There are also more and more cases of online payment fraud that authorities are unable to investigate or stop, as there are far too many victims among new users. Still, optimists say India’s fintech industry offers better prospects for foreign players than China ever has. This is in large part thanks to the UPI, which was created by a group of private banks in 2016 with the support of the Indian Central Bank and which now helps to further stimulate competition, as various financial institutions can tap into it.

Compared to China, which is reorganizing almost every aspect of its FinTech industry by targeting companies like Jack Ma’s Ant Group Co., regulations in India have so far been transparent and predictable. Indian fintechs set to attract $ 3-4 billion in additional investment over the next 18 months due to tighter Chinese regulations, says Anuj Kapoor, chief executive of the investment bank in UBS Group’s Indian operations AG.

“Overnight, Chinese regulations on digital businesses shook investor confidence, mainly in the digital technology sector,” Kapoor said. “It is clear that this has already started to positively shift the sentiment of investing in India. More and more investors will look to India.”

PricewaterhouseCoopers expects India’s digital transactions to reach $ 3 trillion by March 2025, up from more than $ 1.3 trillion today. At the heart of Indian industry’s meteoric rise is the nerve of entrepreneurs like Paytm’s Sharma, who have faced the challenges of a vast country with millions of local stores, most of which are new to accepting. digital payments. “You have to be a lot more Zen to survive in this country,” Sharma said in a 2019 interview with Bloomberg Markets magazine. “If you build in India, you can go build anywhere in the world. What do you think is the first thing an Indian child learns? That the bus stop is not where the bus goes. will stop. “

Investors like Ant and Softbank have announced they will sell shares in Paytm’s IPO. Buffett’s assistant did not respond to a message requesting comment.

Even with funding for a massive IPO, which opens on November 8 and seeks to raise up to Rs 2.4 billion, Sharma faces stiff competition from global rivals like Google and Walmart. . GooglePay and PhonePe control more than 85% of retail transactions on the UPI platform, helped in part by the ease of use and refund offers to users. Despite this, Paytm holds the largest share of the Indian merchant payments market and, unlike rivals Google Pay, Amazon Pay and Phonepe, Paytm has the advantage of expanding its payment business to financial services through its payment bank where it can hold customers’ cash balances. This fits well with its electronic wallet, allowing it to offer loans and insurance while being a marketplace for airline tickets or electronics. In the fiscal year ended March 2021, Paytm achieved sales of Rs 28 billion and losses were reduced to Rs 17 billion from Rs 29.4 billion the previous year.

India has around 825 million people online through their smartphones, including hundreds of millions of new internet users. The biggest players in digital payments want to expand into banking services that have the potential to bring them greater profits.

Facebook offers loans as low as $ 6,720 to small businesses through its network. Google Pay customers can now directly open a deposit with local bank Equitas Small Finance. Google is working with Fintech start-up Setu to allow users to open fixed deposits with one click at a higher interest rate than those offered by big banks. Amazon has signaled its entry into the wealth management segment by investing in fintech startup Smallcase Technologies Pvt., And has also supported insurance and credit startups. “The success of UPI and digital payments has opened up many new opportunities for the financial services industry to partner closely with fintech players,” wrote Sajith Sivanandan, Asia Pacific Payments Manager at Google, in a recent blog.

Meanwhile, a slew of small, local fintech startups have sprung up, some like StuCred offering student loans as low as $ 11 and others offering Rs 2 insurance coverage for taxi rides. New Delhi-based fintech startup BharatPe has developed a universal QR code system that allows merchants to accept digital payments from customers through a payment app of their choice. The changes are disrupting the traditional banking sector. Commercial banks can gain more customers quickly, while saving on the costs of field agents and branches. But they increasingly depend on FinTech companies to acquire customers.

India’s central bank already requires all types of loans to be tied to a licensed regulated entity, which means digital lenders must partner with a bank or non-bank financier.

Yet digital lending in India is expected to reach $ 350 billion by 2023, representing about half of total retail lending, according to estimates by the Boston Consulting Group. This increases the risk of cyber fraud and coercive collection practices, as some smaller fintechs target financially weak customers who cannot borrow from banks. Other downsides include excessive borrowing from less financially savvy clients.

“Highways have made access easier, but lenders have been kept at the center of risk guardians. This allows tighter control of loans, ”said Vivek Belgavi, Head of FinTech Practice at PwC India. But to keep up with the lightning speed of digital innovation, regulatory oversight needs to be further strengthened, he said.

Despite the risks, digital lending is a necessity in a country of 1.3 billion people where the World Bank estimates that only about 10% of adults have access to formal loans. India’s fintech boom is filling these and other gaps.

“I prefer to receive my money in Google Pay and Paytm because I can also buy my groceries, vegetables using QR codes in stores,” said Gore, the housekeeper from Mumbai. “No one uses cash anymore.”