Indian fintech startups face funding drought

During 2023-24, India’s fintech startups raised a total of US$ 1.5 billion, compared to US$ 4.5 billion the previous year. The number of funding rounds dropped drastically too, from 395 to 157 rounds in the same period.

However, experts predict that India’s fintech market is expected to continue its growth trajectory, with a projected value of  US$ 1.5 trillion by 2025. This growth is being  fueled by factors such as increasing digital payment adoption, a growing middle class, and the government’s focus on financial inclusion. 

Funding decline

Source: Pixabay

India’s fintech industry has surged onto the global stage, showcasing remarkable prowess fueled by innovation, adaptability, and a burgeoning tech ecosystem. With a compound annual growth rate (CAGR) exceeding 22%, India’s fintech market is projected to reach $150 billion by 2025, standing as one of the world’s fastest-growing sectors. Key drivers of this growth include India’s robust digital infrastructure, widespread smartphone penetration, and the government’s push for financial inclusion through initiatives like Jan Dhan Yojana, Aadhaar and UPI.

Furthermore, a youthful demographic and increasing internet accessibility have spurred adoption of digital financial services, ranging from mobile payments and digital lending to insurance technology (insurtech) and blockchain solutions. Leveraging cutting-edge technologies such as artificial intelligence (AI), machine learning (ML), and blockchain, India’s fintech firms are addressing diverse market needs, disrupting traditional banking models, and driving financial empowerment across the nation and beyond.

As per the most recent study by Tracxn, India secured the third position worldwide in 2023 concerning Fintech startup investment, thereby solidifying its standing as a noteworthy participant in the global arena.

A period of turmoil

Despite its very storied potential, India’s fintech ecosystem has undergone a fairly sobering financial year 2023-24. According to the most recent data provided by Tracxn, Indian fintech startups raised roughly US$ 1.5 billion in fiscal year 2024, a 66.67% decrease from US$ 4.5 billion in the prior fiscal year. The number of fund raising rounds also dropped sharply from 395 to 157 in the same period.

Funding for late-stage rounds in 2023 reached US$ 1.4 billion, which represents a 56% decrease from US$ 3.2 billion raised in 2022. Similar trends were seen in early-stage rounds, as funding fell to US$ 489 million, a sharp 73% decrease YoY.

The decline is being seen as part of a larger worldwide trend. Global fintech investment also fell to US$ 113.7 billion in 2023, a significant drop from US$ 196.3 billion in 2022, according to KPMG’s recent Pulse of Fintech report. This decline in funding has been influenced by concerns over high interest rates, geopolitical tensions, declining fintech valuations, and a challenging exit landscape. Additionally, the decline in late-stage funding has significantly impacted the sector.

The Indian fintech sector experienced a significant setback in 2023, when funding plummeted by 63% YoY. This decline in funding can be attributed to a global funding winter, which had a negative impact on investor sentiment towards fintech startups in India.

Despite the decline in funding, AI is expected to play an increasingly significant role in the fintech industry, with investors increasingly focusing on profitability and sustainability. Additionally, the Indian government’s recent allocation of approximately US$ 16.7 billion for the BharatNet project to enhance broadband connectivity within rural areas is expected to widen the sector’s reach and potentially attract more investments.

Future Prospects for Fintech Funding in India

To handle this funding squeeze, fintech startups should focus on profitability, strengthen their balance sheet, diversify revenue streams, focus on customer needs, and explore alternative funding options. These options can provide the necessary capital to fund growth and operations without diluting equity or taking on excessive debt.

The future prospects for fintech funding in India are promising, despite the recent decline. The Indian fintech ecosystem boasts over 2,100 fintech companies, and 67% of them have been established in the past 5 years.  According to Neha Singh, co-founder of Tracxn, this demonstrates the sector’s innovative capabilities and potential to drive India’s economic expansion.

The sector was valued at US$ 584 billion in 2022 and projected to reach US$ 1.5 trillion by 2025. This growth is fueled by factors such as increasing digital payment adoption, a growing middle class, and the government’s focus on financial inclusion.

Key trends shaping the future of fintech funding in India include the evolution of banking-as-a-service (BaaS), the rise of embedded finance, the transformation in credit scoring through digital fingerprinting, and the popularity of alternative financing methods like recurring revenue financing. These trends indicate a shift towards more innovative and customer-centric financial services, driven by technology and data-driven solutions.

Despite challenges such as regulatory uncertainty, market saturation, cybersecurity threats, and the need for skilled talent, the Indian fintech sector remains attractive and poised for significant growth. Collaboration between banks and fintech players, along with a focus on financial inclusion and innovative solutions, will likely drive increased funding opportunities in the Indian fintech space.

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