Bala Srinivasa, Partner, Kalaari Capital, helps us understand the nuances of the fintech sector and the various opportunities available for the entrepreneurs.

For Bala Srinivasa, the fact that he is able to get a ringside view of the best and brightest ideas and a chance to work with brilliant entrepreneurs reimagining almost every market space in India, is one of the key factors that makes his job as the Partner of Kalaari Capital very exciting.  He has been involved with young technology companies for more than 20 years and was part of management teams at two successful analytics startups (in the U.S. and India), where he ran the sales, marketing and product management functions.  His interest in the history of technology and entrepreneur-led innovation that creates new market spaces is quite evident in the kind of companies he supports and the sectors that he works in. Some of his portfolio companies include Credit Vidya, Afford Plan, Active.ai, Instamojo, Mettl, Rubique and Scoop Whoop.

In fact, Bala, who spent the first part of his career as an equity analyst in Silicon Valley has a big focus on the financial technology space. He and his team have recently come out with a report titled “Fintech India innovation for the next 400 million”, where they have surveyed over 350 companies and identified trends for the fintech entrepreneurs to build upon. “We expect to lot action to take place in the fintech sector in 2017, thanks to demonetization, GST and the growing business momentum of fintech startups,” said Bala.

Continuing on this note, in this interview, Bala helps us understand the nuances of the fintech sector and the various opportunities available for entrepreneurs.

Fintech is a very general definition for companies falling under this sector. There is payments, personal finance, lending, banking technology, data analytics, and so on. And, these are defined by certain dynamics of their own.

a.What really unites all these sub-sectors (or does it not) and out of this wide range of sectors, which ones do you think will have strong growth going forward?

Fintech is simply an umbrella term for technology startups taking on traditional financial services.  There are a dozens of sub-segments within financial services.  Most banking and financial services are still run based on systems and processes that were developed decades ago.  Fintech startups are in the business of reimagining these financial products/processes using new technology, and a higher focus on consumer experience.

b. What gaps do you see in the fintech sector that a new entrepreneur can capitalise on?

Opportunities in fintech are different in the West when compared to in India.  In the Western markets, there is a near 100 per cent penetration of financial services in many areas such as consumer lending, insurance, small business credit, credit scores and such.  Fintech in these markets is more about improving consumer experience with better technology and gaining market share from incumbents. In India, however, financial services is a very underpenetrated offering in almost any category. And, the opportunity lies in using technology and innovation to deliver financial services that can increase adoption and expand the market itself. One of the largest opportunities in India is around improving credit availability for consumers, small businesses, supply chains, healthcare financing and such.

There are two types of fintech companies – ones that collaborate with banks, and the others which compete with them. How do you think banks can integrate these services and work together in scaling up their business in the coming years?

Few large economies can expect to see the kind of financial services growth that India is likely to witness over the next decade.  This represents a massive opportunity for incumbent banks and new providers.  The question is whether Indian banks, especially PSUs, can move fast enough to benefit from this.  Senior leadership at most banks are aware of the opportunity and risks and have made innovation/technology a key focus area at the board level.  The challenge is in translating this into action and also aligning it with the rest of the organization. While many banks have started accelerators, pilot programs with startups and are hosting demo days, there is still significant scepticism in both camps.  There is good innovation available that can immediately help improve various bank processes.  However, banks need to change the perception of being hard to work with – contract terms, speed of execution, and pricing for example, to create an environment where start-ups can build scalable businesses servicing incumbent banks.

How advanced is the Indian fintech sector when compared to the global financial hubs of the world? And what lessons do you think India still has left to learn from the global fintech leaders?

The fintech sector in India is fairly young but the underpinnings of the India fintech opportunities are very different.  In my opinion, there aren’t too many lessons we can take from other markets, other than the fact that fintech disruption is real.  It manifests itself differently in large economies based on local constraints and challenges.  The combination of the India Stack (Aadhar, eKYC, UPI and digital locker) and smartphone penetration, along with government impetus (GST, Demonetizaton, Jan Dhan accounts) has created an unprecedented environment for growth in digital financial services.  Within the next decade, India will have one of the the world’s most advanced financial infrastructure, with hundreds of millions of Indians using digital financial products that significantly enhance their lives, in turn boosting economic growth.

What kind of opportunities do you think fintech companies can capitalise on for their growth in the coming years? Alternatively, what are some challenges this sector is likely to face?

In our view there are two broad types of market opportunities that present themselves at this juncture. The first is innovation around building segment specific vertical products unique to India and the needs of the next 400 million customers. We are seeing some early examples that include small ticket unsecured loans, pre-paid plans for single medical procedures, instant point of sale credit, pay per day insurance, micro-investment products among others. The key for these startups is to deeply understand the segment and create solutions that are usable, affordable and profitable at a micro offering level. The same applies for the SME market where there are a plethora of opportunities to satisfy strong demand for small business working capital, trade finance, and leasing

The second play is around building horizontal platforms that assist incumbent financial services providers and the vertical fintech start-ups discussed earlier. For example, we see credit scoring using alternate data (transactional, social, geo-spatial, etc.) as being a horizontal utility over the India stack. Similarly, there is a big opportunity to become the consumer interface of choice to manage UPI based phone-to-phone payments. There are also white spaces in managing digital customer interaction via messaging platforms, or horizontal platforms that can manage the flow of verified and secure documents on top of the government-approved digital locker program.

Fintech companies in India do have the dual challenge of small ticket sizes and needing to scale to high volumes to build sustainable businesses. We see a lot of focus on technology and product but significant gaps in go-to-market strategy that can drive large volume. Each Indian fintech start-up has to solve for this based on its product and customer segment.