The $100m ARR Club - Part II

FinTech's

This is the second in our series of posts looking at startups in emerging markets that have scaled to $100m in revenue. Following our first on Marketplaces, this one looks at 15 FinTech startups that have scaled to $100m across India, South East Asia and Latin America. We have analysed what led them to that point and what lessons we can learn for Sturgeon’s markets in Central and South Asia.

In a separate research report, Sturgeon looked at the opportunity for FinTech and financial inclusion in emerging markets, where 1.7 billion of the world's adult population remain unbanked. Internet and phone penetration have a significant positive effect in the short and long term on access to financial services. Further digitalization, higher penetration of mobile and internet subscriptions, and development of suitable financial tools and technology-enabled payments solutions can play an important role in increasing financial inclusion. FinTech also serves as the foundational layer for other consumer tech businesses to succeed.

Looking at our sample of FinTech startups, we identified several key trends:

• The average capital requirement to reach $100Mn is higher than marketplaces and stands at an average of $400Mn; however, the number varies greatly depending on the business model.

• The high cost is related to growth and product development, and the skilled workforce required to build sophisticated and robust payment systems. The marketing spend required to attract and retain customers is high; in India, for example, it stands at 30-40% of revenue as the space is crowded and legacy institutions are catching up.

• Despite the high capital requirement, the time taken to scale is shorter for FinTech startups. The top quartile take only 4 years to reach $100Mn, and once POC is achieved adoption increases exponentially and word of mouth plays a huge role.

India

In India, the government’s push to a Digital India and demonetization has led to widespread adoption of digital payments. From simple payment gateways in the early days to embedded finance players ranging from InsurTech to Wealth Tech, the Indian FinTech ecosystem has matured in the last few years making India the 2nd largest hub for FinTech after US.

The growth was fuelled by tailwinds of:

• Unified Payment Infrastructure (UPI) facilitating interoperability – there were $1.52Tn worth of UPI transactions in 2022, equal to 47% of India’s total GDP.

• A growing number of businesses going online which required digital payment solutions.

• Deepening financial inclusion from 38% in 2011 to 75% in 2022 meant more underbanked customers looking for sophisticated financial products.

Despite the tailwinds for FinTech start-ups, the country's traditional banking institutions, comprising banks and non-banking financial companies (NBFCs), have a predominant position. They benefit from supportive regulatory frameworks, well-established and trusted brands, wider distribution networks, and a more favourable cost of capital. Startup lenders and traditional players have come to coexist, with winner take all trends not seen in this market. The methods FinTech’s have found to win in this environment are laid out below:

Finding the customer where they are

Early FinTech startups such as Paytm and Phonepe spent more than 50% of their revenue to increase merchant coverage. Phonepe, the number one payment software, has 57% market share today, covering 25 million stores across 15,700 villages and towns, comprising 99 percent of pin codes in India. Such wide access was possible through a task force of on-ground staff to onboard merchants. Onboarding these customers is expensive, and Phonepe has reported spending $500m marketing budget to get to $100m in revenue.

Digital marketing spend was not enough; Paytm developed soundboxes with 59 vernacular languages that helped onboard customers who cannot read or write from the remotest parts of the country. Albeit expensive to acquire, having data on these users who had no prior online presence helped these payment players build complex models for more sophisticated financial services. Having access to this audience also helped build a new revenue stream through advertising and today 25% of Paytm & 20% of Phonepe revenue comes from advertising.

Identifying a niche to scale lending

With a large number of new-to-credit consumers and businesses, there are multiple opportunities to build novel lending products and solutions. However, lending platforms have required twice as much capital to generate revenue compared to payments and embedded finance. Finding a niche, such as high-velocity lending, supply chain financing, or microcredit to corporate employees, has been an effective strategy to scale quickly. Three of the top early-stage FinTech lending startups, Incred,  Lendingkart & Rupify, have seen rapid revenue growth in the last few years while pursuing one or other of these niches.

Leveraging alternative data and ease of onboarding to build competitive advantages

Financial institutions have long leveraged data to underwrite credit, authenticate customers, and flag potentially fraudulent transactions.  Data from web apps, mobile devices, and even social networking platforms are now being used to score new-to-credit customers. Successful FinTech’s have been at the forefront of leveraging these alternative data sets to launch better credit, insurance, payments, and other financial services to customers. Cred, a multi-product FinTech app, uses its state-of-the-art data science models to model financial behaviour and profile risk. It relies on data from multiple touch points, such as promotions for electric bill payment, credit card payments and peer-to-peer lending.

Cred’s success is also built on a simple onboarding process, that helped them onboard 11.2 million users in FY22 alone. This is also clear with Bajaj FinServ, one of the largest lending players, that has made high-velocity authentication and access to credit a key edge in the market. Their instant loan approval algorithm helped onboard 9m new users in FY22.

Software and infrastructure development is dominating financial services:

The accelerated adoption of digital lending and widespread cloud usage has meant that banks and non-bank lenders have started embracing cloud-based SaaS platforms across different use cases, including underwriting, fraud, collection, KYC, wealth management, loan origination systems (LOS), loan management systems (LMS), and customer engagement. This is giving rise to many vertical SAAS players in the space.

One example in this space is Lentra, whose artificial intelligence-driven modular architecture helps banks create customized lending products and customer experiences. Their product covers the entire spectrum of a financial institution’s needs, from KYC and compliance to onboarding, servicing, and collections. They support their customers to access new customer bases, reduce non-performing assets, and improve operational efficiencies through digital solutions. Lentra has shown impressive 150% YoY growth and is now valued at $3.3Bn.

As large players like Reliance Jio are eyeing the space, India will eventually see a consolidation of the FinTech market with two or three large players controlling majority of the share. 

A shift is taking place from organic to inorganic growth strategies

As the market begins to consolidate in India, with large players like Reliance Jio eyeing the space, rapid customer acquisition is becoming ever more crucial to reaching scale. Navi the youngest FinTech startup in India, has managed to scale to $100Mn in ARR in only 3 years due to its inorganic, acquisitions-based growth strategy. The acquisition of small but well established microcredit organisations has been used by many FinTech’s to accelerate their growth. In the case of Navi, it acquired an array of mom-and-pop microcredit stores that are unorganised, hyperlocal and have a loyal customer base.

Navi’s acquisition strategy has been also focused on meeting the criteria set by the RBI and other regulatory authorities to reduce time-to-market drastically. For instance, a company needs at least 10 years of domain experience for a universal banking license. Navi is acquiring Chaitanya Financing (CIFCPL), a microfinance company that meets those criteria and through which Navi will be able to get a banking license and compete with the established players.

Latin America

In Latin American markets, FinTech remains the fastest growing sector and the total capital deployed in LATAM FinTech stands at $15.7B as of 2022. Although financial regulations remain unfavourable for startups, most FinTech businesses are finding loopholes to cater to the more than 80% unbanked users through their lending products.

The most successful FinTech business in Latin America till date is the Brazilian Nubank. Nubank today has achieved significant scale, with 74 million customers, leveraging its no-branch business model and technology advantage to become the lowest cost operator in the country. By keeping costs low, Nubank can offer competitive pricing, such as no credit card fees, lower interest rates on loans, and higher interest rates on savings. Nubank became a $100Mn business in 5 years and the largest FinTech player in LATAM.

Without firm regulations and publicly available credit history, recovery remains a challenge. Startups however are using innovative methods of collateral management to enable new customers, whether that is home equity (Loft, Creditas), car (Kavak), or other equipment-backed microfinance. While, acquiring customers and increasing distribution still remains a challenge for FinTech startups in LATAM, the huge unbanked population and use of technology to collect user data to model risk has helped scale lending startups.

South East Asia

The other end of the story is South East Asia, particularly Indonesia. The development of the Quick Response Code Indonesia Standard (QRIS) and supportive regulatory changes have benefited Indonesian FinTech players. Unique to Indonesia is the widespread embedding of financial products within digital ecosystems such as Grab, Shopee, GoTo and Bukalapak. These super apps have a clear advantage of captive user bases and large amounts of data that have made distribution easier and access to capital cheaper, fuelling rapid expansion. They have captured significant market and are showing no sign of slowing down with their YoY growth still at 100%.

This integrated FinTech approach has several strategic benefits for these super apps, including improved customer retention and reduced friction at the point of sale. Embedding financial services has helped grow the share of wallet among existing users, as well as increase the average revenue per user. The large amount of captive transaction and ancillary data gives these players an advantage in credit scoring and building premium financial products for their users.

Sturgeon’s Markets

Looking at Sturgeon’s markets, the foundational layer of digital payments is in the process of being built. Ranging from startups such as Payze (building the “Stripe for Central Asia”) to government-backed systems like RAAST (Pakistan’s instant payment system) and mobile financial services behemoths like bKash in Bangladesh, the foundations are being laid that will enable more widespread adoption of digital financial services.

Building the technology layer to enable efficient access to and distribution of credit is a significant opportunity. It is easy to lend money, but much harder to get it back in a timely and cost effective manner. One of Sturgeon’s portfolio companies, Datacultr, is supporting FinTech and traditional lenders to reduce defaults and the cost of collection. Datacultr’s software collateralises a borrower’s smartphone, using behavioural change and prompts to encourage repayment and restrictions as a last resort. Today the company works with major banks, FinTech’s, device financers, and non-bank lenders across the world. Over 6m loans have been issued utilising its software, with a total value of $1.8Bn. To put it another way, that is more than 6m people who have borrowed from a financial institution for the first time and can now grow their credit profile to access more sophisticated financial products.

Inspired by the success of LSE-listed Kaspi, the trend in Central Asia is towards super apps embedding financial services within ecommerce and logistics. Having started life as a bank, Kaspi has built itself into the de facto financial operating system for Kazakhstan, integrating payments, marketplace, and FinTech for its 11m monthly active users (in a country of 18m people!). Across the border in Uzbekistan, Sturgeon portfolio company Zood is targeting a similar end state, although with a different genesis as an ecommerce business. The initial foray into FinTech was to achieve similar goals as the super apps in Indonesia, namely higher conversion and average order value while reducing the high cost of cash on delivery payments. Today Zood has built a consumer-focused ecosystem including lending (ZoodPay), ecommerce (ZoodMall) and e-logistics (ZoodShip), with more than 10m downloads.

Embedding financial services within an existing distribution base has also been effective in other markets, such as for Trukkr in Pakistan. Trukkr is a SaaS-enabled embedded lending platform banking the unbanked $10bn trucking industry in Pakistan. Their Transport Management System (TMS) acts as a powerful origination engine and source of a large volume of high quality data on truck drivers. Using this data, Trukkr is able to offer working capital loans, consumable financing and collateralised truck financing to individuals and businesses that have never previously borrowed from a formal financial institution. These loans free up their working capital so that they can invest in scaling their business.

We are also seeing startups that are providing multiple financial products to different end users within the same ecosystem. One such example is Abhi in Pakistan. On the one hand, Abhi enables underbanked individuals with little credit history to access credit through Earned Wage Access (EWA). The second leg of their business is providing high velocity financing against liquid collateral to businesses unhappy with their existing credit relationship with their banks. Abhi is focussed on capturing the productive lending opportunity stemming from an underserved and underrated private sector in Pakistan. They do so by embedding technology into their underwriting process, enabling high approval rates, pro-active customer service and rapid collateralization by partnering with financial and non-financial players in the ecosystem.

Conclusion

Looking at the examples set by India, LATAM and SEA, we can see that, once the foundational layers of digital payments has been established, the speed and scale of FinTech startups accelerates rapidly. While there remains work to be done, Central & South Asia are reaching that inflection point as government and private sector backed payment solutions approach a critical mass. One variable to monitor will be whether the traditional financial institutions are able to adapt and evolve their technology stacks to compete with FinTech startups, as they have in India.

Collaborative efforts involving technology, innovative business models, and strategic embedding of financial services within ecosystems are likely to drive further growth and financial inclusion in these regions. As the FinTech landscape evolves, consolidation, strategic acquisitions, and continued innovation will be key elements in shaping the future of Sturgeon’s markets and beyond.

We hope you have enjoyed this post and as always welcome your comments and suggestions. Our next post will look at the smaller number of B2B SaaS companies that have scaled to $100m in revenue.