Daybreak - It made perfect sense for Zomato to go down the fintech route. Until it didn’t.

Episode Date: September 4, 2024

There was once a time, not very long ago, when every company wanted to be a fintech. Food delivery, ride hailing, e-commerce – companies that you would not otherwise associate with financial services. And when you think about it, it does add up. A couple years ago, fintech was where the money was at. Indian fintechs received nearly 9 billion dollars in funding in calendar year 2021. It was one the hottest sectors in the country. The inside joke among venture capitalists was how founders could raise a round of funding just by mentioning “financial services” in their pitch deck. What were earlier standalone businesses would now exist as mere features on their apps. People in the industry came up with a catch-all term – fintech-as-a-feature. Take Ola for instance. Zomato seemed to be going down that path too. In 2022, it had applied for a non-bank financial company or NBFC licence with the Reserve Bank of India. But since then, things have changed. From 2022 onwards, the amount of money being raised by fintechs has dipped considerable. In 2022, they raised about 5.4 billion dollars, then in 2023, this amount fell to 2 billion. What's going on? Tune in to find out. P.S The Ken's podcast team is hiring! Here's what we're looking for.Daybreak is now on WhatsApp at [phone]. Send us a hello with your name and since when you've been listening to us and be a part our community. Also, if you have any recommendations for this Thursday's Unwind segment, send them to us as texts or voice notes.Want to be part of the Daybreak community? Introduce yourself here.Daybreak is produced from the newsroom of The Ken, India’s first subscriber-only business news platform. Subscribe for more exclusive, deeply-reported, and analytical business stories.

Hi, this is Rohan Dharma Kumar. If you've heard any of the Ken's podcasts, you've probably heard me, my interruptions, my analogies, and my contrarian takes on most topics. And you might rightly be wondering why am I interrupting this episode too? It's for a special announcement. For the last few months, I and Sita Raman Ganeshan, my colleague and the Ken's deputy editor, have been working on an ambitious new podcast. It's called Intermission.

We want to tell the secret sauce stories of India's greatest companies. Stories of how they were born, how they fought to survive, how they build their organizations and culture, how they manage to innovate and thrive over decades, and most importantly, how they're poised today. To do that, Sita and I have been reading books, poring over reports, going through financial statements, digging up archives, and talking to dozens of people. And if that wasn't enough, we also decided to throw in video into the mix. Yes, you heard that right. Intermission has also had to find its footing in the world of multi-camera shoots in professional studios, laborious editing and extensive post-production. Sita and I are still reeling from the intensity of our first studio recording.

Intermission launches on March 23rd. To get alert, as soon as we release our first video. episode, please follow intermission on Spotify and Apple Podcast or subscribe to the Ken's YouTube channel. You can find all of the links at the ken.com slash I am. With that, back to your episode. There was once a time not very long ago when every company wanted to be a fintech. Food delivery, ride hailing, e-commerce, these were all companies that you would not have traditionally associated with financial services. And yet, They all seem to be thinking and acting a lot like a fintech.

When you think about it, it does add up. Because until quite recently, this was where the money was at. Indian fintechs received nearly $9 billion in funding in calendar year 2021. It was one of the hottest sectors in the country. In fact, the inside joke among venture capitalists was how founders could raise a round of funding just by mentioning financial. services in their pitch deck. Let me give you some context.

You see, at the time, payments and transactions were becoming a central part of all these companies. They had, to a great extent, become inseparable functions. So many of them decided to go for the natural extension and enable lending and insurance services too. What were earlier standalone businesses would now exist as mere features on their apps. So people in the industry came up with a catch-all term. They called it FinTech as a feature.

Take OLA, for instance. It has a wallet service called Ola Money. It sells co-branded credit cards. It offers post-paid services. And it's the same with e-commerce giants like Amazon and FlipCut. The hypothesis is pretty straightforward. The company's hero service, be it ride-hailing or e-commerce, has already acquired a bunch of customers who keep coming back to the app.

So the next natural step is selling them financial services too. Now, around that time, Zomato seemed to have been going down that part two. In fact, in 2022, it even applied for a non-bank financial company or NBFC license with the Reserve Bank of India. But since then, things have changed. From 2022 onwards, the amount of money being raised by fintech has dipped considerably. In fact, in 2022, they raised about $5.4 billion. Then in 2023, this amount fell to $2 billion. And with that, the writing on the wall was clear.

Pure Play FinTech wasn't as lucrative a bet as it once was. So it makes sense that about a month and a half ago, Zomato's board of directors decided to officially withdraw its application for an NBFC license. Even before that, it had voluntarily surrendered its payment aggregator license. And it's not just Zomato. Even non-banks are going down that route. In the recent past, at least nine of them, surrender their licenses.

Two said it was because of technical reasons while the rest decided to exit the business altogether. In a recent edition of the Ken's newsletter Kaching, Rana Kumar Gunjan delved into why this might be happening. Welcome to Daybreak, a business podcast from the Ken. I'm your host, Rahil Philippos,

and I'll be joining Stikta Sharma every week to bring you one business story that is worth understanding and worth your time. Today is Wednesday, the 4th of September. The first reason Ronak cites in Kaching is timing. Basically, by the time companies like Zomato got to the scene, other companies like phone pay, Google pay and paytm, the OG fintech, had already captured most of the market.

So it would be very difficult for these newcomers with their varied hero products to come in and actually stand out. They would struggle to create a differentiated enough product or experience. Because at the end of the day, there are only so many ways in which you could make payments or avail financial services. And even if you somehow manage to do it, other things don't quite make sense. Ronak breaks it down for us. You see, for users on apps like Google Pay or Phone Pay or Ptm, UPI is the hero product.

So it's pretty much an acquisition tool for them, a way for them to get more customers. But remember, UPI as a product has very thin margins. So while FinTechs may use it as a customer acquisition tool, it doesn't make a lot of sense for other companies. Take the case of Zomato, for instance. UPI is the last activity in a user's journey on Zomato. So you place an order for a meal or some other feature on Zomato, and then you go to UPI.

So for Zomato, it doesn't really make sense for UPI to be used as an acquisition tool. And in any case, it also already has a pretty robust customer acquisition funnel as is. Now, as for lending, companies with larger user basis can either part partner with lenders and send them loanworthy customers or they can lend out of their own books. That's exactly what an NBFC license allows them to do. But this sort of sourcing model offers very low revenue potential for the non-lending partner. And Ronak says lending from your own books requires very robust balance sheets and positive cash flows. Unfortunately, very few new age companies are able to actually achieve this.

Having said that, we do know that there are companies that, still decide to go ahead with it. What happens to them? Well, they then have to deal with the big, scary headmaster waiting to reprimand all the wannabe fintechs. I'm talking about the Reserve Bank of India, the RBI, of course. More on that in the next segment. It isn't easy to deal with the RBI, especially when you are a fintech.

The regulator has done a really good job scaring away a lot of companies. And it's done that in a bunch of different ways, like raising risk weights for unsecured loans in November last year, or initiating forensic audits in the first quarter of 2024, or even asking fintechs to limit their revenue growth to 15 to 20% instead of 30%. So for companies that are already generating enough revenues without fintech as a feature, staying out of the RBI's way is pretty ideal. Ronak spoke to a Zomato executive, who put it quite simply.

He said it's better to be a food. aggregator than to be regulated by the RBI. And all things considered, that executive may have a point. Whether this is the RBI doing its best to maintain a clean financial space in India or scaring new players away is a debate for another day. But there are still some companies going down the fintech as a service route. Like OLA, it continues its financial services wing. But a senior banker told Ronek that may not be the best idea for a company like Ola.

OLA's co-branded credit card with SBI hardly has takers. And even though the card offers cashbacks on Ola rides, flights and hotel bookings, he says that there are far better credit cards available in the market. Some companies still seem pretty undeterred by all of this. Like Flipkart, for instance. It recently launched its own super money platform. But there is a difference. Instead of having FinTech as a feature on its original app,

Flipkart has high revenue. of a separate financial services entity looking exclusively at these services. So has Ola. But does that really make a difference? Well, Ronak says, we just have to wait and watch. Daybreak is produced from the newsroom of the Ken, India's first subscriber-focused business news platform. What you're listening to is just a small sample of our subscriber-only offerings.

A full subscription unlocks daily long-form feature stories, newsletters and podcast extras. Head to the Ken.com and click on the red subscribe button on the top of the website. Today's episode was hosted by Rahil Filippos, produced by me Snikdas Sharma and edited by Rajiv Sien.