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KA-CHING!

EDITION #142 • 4 JUL 2024 • 7 MIN READ

Fintech-as-a-feature has been disabled. Just

ask Zomato
The food-delivery major has joined a long line of companies exiting the business
by Rounak Kumar Gunjan

This week, Zomato’s Board of Directors decided to officially withdraw

its application for a non-banking finance company (NBFC) licence. In
May, it had voluntarily surrendered its payment aggregator licence.

Huh.

Do you remember how not very long ago, every company wanted to
be a fintech?

And why wouldn’t they? Indian fintechs received a cumulative US$8.4

billion in funding in calendar year 2021—one of the hottest sectors in
the country. It got to the point where venture capitalists were joking
about how founders could draw a cheque just by mentioning
“financial services” in their pitch deck.

But that was in 2021. In 2022, fintechs could raise only around US$5.4
billion. In 2023, this fell to US$2 billion, and the writing on the wall
was clear: pureplay fintech was no longer as lucrative a bet as it once
was.

But payments and transactions were still going strong. They had, by
now, become an inseparable function for most companies—be they in
food aggregation, ride hailing, or e-commerce. So many of them
decided to go for the natural extension and enabled lending and
insurance services too. What were earlier standalone businesses
would now exist as mere features on their apps.

Embedded finance, research reports and sectoral analysts called it.

Cool folks came up with fintech-as-a-feature.

Clever.

Anyway, whatever they chose to call it, companies loved it. Take Ola,
for instance. It has a wallet service, Ola Money; it sells co-branded
credit cards; it offers postpaid services. It’s the same with e-commerce
giants Amazon and Flipkart.

The hypothesis is straightforward: the hero service, be it ride-hailing

or e-commerce, has already acquired a bunch of customers who keep
coming back to the app. So why not sell them financial services too?

Neat. Logical.

Only, if it is so simple, what made Zomato back out? And it’s not just
Zomato, even non-banks are going the same way. Nine of them have
surrendered their licences in the recent past—while two ventured
technical reasons, the remaining have decided to exit the business
altogether.
Fintech-as-a-feature is being toggled off.

And I think there are a couple of major reasons why.

It’s too late

First, by the time companies like Zomato got to the scene, others like
Phonepe, Google Pay, and Paytm* had already captured most of the
market. There was no way the newcomers could create a
differentiated enough product or experience. There are only so many
ways you can make payments or avail financial services.

And even if you somehow manage to do it, other things don’t quite
make sense.

UPI as a product, for instance, has very thin margins and is mostly
used as a customer acquisition channel by fintechs. But making
payments through UPI is the last activity in a user’s journey on
Zomato, whereas it’s usually the first for users on Google Pay,
Phonepe, or Paytm. It makes sense for the latter kind to use UPI as an
acquisition tool. For Zomato, not so much, especially because it
already has a pretty robust customer acquisition funnel.

As for lending, companies with large user bases can either partner
with lenders and send them loan-worthy customers or lend out of
their own books (which is what the NBFC licence is for). The sourcing
model, though, offers very low revenue potential for the non-lending
partner. And lending from your own books requires very robust
balance sheets and positive cashflows, which few new-age companies
are able to achieve.

And if you still decide to do it, there’s the big scary headmaster to deal
with—the Reserve Bank of India (RBI).

A very tough regulator

“It’s better to be a food aggregator than be regulated by the RBI.
We’ve seen its decisions very harshly affect fintechs in the past.
Take Slice’s example.”

That quote is from a Zomato executive, to whom I spoke to on

Tuesday evening. And I get it.

It’s fair to say that the RBI has been pretty tough to deal with for
fintechs. Even if we consider Paytm’s massacre as an exception, the
regulator has done enough to scare other companies away—from
raising risk weights for unsecured loans in November last year to
initiating forensic audits in the first quarter of 2024 to asking fintechs
to limit their revenue growth to 15–20% instead of 30%.

It’s only natural that companies that are generating significant

revenues even without fintech-as-a-feature would want to remain out
of RBI’s sight. 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 if it’s so difficult, why has Ola continued its financial services
wing, I can hear you thinking.

Well… “it shouldn’t,” a senior banker told me. Ola’s co-branded credit
card with SBI hardly has takers, they told me, and even though the
card offers cashbacks on Ola rides, flights, and hotel bookings, “there
are far better credit cards available in the market.”

Flipkart, of course, seems pretty confident about its newly launched

supermoney platform, but instead of having fintech-as-a-feature on its
original app, Flipkart has hived off a separate financial services entity
looking exclusively at these services. So has Ola.

Does that make a difference? I’m not sure yet.

What do you think? Write to kaching@the-ken.com or leave a comment

on our onsite version and let me know.
For now, it’s a wrap for this week.

Regards,
Rounak

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Rounak writes on financial services at The Ken..

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