Leading fintech firms face a profit puzzle

During the Covid 19 crisis, fintech companies in India that provide loans to individuals saw a rapid increase in demand, and this trend carried on after the lockdown eased. However, the road to profitability is still not smooth. According to TransUnion Cibil, a credit information company, the total personal loans, consumer durable loans, and credit cards issued by fintechs in 2022-23 amounted to 84,000 crore. In comparison, loans issued by the entire financial sector, including banks and non-banking financial companies (NBFCs), touched 11 trillion the same year.

The fintech sector, despite being new and small in size, is already congested with many operators. The number of fintech firms providing over 5,000 loans annually doubled from 24 in 2018-19 to 54 in 2022-23. During the same period, fintech organisations issuing over 100,000 loans in a year increased six times to 36. However, the number of other categories of lenders issuing similar types of loans grew at a slower pace. The vast majority (97%) of the fintech loan portfolio is comprised of personal loans and consumer durable loans, while the figure stands at 41-44% for NBFCs and private banks, and is just 10% for public sector banks.

Fintech companies are particularly fond of "buy now pay later" (BNPL) loans, a form of zero-interest loans offered on purchases to be repaid in installments. While these loan schemes are increasing in popularity, the path to profitability remains rough, as quoted by the Bank for International Settlements, an international financial institution owned by the central banks of countries. Initially, fintechs relied on technology to sell traditional financial products to consumers, with their main offering in India being the BNPL loan. Consumers can buy items such as smartphones from e-commerce sites and pay for them in installments, seemingly at no extra cost.

Fintech firms leveraging this technology were able to process roughly 70% of consumer durable loans and 57% of personal loans within a day in 2022-23. However, concerns of "signs of risk build up in consumer credit" were expressed in India's central bank's financial stability report on 28th December. Global fintech is learning that technology alone does not ensure a long-term competitive edge.

A recent BIS report based on a study of some of the world's biggest fintech firms, such as Affirm, Afterpay, and Klarna, found that major BNPL platforms have significant operational costs preventing them from breaking even since 2018, with a notably low return on assets in 2021-22. For Indian fintech companies, bad debts in consumer loans and personal loans exceed those of established lenders. Fintechs generally tend to lend to younger individuals with weaker financial backgrounds.

Based on 2021-22 data from VCCEdge for 119 Indian fintech companies specialized in digital lending, 46 registered losses at the operational level and 62 at the net level. In the future, the primary task for fintech firms will be shying away from riskier types of lending and working towards creating more balanced portfolios.