Fintech firms: cracking the profit code

January 10, 2024
1 min read

Key points:

  • Fintech companies that focus on loans to individuals are growing rapidly, but profitability remains a challenge.
  • Total consumption loans by the fintech sector in 2022-23 stood at ₹84,000 crore, while overall consumption loans by the financial sector was ₹11 trillion.

Fintech firms in India that specialize in providing loans to individuals have experienced significant growth in recent years, particularly during the COVID-19 pandemic and its aftermath. However, these companies face a major challenge in achieving profitability. According to credit bureau TransUnion Cibil, fintech firms provided a total of ₹84,000 crore in consumption loans in 2022-23, which includes personal loans, consumer durable loans, and credit card loans. In comparison, the overall consumption loans provided by the financial sector, including banks and non-bank financial companies (NBFCs), was ₹11 trillion during the same period.

Although the fintech sector is still relatively new and small, it is becoming increasingly crowded. The number of fintech firms issuing more than 5,000 loans per year more than doubled from 24 in 2018-19 to 54 in 2022-23. Meanwhile, the number of fintech companies providing over 100,000 loans per year increased six-fold to 36 over the same period. In contrast, the growth of other lenders, such as NBFCs and private banks, was slower.

Fintech lending in India is heavily focused on personal loans and consumer durable loans, which account for about 97% of fintech loan portfolios. In comparison, for NBFCs and private banks, these types of loans make up approximately 41-44% of their portfolios, and for public sector banks, it is around 10%. Fintech firms also have a strong focus on certain types of lending, such as buy-now-pay-later (BNPL) loans, which are interest-free loans repaid in installments. While their loan products are gaining traction, achieving profitability remains a challenge.

According to a report by the Bank for International Settlements, technology alone does not confer a long-term competitive advantage for fintech companies. The operating costs, including marketing, administrative, and technology expenses, have prevented major BNPL platforms from breaking even since 2018. Additionally, rising credit losses and intensifying competition from neo-banks and big tech companies entering the BNPL market have negatively impacted profitability. The median return on assets for fintech companies analyzed in the report consistently fell between 2018 and 2022 from -5.9% to -15.6%.

In India, fintech firms have higher rates of bad loans in consumer loans and personal loans compared to established lenders. This is partly because fintechs tend to lend to younger individuals with weaker finances. A survey of US BNPL services revealed that they are more often used by individuals with low income levels and less educational attainment. Going forward, the key challenge for fintech companies will be to pivot away from riskier types of lending and achieve more balanced portfolios.

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