Apr 29, 2023

Want this newsletter delivered to your inbox? SUBSCRIBE Thank you for subscribing to Unwrapped We'll soon meet in your inbox. It is well known that the freeze in the funding environment is impacting venture-backed startups. But the fintech sector is bracing for the twin blows of a funding winter and increased regulatory scrutiny. The two are intertwined such that many early-stage companies are actually struggling to deal with these challenges. While the well-capitalised Razorpay, Groww, and PhonePe are setting aside dollars to get the requisite regulatory clearances, it is the early-stage ones that are suffering the most. Challenges in lending: “When the unicorns of today were at an early stage, they got a free pass in many spaces. But for us, the initiation has been a trial by fire,” the founder of an early-stage fintech lending startup lamented. His outfit was operating as a loan aggregator in partnership with banks and large NBFCs. The founder’s two-year plan was to scale up the business and eventually scout for an NBFC licence and build his own loan book. “After the digital lending guidelines came out it has become almost mandatory for us to secure a licence. But getting an NBFC licence has been tough for startups,” he said. Recently, neobanking startup Jupiter received an NBFC licence. After Cred and BharatPe both failed to make the cut, this was a positive sign. Perhaps others can succeed as well. As things stand, it is no wonder that fintechs have been shopping around to acquire an NBFC licence. Cred acquired Parfait Finance in November 2021 and BharatPe acquired Trillionloans, a Mumbai-based NBFC, in March. Stagnation in payments: The going has become tougher for payment companies, too. Players such as Razorpay, Cashfree, PayU and Paytm have all been stopped from acquiring new merchants. Razorpay and Cashfree are awaiting their final payment aggregator licence. PayU and Paytm, meanwhile, have been asked to apply fresh. “We are hopeful that the final clearance will come along with a green signal for us to acquire new merchants,” said a top executive at one of the major payment companies. This stop sign from the RBI has hurt some of their fundraising plans, too. The executive quoted above added that if there is no growth in new merchant onboarding, investors will not be enthused. Investors are awaiting the RBI’s final nod before cutting a cheque, he said. The founder of another payments startup said that revenue growth is on track for now, but if the RBI does not open new merchant onboarding quickly, there will be a significant impact on his company’s revenue projections. Regulatory flip flops: It’s not always about strict regulatory scrutiny; sometimes, it’s also about regulatory flip flops. Global payments companies met the data localisation guidelines by toeing the RBI line. But some of them have also been impacted by changing regulatory stances. I wrote on April 24 about how Visa Safe Click was shut down by the company after the regulator expressed unhappiness with the product. Back in 2016, the RBI had allowed card-not-present (CNP) transactions up to Rs 2,000 to go through without an additional factor of authentication. Still, Visa found itself non-compliant. “Sometimes there is backdoor arm twisting from the regulator, which is creating problems for even large fintech companies,” said a senior executive at a global payments giant. “A consistent approach from the RBI will help.” Recently, the UK parliament, in a report on the India-UK Free Trade Agreement, called the mandatory data localisation requirements in India a stumbling block. As the fintech ecosystem matures, there is a need for sector regulators to scrutinise it further. But excess scrutiny and licensing kills innovation and creates boundaries, preventing others from entering the space with disruptive ideas. If the regulators want to keep the ecosystem open, they should try to be light-touch with early-stage players and perhaps stricter with the late-stage ones. Written by Pratik Bhakta in Bengaluru ETtech Exclusives PhonePe may waive off ZestMoney’s $18-mn debt: PhonePe and ZestMoney have not parted ways completely, not yet. Sources told us PhonePe is close to signing a commercial arrangement with ZestMoney wherein it will use the lending startup’s technology stack and can also hire some of its employees. The Walmart-owned payments major is set to waive off the $18-million credit line it had offered to the beleaguered lending startup in lieu of this licensing transaction. Elevation Capital sells $40-mn stake in Xpressbees to Malaysia’s Khazanah: Malaysia's sovereign wealth fund Khazanah Nasional has picked up about 3% stake in ecommerce focussed logistics firm Xpressbees by paying $40 million through a secondary share sale, sources briefed on the matter said. Xpressbees has facilitated the funding round at a 25-35% premium valuing it at around $1.3-1.4 billion. Online stock brokers suffer major loss of active users: Tech-backed discount brokers which gained immensely during the pandemic have been hit over the past year . Tiger Global-backed Upstox has seen around 2 million traders go inactive, while nearly 200,000 traders left Zerodha during the same time. Even 5Paisa lost 1 million users. Groww and AngelOne have bucked the trend and have grown their active trader base positively in the same time frame. Startup Corner Over 9,000 startup jobs slashed between Jan-March: Nearly 9,400 staffers across startups were fired during the first three months of this year , per a report by recruitment platform Careernet shared exclusively with ETtech. Edtech firms including Byju's and Unacademy, have fired the largest numbers – over 1,000 employees at a time. Most early-stage investors expect muted 2023, says report: Over 80% of investors in the early-stage startup ecosystem believe that the investment activity in 2023 will be at a slower pace than last year, a report by venture-debt firm InnoVen Capital said. For the report, the firm surveyed 20 early-stage investors including Blume Ventures, WaterBridge Ventures, India Quotient, Kae Capital and others. Neobank Jupiter secures NBFC licence: Neobanking startup Jupiter has secured a non-banking finance company (NBFC) licence from the Reserve Bank of India (RBI) , a development that will help it dole out credit from its books. Jitendra Gupta, founder of Bengaluru-based Amica Financial Technologies Ltd., which runs the startup, told us Jupiter will hire a professional chief executive officer to run the NBFC. ETtech Interviews ‘We need to own more product IPs, build distribution chops’: Shiv Nadar, pioneer of the country’s “startup and innovation” culture as he was the first to introduce microcomputers way back in 1978, spoke to us about what the Indian technology industry must do to strengthen its product capabilities, create a sustainable culture for startups and his philanthropic vision. He was conferred the ET Corporate Excellence Award for Lifetime Achievement 2022-23. ‘Emphasis on efficiency, cost optimisation in FY24’: As an uncertain market depresses discretionary spending, India’s third largest software services firm, HCLTech, will in the short term chase deals driven by cost optimisation and vendor consolidation, its chief executive and managing director C Vijayakumar told us. He also spoke about opportunities in the banking sector even as there are concerns over the balance sheets of some smaller banks. Tech Policy Ads of betting, gambling sites still in play on social media: Online betting and gambling portals continue to aggressively advertise on social media platforms despite India’s new gaming regulations prohibiting betting and wagering of any kind. This also places these websites and companies in contravention of guidelines from the I&B ministry, directing media firms and online intermediaries to refrain from carrying advertisements and promotional content related to betting platforms. Startups call for exempting more from angel tax: The startup industry is lobbying with the finance ministry to scrap, or at least increase, the Rs 25-crore threshold below which it is exempted from the so-called angel tax . The industry says only a small percentage of startups will be able to meet this limit. The Centre is gathering inputs from various stakeholders and is expected to come up with a detailed clarification on angel tax soon. Amendments to Aadhaar authentication rules ‘unconstitutional’, say experts: The proposed amendments to the Aadhaar Authentication for Good Governance (Social Welfare, Innovation, Knowledge) Rules, 2020, (GG Rules) are unconstitutional and violative of the Supreme Court’s 2018 Aadhaar judgment, legal experts said, arguing that the changes would make people more vulnerable to frauds. The government cannot overcome the Supreme Court judgment by amending the IT rules, said former Supreme Court judge BN Srikrishna. Visa pauses single-click checkout for Indian ecommerce transactions: Card payments major Visa has paused its single-click checkout service for online transactions in India , amid a push by the RBI to tighten security standards for digital payments. In 2019, Visa launched ‘Visa Single Click’ in India to enable a smooth checkout for consumers buying goods online worth up to Rs 2,000. This feature did not need CVV or OTP to be punched in while making a transaction. Google’s Legal Troubles Madras HC restrains Google from ejecting Bharat Matrimony app from Play Store: Google and Matrimony.com remain bound together for now. Granting an interim injunction in a case filed against the tech giant by Matrimony.com, the Madras High Court directed the former not to delist the Indian platform’s app from its Play Store until June 1 . Matrimony.com had approached the court alleging Google was forcing app developers to adopt its user-choice billing system. HC issues notices on Google’s plea against ADIF order: A division bench of the Delhi High Court issued notices to an alliance of Indian startups and the Competition Commission of India (CCI), seeking their response to Google’s appeal against an order directing the antitrust watchdog to take up complaints against the tech giant's new in-app purchase billing system. Google had approached the division bench on Tuesday. IT Earnings Roundup Wipro reports flat Q4 net profit; board approves Rs 12,000-crore share buyback: India’s fourth-largest software exporter Wipro on Thursday missed estimates to report a flat fiscal fourth-quarter net profit while flagging uncertainties in technology spending, but the announcement of its second buyback in as many years at a near 20% maximum premium to the current market price could cushion the anticipated fall in stocks. Read the full earnings report here Tech Mahindra's Q4 net profit dips 26% to Rs 1,118 crore: Tech Mahindra reported a 25.8% year-on-year dip in net profit for Q4 FY23, missing estimates to Rs 1,118 crore due to cutdown in client spending and higher employee costs. North American inflation has impacted spending sentiment, while Europe is also going through challenges, said CEO CP Gurnani. Read the full earnings report here LTIMindtree Q4 profit flat at Rs 1,114 crore; revenue jumps 22% YoY: LTIMindtree’s net profit grew 0.5% in Q4, missing estimates. The subdued number came due to higher employee costs and other expenses. The company maintained a cautious tone about the demand environment and said that clients are focusing more on projects that bring in cost efficiencies. Read the full earnings report here