It is worthwhile to consider Bill Gates' well-known statement, "Banking is necessary, banks are not." Think about 2021: the globe is recovering from the shock of COVID-19, digital technologies are transforming the way people engage with institutions, and data and artificial intelligence are transforming how the world runs. In this environment, fintechs claimed to usher in the exciting new future of cheaper pricing, better convenience, lower risk, and universal coverage, while banks were the antiquated, slow, unfriendly to clients, and institutions that glowed with prices. Fintech VC funding broke all previous records, with $8.4 billion invested in these companies. In India, 45 unicorns emerged throughout the year, while other "soonicorns"—companies that appeared ready to become unicorns soon—also emerged.After two years, there has been a notable decline in fintech funding. Fintech funding decreased 73% in 2023 compared to 2021. Some listed fintechs are trading below their IPO price, and their valuation has drastically dropped. Since then, a few ill-fated fintech companies have disappeared. Generally speaking, fintech companies have not yet reached break-even, and many lack a clear route to profitability.

This gets us to the main query: Where will fintech end up? Which perspective is more accurate: the fintech as a valuation-focused, expand at any cost, regulations-avoiding organization, or the fintech as the new age disruptor, the panacea for all problems, the technology-led enhancer of efficiency and customer satisfaction? Most likely, the solution to this is somewhere in the middle. Let's examine our current situation and potential future directions for this emerging industry. This dynamic segment's evolution will be shaped by five forces.

First off, we are probably past the easy money climate of the last fifteen years. This implies that for fintechs, developing a viable business plan with steady free cash flows becomes crucial. The transition from entities with negative unit economics and a growth mentality to ones with sustainable unit economics and overall profitability is becoming more and more difficult.

Second, a lot of fintechs appear to use lending as their primary source of revenue, either directly as an NBFC or through distribution. In a low-risk, low-penetration setting, this seemed very logical. But in its haste to seize this chance, fintech has mostly concentrated on small-ticket, unsecured loans. Moreover, people who already participate in the credit ecosystem typically get loans. It doesn't appear that the declared goal of integrating new-to-credit (NTC) clients into the credit ecosystem has been achieved.For instance, 6% of personal loans in 2023 went to NTC clients, based on statistics from CIBIL. This percentage decreased from 19% in 2019. Fintechs' business model is further challenged by the digital lending standards and many of the previous structures (like FLDG), which are either no longer permitted or require significantly different procedures. Furthermore, there has been a withdrawal of accommodation in the liquidity environment, and this is probably going to continue. Lending costs will rise in a low liquidity environment and will be exacerbated by the RBI's introduction of higher risk weights. These two will reduce this activity's profitability.Regulations tighten and the unpenetrated client sector shrinks as hazards increase. It will therefore become increasingly difficult to believe that "I will acquire customers by offering X and make money by lending."

Third, there has been a substantial shift in the regulatory posture toward both differential regulation of digital financial services (see the differing rules governing digital lending compared to physical lending) and stronger supervision as expressed in several public comments. Any business strategy that relies on regulatory arbitrage is going to encounter difficulties. We have also witnessed such instances.

When taken as a whole, these seem quite dire from a fintech standpoint. But for fintechs, this could be the turning point. And the fourth and most significant force influencing this space is what propels that belief. India's macros appear more promising than they have possibly ever been. It now appears that the nation's demographic dividend, which has long promised compound growth, will materialize. According to a Standard Chartered estimate, India's per capita income is currently $2,450 and is expected to reach $4,000 by the end of this decade.The shift that many people are making from living paycheck to paycheck to buy necessities to living on the surplus and treating luxuries will transform financial services in India. There will be a significant increase in the real addressable client base. Financial services are required by this group of clients, and those who can provide them will find buyers.

Over the next ten years, we may witness the birth of a number of fintechs, all of which will be significant players providing customers with unique services. But, successful businesses will have to change a few things. Instead of unicorns that can be listed on an initial public offering (IPO) in five years, they must first concentrate on true business model innovation and work toward creating durable institutions that last decades. Second, they will need to provide services that make money. Cross-selling and lending services can be the icing on the cake, but the cake itself must stand on its own. Thirdly, they must abide by the rules in letter and spirit.It's important to keep in mind that restrictions should be viewed as features rather than defects, as one colleague put it.

Following deregulation, a few of highly influential private sector banks have emerged every ten years, including HDFC Bank, ICICI, and Axis in the 1990s, Kotak in the 2000s, and NBFCs like Bajaj Finance in the 2010s. Fintechs may start to appear in the ensuing ten years and have an equivalent influence. The best is not yet upon us.