Day: December 6, 2023

Neo banks, or startups ‘aiming to disrupt banking for millions of Indians’, have been a sort of holy grail investment in the fintech VC world. We are talking consumer neo banks, and at my last count, there are more than 20 of them that have raised nearly a billion dollars over the past five years.

That’s a lot of money, but then startups in India raised a lot of money in general over this period. The critique here, though, is that there really hasn’t been a business model other than credit that seems to be sticking.

With that said, I have somewhat of a traditionalist view of credit. It’s not a growth business but rather a risk business. I also think that millions of Indians do not need a disruptive bank. They just need a functional one. This has several cascading implications:

• Disruption typically means feature-rich. While many customers are keen to experience these features, they are unwilling to pay for them.
• Disruption as a value prop is an expensive one when it comes to acquiring customers. Two things create customer pull in financial services — being there at the time of a need and brand. Disruption as a brand value prop takes years to establish and a much shorter period to become a commodity. And being there at the time of a need means running a ton of ads and suffering a low click-through rate. In a nutshell, in financial services, disruption means high CAC.
• Unlike in the case of other startup categories, I want to bank with my mother’s bank. Banking is a serious business, and parents often significantly impact how young millennials bank. Neo banks often don’t get to play a role in this conversation.

Also Read: India and Southeast Asia’s climate tech sector set to reach US$350B by 2030

As a result, the NuBank of India will take a few more years (decades?) to build. In the meantime, the competition in the consumer credit space will continue to increase as well-funded neo-banks start to issue transaction credit instruments such as credit cards or as credit on UPI instruments.

Core tenets of transaction credit

As you read through this section, note that there is a central assumption I make. It is that for credit on UPI to succeed, most transactions need to be MDR-free. I will revisit this assumption and write a follow-up in a few months, but this is my strongly held-point of view for now.

Zero or near-zero MDR

I think the credit on UPI revolution lives and dies by this tenet, and I will try to describe it.

If a small merchant — think the small electrical shop behind my dad’s house — receives a payment on UPI, he expects to receive 100 per cent of the money in his account. If the issuer starts levying a 1.1 per cent MDR on this transaction (assuming it settles using a credit on UPI loop), the merchant starts turning off credit transactions in a heartbeat.

I actually think the RBI will start asking merchant acquirers to turn off credit on UPI acceptance on all merchant QR codes by default. And if that happens, Credit on UPI is dead on arrival.

So, how does credit on UPI work? I think for credit on UPI to succeed, the interest rate needs to be high enough so that issuers can offer an MDR-free transaction. This is not simple — an MDR-free transaction means a significant negative carry for the issuer. In the case of a credit card, the issuer is paid by the merchant in the form of an MDR for the credit-free period offered to the user.

There is a second-order effect — in the case of Credit on UPI, the revolvers must pay for the credit-free period enjoyed by the transactors. Therefore, assuming a current split of transactors and revolvers (see SBI Card; the ratio is 35–65), the interest rate on revolving needs to go up by as much as 18–24 per cent to get to credit card equivalent economics, which means an APR of 50 per cent + for the revolving user.

Rewards need to be re-thought

This brings me to the user segmentation. I believe Credit on UPI needs to be offered only to revolving customers. Adding transacting customers to bump up card spending and earn MDR does not work in this world.

Which means rewards need to be rethought. In the world of credit cards, the ground reality is that revolvers pay enough interest for some of it to be farmed back into rewards that are mostly used by the transactors. In the world of revolver-only instruments, similar rewards don’t really work. The user segment changes and rewards need to be rethought from the ground up.

This has a significant impact on user retention and on spending prioritisation for customers.

Customer engagement takes place on payment platforms

In the world of credit on UPI, user acquisition happens at two levels. First, fintechs acquire users and issue them credit instruments. Second, the payment platforms acquire users and enable them to pay at the point of purchase.

In my view, users will not use the issuer platform as their payment platform. To illustrate, I have never seen anyone open their HDFC bank app to pay at the neighbourhood store. We (predominantly) use Google Pay, PhonePe, or Paytm. In the world of Credit on UPI, the user will simply add her credit instrument to her payment app of choice and just continue her merry way.

Now, you may say that the fintechs issuing these credits on UPI instruments are not HDFC banks, but I submit that they are not PhonePe either, and I bet that winning a user from PhonePe is just not going to be easy.

Also Read: Why SEA and India would take centre stage in startup and VC world in the next decade

I contend that the battle is lost, and it’s best not to invest in trying to ensure that the user uses your app as a payment platform. Gamification and rewards tend to be very effective, but I wouldn’t count on the user opening the issuer app a few times a day.

CAC is crucial

Yes. Fintechs that cannot solve for CAC don’t make it. We saw this in BNPL, and we will see this kill many credits on UPI platforms over the next few years.

Collection muscle unclear

Yes. Fintechs that are built with collections as an afterthought don’t make it. We saw this with a host of personal loan platforms. We will see this kill many credits on UPI platforms over the next few years.

A word of caution: Debt trap

Household financial assets in India are at their lowest ever. The gross savings rate (Savings to GDP ratio) has declined at a rapid clip — from 37 per cent in 2011 to 30 per cent in 2022. Now, sure, part of this is linked to an increase in the value of real assets and investments, but it’s easy to see that spending has increased at a rapid clip, as has credit.

This shows up in household credit, which nearly doubled last year. Again, some of this goes into real estate, but I would contend that a fairly significant proportion goes towards other personal expenses, a sign of increasing aspiration for a large spending consumer segment.

Now, this rapid increase in indebtedness is not unique to India. There is an increase in leverage across the world, most notably in the US. To be fair, an increase in indebtedness is, in some ways, necessary to improve the standard of living in India.

India has always been a consumption juggernaut, and credit allows consumption to grow even faster. Simplistically, if tomorrow is going to be better, we can always grow into paying off the debt, and that remains the most likely scenario.

However, contagion across markets works in funny ways. The Indian consumption economy has been one of the most resilient across the world — not been dramatically impacted by global macroeconomic fluctuations for over a decade now. Importantly, the consumption economy looks at its best — people are spending more all around us.

However, there is a note of caution that I need to point out — a lot of this consumption is credit-fueled. How domestic credit behaves in the wake of a global credit meltdown — which looks more likely every passing day — is anybody’s guess, and we could see a temporary cycle in small-value personal loans and transaction credit.

However, the long-term story is clear as day. Retail credit penetration in India will continue to go up, and there remains a tremendous opportunity to create new, disruptive models in transaction credit.

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Singapore-based climate tech venture builder Wavemaker Impact (WMI) has hit the final close of its debut fund oversubscribed at US$60 million.

The fund, which surpassed its initial US$25 million target by 2.5 times, seeks to drive large-scale decarbonisation efforts in Southeast Asia.

The additional capital will enable the firm to expand its portfolio of companies and continue making follow-on investments in its best-performing ventures to their Series B funding rounds.

Also Read: Wavemaker Impact backs RegenX to promote regenerative farming in SEA

The firm’s latest limited partners (LPs) include the United States Development Finance Corporation (DFC), British International Investment (BII), and Triple Jump/DGGF, three leading international development finance institutions and impact investors.

Beacon Capital, Thailand KBank’s venture arm, and Autodesk Foundation, the corporate philanthropy of Autodesk, also invested in Wavemaker Impact.

To date, Wavemaker Impact has launched and invested in six companies, with another four currently in development. It is on track to finalise its 10th investment by the end of the year and is launching its first companies in India and Australia.

Its current portfolio includes Agros (a sustainable farming platform), WasteX (a distributed biochar technology company), Rize (a platform for farmers to reduce methane emissions in rice cultivation), Helios (a solar mortgage company), BumiBaru (a degraded land flipping company in Indonesia), and RegenX (a regenerative agriculture platform focusing on commodity crops like coffee and cacao).

Also Read: ‘The next generation of unicorns will be from greentech’: Wavemaker Impact’s Steve Melhuish

Marie Cheong, Founding Partner of Wavemaker Impact, commented: “There’s a paradigm shift in the investor community’s perspective, with growing belief that climate tech ventures can be profitable, high growth investments that significantly contribute to the fight against global warming. We look forward to working with all our LPs to realise this vision.”

Wavemaker Impact, backed by Wavemaker Partners, builds sustainability startups with proven entrepreneurs to reduce 10 per cent of the global carbon budget by 2035. Every company that Wavemaker Impact builds is a ‘100×100’ company, a startup with the potential to abate 100 million metric tons of carbon and be a US$100-million revenue business.

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Circulate Capital, an environmental impact investor that aims to advance circular economy for plastics in high-growth markets, today announced the final close of its Circulate Capital Ocean Fund I-B (CCOF I-B), bringing the fund’s total AUM to US$73 million and the firm’s total AUM to US$255 million.

Circulate Capital also announced a US$7 million commitment from British International Investment (BII), the UK’s development finance institution (DFI) and impact investor.

According to a press statement, this marks the firm’s fourth investment from a DFI, including the International Finance Corporation (IFC), the European Investment Bank (EIB), and Proparco, a subsidiary of the French AFD Group, with total commitments from DFIs now reaching US$32 million. These commitments are expected to help catalyse institutional investment into enterprises that develop solutions to combat plastic waste in Asia.

CCOF I-B invests in two complementary strategies aimed at tackling the plastic pollution crisis and fighting climate change:

Circulate Capital Disrupt (CCD)
Described as climate-tech investments in breakthrough innovations that reduce the need for virgin plastics and limit greenhouse gas emissions across the sustainable fashion, biotech and AI, and smart materials sectors.

Circulate Capital Recycling Supply Chains
Described growth investments that transform recycling and waste management supply chains in South and Southeast Asia (SSEA), scaling the highest-potential solutions and replicating their success.

Also Read: Wavemaker Impact debut fund makes final close at US$60M

“We’re proud to welcome BII to our prestigious list of institutional investors so we can scale our investments more quickly to address the global plastic pollution crisis and advance the circular economy,” said Rob Kaplan, CEO and Founder of Circulate Capital.

“To close our climate tech fund with the support of prominent partners including global corporations, family offices, foundations, and now four of the biggest DFIs in the world signifies that the sector is ripe for the capital it needs to achieve circularity and mitigate the negative effects of climate change.”

Kaplan said, “Crossing the US$250 million AUM threshold is an exciting measure of our success, but even more a testament to the growing appetite amongst institutional and impact investors for investments in high growth companies that are delivering both deep impact and meaningful financial returns. Thus far, our climate tech strategy has invested in four impressive enterprises at the forefront of climate tech and circular innovation, and we will continue to identify and add innovators in this space to our portfolio as well as for our flagship strategy of investing in recycling infrastructure in the SSEA region.”

Circulate Capital additionally announced that CCOF I-B has qualified for the 2X Challenge, recognising its significant commitment to women’s economic empowerment. The Fund’s nomination was sponsored by BII.

With a presence in more than 10 countries, Circulate Capital partners with global brands and financial institutions to transform supply chains at scale by delivering economic, social, and environmental value.

Also Read: Qarbotech raises funding for its nanotech solution that boosts agri productivity

Launched in 2018 by supply chain experts and leading corporations including PepsiCo, Procter & Gamble, Dow, Danone, Chanel, Unilever, The Coca-Cola Company, Chevron Phillips Chemical Company LLC, and Mondelēz International, the firm is scaling solutions across the recycling and innovative materials value chains.

Circulate Capital was founded in and focused initially on South and Southeast Asia, but the firm today also targets “untapped opportunities in high-growth markets to spark further development in the emerging circular economy.”

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Artificial Intelligence (AI) will have a way more critical impact on our future than blockchain, according to Dusan Stojanovic, Founder and Director at blockchain VC firm True Global Ventures. Therefore, regulating AI is more critical than regulating the blockchain industry.

“The success of ChatGPT and similar services has driven enormous user adoption,” he said in an interview with e27.

Also Read: True Global Ventures’s Web3-focused follow-on fund TGV4 Plus hits US$146M first close

ChatGPT now has 100 million weekly active users and nearly 1.5 billion monthly visitors. The US has the highest number (14.82 per cent) of ChatGPT users, followed by India (8.18 per cent). A quarter of companies, including SMEs, have saved roughly US$50,000 to US$70,000 using ChatGPT.

Right now, only a few players are developing and launching AI models for the masses — around 15 in the US, 11 in China, and 1-2 in other developed nations, limiting access to the mainstream.

“The AI industry needs to have a more open playfield. So, regulation is required as soon as possible, and it should be the top priority for any country, starting with the US, because AI will have a more critical impact on our future than blockchain,” he said.

In his opinion, the recent turmoil within Open AI (parent of ChatGPT), with Sam Altman being fired and reappointed, shows how difficult it is to marry research with product development. Altman’s firing/resignation looks like the strangest case since Steve Jobs was fired by the Apple board in 1985 after a power struggle with the board.

Also Read: Next blockchain unicorn will be from gaming: Dusan Stojanovic of True Global Ventures

According to True Global Ventures’s General Partner Beatrice Lion, the institutional consumer demand for exposure to Bitcoin is accelerating the need for regulation. Bitcoin will be one of the most robust use cases for blockchain technology since it is entirely decentralised, and there is nobody to make a legal claim against.

“We believe Bitcoin, the oldest use case of blockchain and decentralisation, will be among the biggest winners in 2023 and beyond. As the demand for Bitcoin increases with spot Bitcoin ETFs expected to be approved in early 2024 and the new supply of Bitcoin halves in April 2024 (Bitcoin halving occurs every four years and cuts the rate at which new Bitcoins are released in circulation by half), we are optimistic about Bitcoin price increases,” she said.

“In this respect, with all other legal battles between regulators and the industry, Bitcoin is and will be untouchable, so the limited downside risk is even more apparent now than it was at the beginning of the year. At the same time, traditional finance is taking over from pure players in terms of market share. The CME Group, which recently took the top spot on the list of the biggest bitcoin (BTC) futures exchanges of the world, replaced Binance for the first time in two years,” she elaborated.

Stojanovic believes that governments will play a crucial role in promoting investments in metaverse ecosystems to avoid being left behind. “One recent concrete example is in Saudi Arabia, where the Neom Investment Fund created a strategic partnership and signed a term sheet investing US$50 million in Animoca Brands, one of our portfolio companies. Neom will apply Metaverse and blockchain technologies to their vision of a US$500 billion mega smart city.”

Also Read: True Global Ventures injects US$10M into NFT metaverse game The Sandbox

Founded by an international group of angel investors, True Global Ventures is a distributed ledger technology (DLT) equity fund. It targets areas like legal AI, education AI, revenue AI, and code-related AI, where it sees that Generative AI has a material impact on productivity and new revenue streams. The fund covers 20 cities in North America, Europe and Asia.

True Global Ventures has invested in companies, including Animoca Brands, The Sandbox, Forge, Chromaway, Coinhouse, GCEX, Chronicled, and Dedoco.

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Southeast Asian startups raised US$226 million in investments across 26 rounds in November. The figure is about 69% less compared to October, a Tracxn report showed.

On a y-o-y basis, the drop is nearly 46%.

The investments comprise 17 seed-stage deals, eight early-stage deals, and one late-stage round.

See the infographic below for more details:

 

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