The fintech sector, particularly those operating in the payments space, has experienced a dramatic reduction in funding. According to a recent PwC report, overall fundraising for these companies has plummeted by about 99% between 2021 and 2023, dropping from $2.3 billion to a mere $85 million.
This significant decline is attributed to several factors. Many companies have shifted their business models from payments to lending and other sectors due to the lower sustainability of the payments business. Additionally, the high operational costs and limited monetization options in the payments domain have caused the valuations of payment startups to decrease, raising concerns among investors.
Concerns about the zero merchant discount rate (MDR) on digital transactions, such as Unified Payments Interface (UPI) payments, have also contributed to the funding decline. In response, the National Payments Corporation of India (NPCI) introduced an interchange fee on prepaid payment instruments (PPI)-based merchant transactions through UPI. This fee, up to 1.1%, is applied when the transaction value exceeds Rs 2,000, depending on the type of merchant.
The NPCI has clarified that this fee only applies to PPI-based merchant transactions on UPI, while basic UPI transactions remain free for merchants and users. Most UPI transactions continue to be free, but NPCI chief Dilip Asbe suggested that large merchants might incur a ‘reasonable’ fee on related transactions within the next three years.
Despite these challenges, the payments sector is witnessing the emergence of new business segments, including cross-border payments and central bank digital currency (CBDC). Efforts are being made to integrate UPI with payment systems of other countries such as Sri Lanka, Mauritius, France, the UAE, Bhutan, and Nepal.
However, the segment continues to face hurdles, including an increase in fraud, limited customer awareness, and increased regulatory compliance. The number of frauds in the banking sector has increased more than fourfold over the past five years, reaching 36,075 cases in FY24. Although the total amount involved has decreased significantly to about Rs 14,000 crore in FY24 from over Rs 1.85 trillion in FY20, most of these frauds have occurred through digital payments (card or internet).
In terms of value, loan portfolio frauds have seen a gradual decline, dropping to Rs 11,772 crore in FY24 from Rs 1.81 trillion in FY20. Despite the challenges, the fintech sector remains dynamic, with ongoing initiatives to adapt and integrate new payment systems globally.
