At Lightspeed, we are constantly looking for founders who are on a mission to build for India and transform laggard markets and infrastructure. We’ve known Sahil Kini and Nikhil Kumar for a few years, and they’ve often been our first calls on discussions on the financial sector in India. As we spent time with them on their vision for Setu, we were excited not just by their deep understanding of the sector but also their vision of what it should, rather, what it must become to unlock the massive potential of financial services in the country.
When it comes to financial products, India is deeply under-penetrated. Most financial products available in the country have limited reach. For instance, insurance penetration in India is about 3.69% — lowest in the world! Household income-to-debt ratio is 11%, compared to a staggering 60–120% in most other economies. Out of 220 million Indians who qualify for credit, only 70 million are credit-active. One out of 31 Indians has a credit card while an American has three credit cards on average.
There are several reasons for the current state of affairs, but chief among them are two:
Use of unscalable distribution channels:
Traditional high cost distribution channels such as DSAs, brokers etc., meant that the cost structures didn’t allow for the creation of low priced financial products. Furthermore, the channels themselves couldn’t scale beyond a point
Large entry barriers:
Large entry barriers such as licensing, compliance, strong regulation and complicated integrations with capital providers made innovation difficult
However, we noticed a few early signs of change:
A ready market with rapid adoption of digital payments
A combination of factors is disrupting the payments landscape in India. Primarily, the increase in adoption of digital instruments at merchant outlets and rapid adoption of UPI (crossed 790M transactions in March 2019) have led to an increased number of transactions going online.
Evolving regulation and incumbents
Financial inclusion has become a key objective for the Indian government and financial sector regulators like the Reserve Bank of India (RBI) and Insurance Regulatory Development of India (IRDAI). The Pradhan Mantri Jan Dhan Yojna coupled with other digital initiatives such as UPI, Bharat Interface for Money (BHIM), Bharat QR and eKYC reflect an increasingly progressive regulatory environment and have given a boost to the adoption of payments and other financial services in both business and retail segments
In the last few years, more and more banks have also partnered with startups to power UPI, wallets, loans and other financial products. Banks have also been adopting technology to keep up with the evolving tech landscape and are increasingly willing to allow technology companies to leverage their core financial services to build new products and reach broader audiences.
Large scale distribution platforms who want to build financial products
Platforms with large customer bases such as Ola, Flipkart and Amazon are offering financial services to keep their users and partners engaged, and shore up their bottom lines. Ola launched the Ola Money wallet for better rider experience. Ola also launched a micro ride insurance solution with Acko. Most distribution platforms are now looking into designing tailored financial products for their users using proprietary data
We believe that these tailwinds will lead to a flurry of innovation in sachetized and tailored financial products that will be distributed online to hit ‘internet scale’. However, due to heavy regulations, most of this innovation will continue to require partnering with banks, insurance companies and other incumbents. Since most incumbents have long approval processes and long development cycles, today they choose to work with fewer (and often larger) partners over several young startups.
Sahil and Nikhil recognize this problem and are building the bridge (Setu) to supercharge financial innovation. Setu works with banks and other incumbents to abstract out their internal processes by creating a suite of APIs to expose core financial services. Startups can pick these APIs off the shelf and mix and match, often with little integration or regulatory hoops to jump through, to create unique and powerful financial solutions for their users.
When we met the team, and heard their vision for Setu, we knew right away that there was no better team to go after this mammoth task. They have the vision to imagine what India could be and the deep passion it will take to build out the product. With Sahil’s background in investing in the financial sector as a VC at Aspada and Nikhil’s core experience as a fellow at iSpirt, the team brought to the table, an extremely deep understanding of building for the Indian user. We are incredibly excited to partner with this dynamic duo and to help contribute to India’s financial inclusion journey! Please join me in cheering them on….
PS: Setu is hiring. Drop me a note at harsha@lsip.com if you are excited about their vision… For more details about what Setu is building, visit their site here and their blog here…
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