Edition #19–6th Feb, 2021 | Revenue Based Finance
Hi Insiders, Osborne here.
Welcome to the Nineteenth edition of Fintech Inside. Fintech Inside is the front page of Fintech in emerging markets.
Format updates: 1 Bad, 1 Good. Bad: I’ve discontinued coverage of European Fintech. If you’d like your EU Fintech Fix-subscribe to Fintech Across the Pond or Sifted’s (part of FT) Fintech newsletter. Good: By popular demand, I’ve added a “Featured Fintechs” section which will attempt to feature some unique Fintechs in India or Globally. Submit your Fintech startup here.
This week I have a guest post covering the emergence of Revenue Based Finance and what it means in the Indian context. News was dominated by the budget announcements in India. SEBI released its revised framework for Innovation framework and lastly Global Fintech’s are entering India!
New: Anand Datta (Nexus Ventures), Rahul Sanghi (VISA) and I have launched a Fintech Huddle session on Clubhouse (iOS only). We hold conversations with the Indian Fintech community around founder journeys, industry views, product management, big news updates and more. These sessions happen every Thursday at 7PM on Clubhouse. I have 3 Clubhouse invites to giveaway, please email me to know more. Join the discussion!
In other news: Royal Bank of Canada (RBC) launched PayPlan — its BNPL product. Social trading platform, Public, released a note on its revenue model. India’s MeitY has invited suggestions on its Draft National Strategy on Blockchain (h/t Sandeep). Lastly, Balaji published his informative opinion on why India should buy Bitcoin.
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🤔 One Big Thought
Emergence of Revenue Based Financing
This is a guest post authored by Satish Kataria (Email), Founder of Aavejak.com, a revenue based finance platform
The one thing that binds all founders is the requirement for capital. Every founder wants the desired amount of capital at the lowest cost. At the other end of the spectrum are investors looking to generate returns by investing in upcoming business ideas. Several funding models have emerged over various phases of our history and markets. While last few years have witnessed the dominance of Venture Capital and Private Equity funding, the changing business dynamics — especially after pandemic, require new financing models. One such financing model that is witnessing increased adoption and balances risks at both ends for Investor and startups — is the Revenue Based Funding model.
What is Revenue Based Finance (RBF)? The RBF platform underwrites a brand/business based on digital data streams available and automatically sourced from various sources. If approved, the platform will disburse the loan amount. Collections of the loan amount happens daily or monthly and at a pre-agreed percentage of the revenues over a pre-agreed tenor. This collection continues till the RBF platform recoups a certain multiple on their original investment amount. Essentially, RBF is a hybrid of equity-only funding and debt-based funding models.
Under equity funding, when raising money, founders sell an ownership stake in their company. Investors are not guaranteed any returns. The only returns they get is an appreciation in their equity valuation.
Under debt-based funding, founders get a loan from lenders. Lenders expect repayment of their full amount (principal) plus interest. Founders need to pay interest payments, a fixed sum at a pre-decided interest rate, regularly to the lenders. Interest payments stop once the principal amount has been paid off.
Those familiar with the popular show “Shark Tank” must have come across the famous “royalty deals,” which is one form of revenue-based funding. However, unlike royalties, which go on infinitely, revenue-based funding comes for a fixed term of 3 to 5 years.
How is this model of financing beneficial to Founders? Revenue-based funding offers a host of advantages to founders.
- No dilution of ownership: In revenue-based financing, the platform does not take any direct ownership in the business.
- No fixed commitment: Businesses go through cyclicality, and not all months/quarters are the same. In debt-based funding, the business is obligated to make interest payments even if they do not have any sales. However, in revenue-based funding, the payments to investors are linked to revenues.
- Easier to raise capital: It’s tough for a founder to raise equity or debt in the traditional sense. With RBF, a founder needs to integrate their digital data streams (payment gateways, ad streams, inventory platforms and others). Underwriting is done instantly.
Are there RBF platforms in India? India has seen a number of Revenue Based Funding platforms come up. So far, they can be categorised to fall under following three categories:
- Fixed Fees & RBF: These platforms essentially support D2C brands, consumer-tech, subscription-driven businesses to get funding support towards their marketing and working capital needs by charging a flat fixed fees on the funding and return through revenues shares. Tenors are usually 12–24 months. Examples include Klub, GetVantage, Velocity etc.
- AIF Based platforms: Taking inspiration from some Silicon Valley funds following RBF model — India also witnessed launch of its first AIF Cat-2 Fund which would be supporting mature startups through RBF i.e. N+1 Capital
- Marketplace Models: This platform endeavors to connect mature startups and SMEs with investors & NBFCs. In here, the investment size is relatively larger and investment holding period is longer. Example: Aavejak.
Revenue-based funding is a unique, emerging source of financing for small and medium businesses. It is comparatively easier to get revenue-based funding against finding equity investors or getting bank loan. It is also an attractive option for investors who can be assured of fixed repayments while safeguarding their capital. Overall, it is a win-win method for both founders and investors.
Have something to share about personal finance? Are you a founder in this space? Keen to talk to you — email me here or schedule a meeting here.
💼 Fintech’s Hiring
- Sheroes Money, a neo banking platform for women, is hiring a Chief Product Officer and a Chief Technology Officer.
- BimaPe, an Insurtech platform on a mission to simplify insurance for users, is hiring for several Engineering and Product roles. Check out the roles here.
If you’re a Fintech who’s hiring I’d like to help. Write to me and I’ll put your requirement here.
3️⃣ Fintech Top Three
1️⃣ Coverage of India’s Budget FY2022 and implication for Fintech
This week the Indian government announced its Budget for the country for FY2022. In the Budget, the announcements that will have some impact for India’s financial services sector are: 1. Digital Payments incentivsation fund of USD 200 mn (details of allocation are yet to be announced). 2. FDI in Insurance increased from 49% to 74%. 3. SEBI was notified as a regulator for Gold exchange. 4. Government will facilitate a Fintech Hub at GIFT city 5. Announced setting up a bad bank to take on bad loans from Banks.
Takeaway: To me, these announcements will not have any material impact (good or bad) on Fintechs. Some of them are generally beneficial for the financial services industry — which is great. For digital payments, this government has done all in its power to incentivise digital payments. The details of this USD 200 mn allocation will be important. As Deepak Shenoy said, and I agree with, instituting Bad Banks will end up having Banks categorise every loan as NPA to clean its books. Lastly, the insurance FDI increase is great for the Insurance industry and hopefully it will increase insurance penetration in the country, but Fintech’s have little to benefit here.
2️⃣ SEBI released its revised framework for Innovation Sandbox
SEBI (India’s securities regulator) released its revised framework for the Innovation Sandbox. The main updates to the sandbox framework are 1. allowing individuals to participate in the sandbox, 2. It created a graded criteria to enter the sandbox, 3. Participants will not be able enforce IPR for their innovations.
Takeaway: This framework is an update the the one released in May, 2019. Allowing individuals in this innovation sandbox will be quite interesting to track. Through this innovation sandbox, SEBI will give eligible participants access to anonymised, historical market data — stocks, depository and mutual fund transactions. I’m keen to see how SEBI will treat innovations for alternative investment products, new business models etc. RBI in its innovation framework focused solely on Payments and innovation. SEBI has not taken this sector-focused approach and is keen to just see the whole gamut of innovations.
Will social trading come out of this innovation sandbox? Doubt it. I think SEBI will primarily look to focus on innovations that increase the investing audience, make products simple to understand for the masses or help educate consumers about savings and investments.
3️⃣ Revolut is launching remittance product in India
UK-based challenger bank Revolut is launching its remittance service in India later this year. Revolut’s CEO said they are in touch with RBI, local banks and Fintechs to launch the product soon. The remittance product will allow payments to and from India and will be available at no cost.
Takeaway: It’s amazing to see global fintech’s targetting India in a serious way. This week it was Revolut, last week Tide (UK-based SME finance platform) announced its plans to launch in India with an Indian as CEO. Stripe has been in the country for 3+ years now, but has not been able to find its feet yet. There are several more in the works. All this, while PayPal announced this week that it is closing down its domestic payments business in India.
I’m just glad these global Fintech’s are willing to deal with Indian regulations and bureaucracy to focus on the largest open-market consumer base in the world. I also feel that Indian Fintech’s have no reason to fret just yet, Indian Fintech’s have a serious upperhand. Lastly, I feel most of these Global Fintech’s will most likely partner with Indian Fintech’s than compete with us. So I say, let ’em in!
🚀 Featured Fintechs
Featuring 3 global Fintech’s weekly that have a unique business model, unique product or have newly launched.
- Launched publicly this week, IndiaGold is a gold backed open credit network. It is founded by Deepak Abbot and ex-Paytm executives.
- IndiaGold offers its users ways to monetise their gold assets via loans, lockers, insurance and other products.
- India has 22K-25K tons of gold reserves, 82% of which is held in households and could be valued at USD 1 tn.
- Launched in beta (Android only) this week, SaveMo is a personal finance platform. It is founded by Gopikrishnan, Gokul and George (ex-Capital Float)
- SaveMo intends to simplify savings and investments for users and provides a singular dashboard view of expenses across all bank accounts and cards
- iBanFirst: (Belgium, Europe)
- iBanFirst is a global remittance payment gateway for businesses.
- Recently it launched a product that provides a “Tracker” for B2B international payments, similar to the “Tracker” you see when you order something on Ecommerce.
- The product will offer live updates on the payment movement as well as insights on delays if any.
Let’s get your startup featured here. Submit your Fintech startup
📰 Market Updates:
- FINTECH’s: UK-based Revolut is entering India, expects to launch Remittance service. UPI records 2.3 Bn transactions worth USD 58 bn in Jan-2021. Justdial to launch B2B sellers platform JD Mart. PhonePe allots ESOP’s worth INR 1,500 cr (USD 200 mn) to all 2,200 employees.
Khatabook claims to have recorded USD 100 bn in value of transactions. Khatabook reported USD 17 mn losses with zero revenues in FY2020. Supreme Court issued formal notices to WhatsApp, Facebook in UPI data protection case. RBI report claims 342 Firms offer crypto services in India.
PayPal is shutting down its domestic payments business in India, at a time when its global active user base increased to 377 mn
- TRADITIONAL BANKING: Link to all Budget 2021 Updates for startups. SEBI assigned new responsibility as Gold Spot Exchange regulator. Insurance stocks rose 12% after announcement of FDI cap increase.
Bank credit grew 6.36% to USD 1.43 tn, while deposits increased by 11.41% to USD 1.98 tn in the fortnight ended January 15. Asian Development Bank in talks to invest INR 1,000 Cr (USD 135 mn) to set up a Fintech Hub at GIFT City.
Indian Banks wrote off INR 62,000 cr (USD 8.4 bn) bad loans of top 100 wilful defaulters as of 20th Mar-21. Bombay Stock Exchange’s market cap crossed the INR 200 tn (USD 2.7 tn).
Financial Services Advisor says it will transfer Rs 2.2 tn (USD 29.7 bn) NPAs to ‘bad bank’. SBI YONO claimed 32 mn users and disbursed personal loans of USD 2 bn to 1 mn borrowers from Apr-Dec-2020.
📝 Regulatory Updates:
- RBI (Central Bank): Canceled the banking license of a regional bank in Maharashtra. Released data on Sectoral Deployment of Bank Credit — December 2020. Appointed an external firm to audit HDFC Bank’s IT infra in view of service outages.
Brought all deposit taking NBFCs & non deposit NBFCs and also urban co-operative banks (UCBs) under a risk based internal audit (RBIA) framework. Will provide access to retail investors to directly invest in Government Securities — called Retail Direct. Proposed to provide NBFC’s with funds from Banks under a on tap TLTRO scheme (WTF is TLTRO?)
-SEBI (securities): Released a revised Framework for Innovation Sandbox.
🚀 Product Launches:
IndiaGold launched its gold monetisation platform. epiFi launched its neo banking platform Fi, in partnership with Federal Bank for Indians. Bajaj Finance increased its Fixed Deposit rates to 7%. SBI Card launched its metal credit card (by invitation only)
💰 Funding Announcements:
Announcements: Vested (US stock investing). OneCard (credit card program)
📰 Market Updates:
Validus partnered with proptech startup Really Singapore to offer collateral-free loans for SMEs. Sequoia China partnered with a Chinese insurance company to launch a Health focused fund.
Bank Syariah Indonesia, a merger of sharia subsidiaries of three largest Banks in Indonesia, launched this week. MoneyGram partnered with VISA to roll out real-time P2P payments in Vietnam.
KPMG nominated virtual exchange HKVAX, as 2020 Fintech Leader in China. Sea Ltd. stock rose more than 500% in 2020.
Tonik, neobank in the Philippines, struck a partnership with FinScore, an alternative credit scoring company. CXA Group, Asian Insurtech, is selling its insurance brokerage business to focus on SaaS only.
📝 Regulatory Updates:
Malaysian regulators warn investors off social media chat rooms. MAS (Singapore) is considering regulating BNPL schemes amidst concern of rising consumer debt. IMF tells Korea to lift longstanding short-selling ban, Korea to lift ban by May.
SWIFT set up joint venture with China’s central bank ahead of digital yuan launch. Chinese regulators and Ant Group agree on restructuring plan for the company.
💰 Funding Announcements:
Announcements: Global Sadaqah (Malaysia). Furucombo (Taiwan). BukuWarung (Indonesia). PasarPolis (Indonesia). GajiGesa (Indonesia). Qapita (Singapore).
👋🏾 That’s all Folks
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