Shift towards Profitability has Set B2B Fintech Apart from others & will be the Key Factor for Future Investments: Digitap.ai

In a riveting conversation, Amit Singh explores the historical evolution of B2B Fintech in India and the transformative journey it has undertaken. Nageen Kommu, Founder and CEO, Digitap.ai, shares profound insights into the challenges and growth opportunities that have shaped this dynamic sector. From the early days when digital lending was met with skepticism to the burgeoning landscape of data-driven solutions, the story of B2B Fintech in India is one of innovation and adaptation. In this interview, we delve into the past, present, and promising future of B2B Fintech, as Nageen Kommu reveals the profound impact of his company, Digitap.ai, in streamlining financial operations and delivering cost savings to its clients.

Amit Singh: Can you provide insights into the historical evolution of B2B Fintech in India and the challenges businesses faced before its rise?

Nageen Kommu: To understand how B2B Fintech has evolved in India, we need to step back a bit and consider the broader context of the Fintech industry. The majority of clients in the B2B Fintech space serve end-customers, primarily in the B2C Fintech domain. Now, if we rewind to a period before 2015-16, we find a different landscape. Back then, Fintech was still in its early stages of evolution, and the primary focus was on payments. Digital lending was nascent, and people were skeptical about the concept of lending without physical verification. The idea of digital lending was met with doubt; people were not comfortable with lending without face-to-face interaction. Fast forward to 2023, and the scenario has dramatically shifted. Most people are now open to digital lending and don’t necessarily need to meet borrowers in person. But that wasn’t the case in 2015.

At that time, most financial processes, including lending, were still predominantly offline. Even though internet banking existed, it was limited to desktops and laptops, with smartphone penetration not as high. Apps were not as popular, and digital solutions were only beginning to gain traction. The financial sector, especially in the B2B domain, was still heavily reliant on offline operations. Few B2B Fintech companies were active, mainly focusing on payment solutions that acted as intermediaries between banks and clients.

The landscape changed post-2015-16 when companies started to digitize lending processes. This period marked a significant boom in B2B Fintech. These companies, especially digital lenders, relied on third-party solutions to streamline the lending process. They outsourced functions such as KYC, data verification, and onboarding to specialized B2B Fintech providers. This marked the genesis of B2B Fintech as a distinct industry. Alongside payment solutions, these companies realized the growing need for digital onboarding and validation services, given the constraints of in-person interactions. The shift towards digital onboarding solutions allowed financial institutions to scale rapidly. Traditional branch models could onboard only a limited number of customers, but digital onboarding scaled this capacity substantially.

However, as digital onboarding became commoditized and competitive, providers began to look for ways to differentiate themselves. This led to a shift towards data-oriented solutions. B2B Fintech companies started to explore data enrichment products to obtain more information about existing customers. They aimed to cross-sell more effectively by understanding customers’ needs better, especially those who didn’t initially accept certain financial products. At the same time, they began focusing on new customers entering their platforms, aiming to offer the right products at the right time.

Today, B2B Fintech is evolving towards becoming more than just onboarding specialists. These companies are striving to be data-driven and analytical. The future holds the promise of advanced data solutions and analytics that help financial institutions make more informed decisions, cross-sell effectively, and enhance customer experiences.

In terms of challenges, historically, two major obstacles stand out. First, the COVID-19 pandemic posed significant challenges for B2B Fintech companies. During this period, many businesses stopped their operations, impacting B2B Fintech companies that relied on serving these clients. The second challenge is the competitive landscape. With numerous players entering the market, price pressures have mounted. Smaller companies have intensified the competition, and some established players are finding it difficult to sustain against these newcomers. The industry is now grappling with increased competition and pricing pressures, which is forcing some players to reconsider their roles in the B2B Fintech space.

Amit: What are the current investment trends in the B2B Fintech space, and how has the demand for B2B Fintechs grown over the last few years?

Nageen: If we look at the current investment landscape, particularly over the past year, it’s evident that the entire startup ecosystem has faced a challenging investment climate. This challenge isn’t confined to B2B Fintech or Fintech alone; it extends across the board, impacting sectors like edutech and health tech.

However, when it comes to the B2B Fintech space, there’s a distinct difference. Most companies in this sector have shown a unique ability to demonstrate profitability. Historically, many of these companies operated at a loss for extended periods, but this dynamic has shifted, excluding payment gateways.

A considerable number of B2B Fintech companies, especially those focused on software-as-a-service (SaaS) and AI-based solutions, have showcased their ability to not only generate revenue but also to turn a profit. This shift towards profitability has set B2B Fintech apart from other sectors and might be the key factor influencing future investments.

Looking at trends in revenue, the past couple of years have been particularly positive for B2B Fintech companies. After the second wave of the pandemic subsided in 2021, there was a significant surge in digital onboarding and data solutions adoption. The demand side, especially consumers of banks and financial institutions, became more digitally savvy and began to expect digital alternatives. This surge has resulted in impressive growth for B2B Fintech companies, often at a minimum rate of 2x year-on-year.

What’s striking is that these companies achieved this growth while working towards profitability, effectively reducing negative margins year-on-year. SaaS companies have been at the forefront, setting an example for others to follow in terms of achieving profitability. This trend is expected to weigh heavily on future investments.

However, there’s a potential hurdle in the investment landscape for these SaaS companies. Their remarkable revenue and profitability might lead investors to question whether they actually need additional funds. Investors might question how to value these companies and what investment they truly require. These conversations could arise.

Nonetheless, it’s crucial to consider the long-term perspective. When B2B Fintech companies eventually look toward IPOs or acquisitions, the returns at exit may be extraordinarily high, especially when compared to their initial valuation, setting the stage for exciting opportunities in the future.

Amit: How does Digitap operate concerning financial analytics and reporting? How can enterprises benefit from cost savings by adopting Fintech solutions from Digitap?

Nageen: Our journey parallels the evolution of the industry itself. Initially, we focused on providing onboarding solutions to our clients, helping them digitize their customer onboarding processes. This transformation enabled them to onboard customers at an unprecedented scale. For example, they could go from onboarding 10,000 customers a month to 100,000 or even 200,000 customers a month. This was a significant shift from their traditional business models.

However, scaling comes with new challenges, primarily related to risk management and fraud detection. When you’re onboarding a few customers, dealing with issues like fraud, identity theft, and risk is one thing. However, handling these challenges at a scale of hundreds of thousands of customers is an entirely different endeavor. This realization led us to develop solutions that extended beyond onboarding.

Over the past year and a half, we’ve placed a significant focus on data. Once we help our clients identify and onboard the right customers, the question becomes, “How can we serve these customers better?” This applies not only to their existing customer base but also to potential new customers. What additional data can we gather about these customers to enhance our client’s ability to serve them?

For instance, a customer might come to your platform to apply for a loan. However, our data might reveal that this customer’s insurance policy is expiring soon. By knowing this, our client can offer them suitable insurance policies. It’s about capturing the customer’s needs in real time during their interaction with the platform. Fintech companies are different from social media platforms where users frequently return. Fintech users might not access the app or platform as regularly. Therefore, it’s crucial to identify the customer’s needs when they are on the platform, so you can offer them the right products.

We’re actively developing data enrichment solutions to fulfill this vision. However, it’s essential to highlight that we are extremely cautious and meticulous in our data practices. We only use publicly available data that customers themselves have uploaded to the public domain, or we collect data with explicit consent. This consent is either provided through methods like OTPs or other secure means. We align with the principle of data ethics and privacy.

Our analysis revolves around how our clients can serve their customers better based on the data we provide. This approach defines our business model and the vision we have for our company – enabling better decision-making and enhancing customer experiences through enriched data.

Amit: What cost savings and operational streamlining has Digitap delivered to its clients? Can you provide some specific data to illustrate these benefits?

Nageen: Certainly, let me break down the cost savings and operational improvements we’ve delivered to our clients, backed by some figures.

• Scale and Revenue Growth:With our onboarding solutions, our clients achieved significant cost savings and revenue growth. To put it in perspective, if a client was initially catering to just 10,000 customers a month, our solutions enabled them to scale to 100,000 or even 1 million customers a month. While this might not translate directly to a 10x increase in revenue, it resulted in substantial revenue growth. On average, our clients have seen a remarkable 5 to 8 times growth in revenue. This transformation alone has been a game-changer for them.
• Risk Management and NPA Reduction:Our risk management and data management solutions have proven invaluable to lending clients. We’ve helped cut down on Non-Performing Assets (NPAs) significantly. Some clients have reduced their NPA figures from double digits to single digits. In fact, using our scoring models, a few clients experienced a remarkable 1-2 percentage points reduction in NPAs. To illustrate, if a company with a Rs 10 crore business was losing 8% of that to NPAs, reducing it to 6% directly adds Rs 20 lakhs to their bottom line. These are substantial financial gains achieved solely through data-driven NPA reduction.
• Scoring Models and Revenue Growth:In addition to NPA reduction, our scoring models have been instrumental in increasing revenue. We’ve seen clients achieve revenue growth ranging from 5x to 8x using our onboarding solutions. The ability to make data-backed decisions, especially during the onboarding process, has been a financial performance game-changer.

Our ongoing focus is to help our clients cross-sell and upsell more effectively while further decreasing NPAs through advanced data enrichment and analytics. By providing additional data and predictive insights, we aim to continue improving the financial performance and operational efficiency of our clients.

Amit: What are the most promising growth opportunities you see, and what’s your outlook for the B2B Fintech space over the next three to five years?

Nageen: The B2B Fintech space holds tremendous promise, and my outlook for the next three to five years is quite optimistic. Several factors are converging to drive growth and innovation in this sector.

• Government Support:Government policies have evolved to support digitization in the financial sector. India, for instance, has taken the lead in adopting innovative payment instruments, setting an example for the world. This kind of government encouragement fosters innovation and digital transformation in Fintech.
• Digital Transformation and Automation:B2B Fintech companies are now focusing on comprehensive digitization and automation, not just in customer onboarding and payment processing but in data availability as well. The advent of account aggregator networks has made it easier to access digital data, enabling more extensive automation. This is particularly important for reaching customers in rural or remote areas.
• Data-Driven Insights:The future of B2B Fintech lies in data. Companies that can harness data effectively and derive actionable insights from it will thrive. The ability to analyze and interpret data is a key differentiator. As financial institutions expand their focus from the top 100 million customers to the next 400 million, data availability and analysis will play a pivotal role.
• Global Expansion:B2B Fintech companies, especially those in India, have opportunities to expand internationally. Even in well-developed markets like the UK and the US, there is room for improvement in terms of payment systems and digitization. Indian Fintech companies can leverage their expertise to offer innovative solutions in these markets.

In summary, the B2B Fintech space is at the cusp of significant growth. The continued support of governments, the relentless drive toward digitization and automation, data-driven insights, and international expansion opportunities position this sector for a bright future over the next three to five years.