Mr. Krishnan ASV, Institutional Research Analyst, HDFC Securities & Mr. Madhukar Ladha, Institutional Research Analyst, HDFC Securities
As policymakers put together a series of guardrails for the financial services industry (UPI, account aggregators, and OCEN), we identify the key megatrends that are likely to emerge and/or accelerate to shape "India's Decade", going forth. These megatrends are anchored in (a) accelerated micro-merchant adoption of digital payments on the back of D2C commerce (unit economics turning positive as breakeven thresholds shrink by >70%); and (b) 'sachetisation' and re-bundling of financial solutions (proliferation of "checkout financing"). A combination of these megatrends is likely to reflect in (a) new growth avenues (thin-file or NTC customers), (b) new asset classes (Buy Now Pay Later), and (c) consequent changes to market microstructures across lenders, brokers, asset managers and insurers alike.
The accelerating generational shift: The generational shift within the Indian populace is beginning to accelerate, altering income, spending and savings patterns. As digital natives, the millennials will contribute to increasing digital adoption and rising penetration of financial services beyond deposits, facilitating a sharper migration in deposit market share to private banks.
From savings to investment products: The demographic shift will also drive a more secular shift in savings patterns, thereby driving higher penetration across financial products beyond deposits. While the expansion in the total addressable market (TAM) could offer a significant canvas for growth, the higher competitive intensity from new-age FinTech companies could change the market micro-structure, forcing consolidation and a "long-tail" shakeout in investment and capital-market businesses.
Merchant adoption turbocharged: A lower regulatory cost (MDR) and a pandemic-induced push towards contactless payments, especially with the proliferation of low-cost QR-codes, has turbocharged micro-merchant adoption of digital payments. With FinTechs and Big Tech investing heavily in this space, the merchant ecosystem is approaching a critical mass, reflecting in improving unit economics (30-50% reduction in breakeven time), which offers FinTechs a "right-to-win" and a valuable cash cow to top up their payments offering with checkout financing solutions such as Buy Now Pay Later that are emerging as disruptors to conventional credit cards.
The re-bundling of financial services: The first generation of FinTechs built its business models around unbundling of financial services, one traditional function at a time, such as payments. Even as they continue to unbundle, entities that can successfully re-bundle services are likely to emerge as winners. We see this manifest in higher competitive intensity for deposits, the emergence of "thin-file" customers as a new growth avenue and potential disruption of last-mile FIs. We identify ICICI Bank and Kotak Mahindra Bank as early winners in the "re-bundling" journey.
The elusive capex cycle: A sustained uptick in the post-lockdown economic activity and a benign interest rate-liquidity environment has the potential to spur the next round of corporate capex, led by CPSUs. We expect larger, well-capitalised private sector banks to disproportionately participate in the capex financing cycle. Forced mortality (IBC) and a deleveraging drive have shrunk most capital-intensive sectors to 2- or 3-player markets, with implications for concentration risk residing on banks' wholesale portfolios as they continue to raise their fund-based exposure to market leaders.