Embedded finance isn’t an entirely new concept. However, its growth to the forefront in India is only happening within the last couple of years. There is a desire for everyone to become an fintech’.
This led to the emergence of intermediaries in the market that joined the ropes between platforms and banks in order to enable the latter to embed financial services on their apps and websites in addition to their core product.
The most significant market player in terms of valuation M2P Fintech actually got its first advantage as a mover when it began as a provider of payment stacks in the year 2014, a time in which the term “embedded finance was not as common within the Indian fintech dictionary.
It began by forming partnerships with NBFCs and banks in order to assist them in launching their own payment options for businesses that want to provide digital payment solutions through their respective platforms. An example of this is Zomato offers different payment options when you check out.
In 2017 the API infrastructure company had managed to enhance its payment platform, which includes credit, debt travelcard, prepaid UPI, QR codes, AadhaarPay and NETC toll payment, as well as the introduction of the credit stack (BNPL) and a core banking infrastructure suites to traditional bank.
The client list of the company includes the most prestigious brands in fintech. both private or public bank, as well tech players.
Of the many startups that made it into the market, M2P today has a valuation of over $600 million with more than 300 banks and more than 600 fintech customers around the world. Its 40.58 crore in 40.58 crore in revenue (FY21) spread across 15 countries, as well as an over $100 million cash-flow from investors such as Tiger Global, Beenext, DMI Group, Better Capital, Insight Partners and MUFG Innovation partners.
It is now an enormous share of the ever-growing pie of embedded finance.
After the pandemic, however the competition for becoming an API infrastructure provider has grown more aggressive, as is the company’s plan to expand and maintain its market share.
Through the decades, M2P was always situated in the middle of fintech and business banks. However, M2P hit an pause, re-evaluated its growth strategy, and placed the spotlight on traditional banks , and “fulfilling their dreams” first.
While the relationship of traditional bank and fintech are evident however, fintech is now upping its game by launching Neobanks (in collaboration with banks) offering almost everything banks do in traditional banking and perhaps more.
Traditional banks have been sucked into their own FOLO (fear of being not being).
The Chief Executive Officer (CEO) and Co-Founder Madhusudanan R puts things in the right perspective.
This has led to the concept of “digital banks’.
They are an expansion of the traditional banking institutions (for instance, Kotak Mahindra Bank’s “Kotak811 Digital Bank’) whereas neobanks are solely online and do not have a physical branches.
The new “aspiration” of becoming an online bank has created an important lead to M2P. It is putting a more intense concentration on enhancing its banks’ core banking infrastructure infrastructure for banks, allowing banks to establish their digital banksat on the same level with fintechs in addition to its leading position in the lending and paymentstack for all other stake holders.
“We discovered that we are very much poised to draw the lessons we’ve learned from a product that other fintechs are offering , and provide banks with a viable option to create their own offerings. That’s the path we’ve traveled through the past few several years,”” the CEO says.
This is the acquisition aspect of M2P over the last 10 months. The five deals are geared towards this goal along with new product features like engagement and collections instruments for banks that do more than just enhance the value of M2P but also broaden its revenue streams.
The focus is on the banks’ core banking stack
We must first understand why banks are purchasing technology. It is broken down into three components: System of Execution, which includes the bank’s core financial technology (CBS) or an Loan Management System (LMS); System of Exploration (the payment stack that is used for companies) and the System of Engagement (products on top of the core banking system, such as rewards).
Since its beginning the main service offered by M2P to banks has been exploration, i.e providing the payment stack. Most of its revenues come from this and is followed by its main lending infrastructure and banking infra. The company has not made any comments on its revenue share.
It’s not a hidden fact that the old or CBS is long overdue for an upgrade, and that includes the move to cloud computing.
To delve deeper into this offer, M2P acquired BSG ITSoft and Finflux. While BSG enhances M2P’s banking infrastructure play, Finflux, which offers the LMF platform, is the next step towards creating more secure and compliant bank-specific digital lending platform (including BNPL), along as tapping into new areas, such as mortgage finance for housing.
In the 10 banks that are private, 8 are currently in the process of launching their own version of the BNPL product using M2P’s platform.
Furthermore, BSG primarily focused on cooperative banks, which is a bigger segment of M2P that can be tapped since a new set of clients are added to the list of customers. In addition to the fact that it is an integral CBS payment stack it can also help M2P develop capabilities in new uses cases involving trade finance and blockchain and speed up their integration into mainstream banking.
In addition, the company has been keeping tabs on the digital lending rules of RBI as well as account aggregate (AA) possibility.
Finflux which comes with an AA licence enhances the features of M2P that will be “working closely with the startup to figure out how it can leverage the AA licence from an embedded finance standpoint, especially lending”.
He goes on to say, “And we can actually use that learning to go back to banks and say, can we build better products around home loan?”
The third acquisition by Wizi which is a credit card focused startup, falls within the banks’ exploration segment. This acquisition is a boost to the M2P BNPL platform for banks which will be able source new customers.
In actuality, Wizi was actually a consumer-facing B2C platform that M2P was able to convert to the B2B bank-facing company.
“Most are our BNPL stacks are digital from a source perspective. Wizi’s platform being used in this regard. The strategy seems to be being successful,” he says.
M2P’s acquisition by Origa the platform for loan recovery that is a SaaS service, along with Syntizen that offers electronic solutions for customer onboarding could be described by some as “add-ons” offered by M2P to banks. The former provides more underwriting options, and the latter eliminates the burden of onboarding customers for banks.
In a sense, M2P wants to be the bank’s single-stop shop.
“There are elements that go together and make the system effective. The deals were executed as we were working on other parts and were in sync with one with each other,” Madhu says.
The five deals all involved made up of stock and cash.
M2P has raised two new capital rounds in 2021 (the most well-known was C1 and Series C of $191 million) with the help of Tiger Global and Insight Partners to finance the transactions.
Fintech is a SaaS play
The main goal of M2P is to create an “plug-and-play” SaaS productfor banks that will enable them to become digital within a maximum of 90 days as opposed to the normal cycle of 12 months.
“Instead of contacting several different tech companies for the development of several products, why not put everything together into a single platform, like a bank-in-a box? There’s a lot to be done in this regard and we’re identifying areas to create or explore the possibility of acquisitions” The founder of the company says.
Tapping other segments embedded in the same
Other possibilities in the area of embedded finance such as integrated insurance and investment are being explored and are being closely monitored by the M2P team.
The company has adopted an “first partner, then acquisition”approach to determine whether these segments can add benefits to the company’s existing operations.
The value of deals in dollars and future acquisitions
At present, M2P fintech claims to be among the top API infrastructure service providers in India. The company has more than $100 million in revenues, out of 20% of which 20% will be from acquired companies.
Around 15 15%of the earnings come in the international market,inlcuding United Arab Emirates, Bahrain, Egypt, Qatar, Oman, Australia, New Zealand, Nepal, Sri Lanka, Singapore, Vietnam, Indonesia and Philippines and the shares will rise over the next two to three years Madhu says.
The founders, who have around 45 percent equity and claim to have an efficient India company and have no plans to launch an IPO currently. The company’s revenues soared from 22.48 million in FY20 and the figure of 40.48 million in the FY21. The costs,particularly around employee benefits and co-branding expenses, increased in a similar manner.
While it earned profit in its last two years of financial reporting but it was hit with massive losses up to the sum of Rs 5.99 million for FY21. “It was our first year of losses and was due to hyper growth. While our revenues have been growing steadily, we have been actively investing in our growth in India and abroad,” the company stated.
Additionally, the company has invested around 3.67 crore in its UAE subsidiary. 3.67 crore into its UAE subsidiary too.
The Financial statement for FY22 is yet to be submitted.
In the future, M2P is betting high confidence in its plug-and-play system to offer digital banking. Its latest deal has been with IndusInd Bank using M2P’s tech to offer services in the areas of lending, payments and wealth management for the bank’s customers.
“The programme (digital bank) will compete with the best of what fintechs have to offer,” Madhu states.
M2P may have pressed the pause button for acquisitions to incorporate its new business and teams, but it’s still maintaining it’s “antennas up” for valuable deals.
Due to the massive nature of M2P fintech, and its huge size, will it be harder for smaller or emerging businesses to take on the competition? It competes with the such companies as Rupifi, Niro, Decentro, Setu in the API infrastructure industry. Following M2P, Tiger is backed by global investors. Rupifi and Setu (acquired by Pine Labs) are among the top-funded startups.
Madhu exudes confidence as he leaves.
“My responsibility is to ensure that we continue to move the goalposts. Even if someone new who steps into the team, it will be extremely difficult to make them catch up to the performance we’ve achieved. This is an already difficult sector due to regulation and banks. So, if someone starts today even with a large amount of capital, it’ll take at most several years before they are at a level comparable to what we’re doing now.”