Exploring the Potential of the Indian Market and the Latest Fintech Trends with Ryu Muramatsu, Leading Japanese VC (Part 1)

The Indian government has been actively promoting digital transformation (DX) for the last few years, setting in place a wealth of digital public infrastructure for use by individuals and the private sector. Examples include Aadhaar, a national ID system similar to Japan’s My Number scheme; DigiLocker, a cloud storage platform linked to Aadhaar where individuals can manage their documents; and an e-invoice authentication system that streamlines corporate tax returns.

Startups are flocking to utilize this new environment to launch new businesses. Having watched Asian economic trends for more than a decade now from your base in Singapore, what do you make of the changing fintech situation in India?

The pioneers of what would become fintech emerged in the late 1990s, before we even had the term fintech. Working as a venture capitalist in Silicon Valley, I watched the evolution of the internet open the way for online payment, online brokerage, and other new technology-based financial services.

When I moved to Singapore in around 2012, fintech was finally beginning to enter the international lexicon. Business-to-consumer (B2C) digital payment services were the mainstream, and GMO VenturePartners began working with GMO Payment Gateway on intensive investment in and tie-ups with fintech businesses providing payment processing services* in Asia (below, investment by the two companies is not differentiated).

Back when we started investing in India, business-to-business (B2B) fintech companies were just beginning to gather momentum internationally. Previously, everyone knew that there was a huge B2B market out there, but it was tough to break into. Around 2015–2016, digitalization finally took off in the United States, starting with supply chain finance,* and fintech companies beginning to appear. We invested in two firms: Fundbox, which links into the accounting systems of small and medium enterprises (SMEs) to enable them to monetize their accounts receivable (as short-term loans), and Taulia, which provides a platform for early payment of accounts receivable and procurement of funds from multiple funders.

Why did B2B fintech companies emerge in India with such a short time-lag, do you think?

I put it down to the credit gap—the huge gap between supply and massive capital demand.

The figure often bandied around in India is 60 trillion yen. Numerous reports have put combined consumer and corporate capital demand at 90 trillion yen, of which 60 trillion yen has yet to be supplied. Consumers are primarily looking to borrow for consumption purposes, but in the case of companies, the situation is even more serious. SMEs unable to grow their sales because of a capital shortfall number in the millions to tens of millions, leaving a market of unimaginable scale.

I often say at the office that India is currently experiencing the same kind of rapid economic growth that Japan enjoyed during its strong growth period. In fact, thanks to a population 10 times larger than Japan’s and the development of digital public infrastructure that has equipped India with devices, tools, and an Internet environment that did not exist in Japan back then, India’s actual economic growth surpasses Japan’s best years.

During Japan’s strong growth period, the country didn’t have enough money and had to borrow from the World Bank to build its bullet trains. India too has to cover its 60-trillion-yen shortfall from somewhere, and this has drawn attention to fintech companies that use digital technologies to provide highly convenient supply chain finance and payment services for B2B transactions as the means to do so.

Many Japanese companies accept that markets in India are growing and yet they hesitate to establish a presence there. While there are various reasons for this, from the many years that I’ve spent watching business in India, I believe that the decision to set up operations in India could be made much easier if Japanese firms knew about India’s advanced digital public infrastructure and fintech companies. What do you regard as key points in terms of Japanese companies succeeding in entering Indian markets?

I agree that making use of fintech companies is a critical point.

How do you see India’s fintech developing in the coming years? What impact do you think the spread of the fintech wave and fintech standards in India will have on Southeast Asia and Japan?

For payment processing services, for example, the one-percent service commission that can be charged in Japan tops out at 0.3 percent in Southeast Asia and 0.1 percent in India. Price competition is in fact so fierce that providers are conversely amazed that it’s possible to charge one percent in Japan. Indian fintech companies are also beginning to buy up Southeast Asian firms, including many of the firms that we invest in. This is a complete turnaround from the situation 10 years ago when we first set up shop in Singapore.

One easily understood example of DX is the Unified Payments Interface (UPI), an electronic payment and transfer platform introduced by the National Payments Corporation of India (NPCI) in 2016. UPI enables immediate money transfers as well as payments at participating merchants around the clock 365 days a year from a mobile device. Many Southeast Asian countries use it, so you’ll even see a UPI money transfer button right on the home page of a Singaporean bank’s app. The wave of India-developed standards is sweeping in.

Payment services seem to be extremely important not just as a means of making and receiving payments, but also for collecting the original data that informs credit decisions. That data becomes proof of a transaction while simultaneously helping to build trust. In other words, financing methods such as revenue-based lending based on sales information could become one means of resolving the massive credit gap.

With payment data creating invisible power everywhere, when we think about business supply chains, we should also think about how to leverage payment data for finance.

Absolutely. Visualizing as much data as possible—payment data included—is critical in terms of credit. Providing no data and claiming that you keep all your books on paper won’t create a digital data history. Data that is not digitally recognized might as well not exist. Data accumulated from years past becomes a credit history and provides the basis for credit, but if there is no such accumulation, you have to begin by building up that data from scratch.