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Fintech Invasion And Future Of Banking Industry In India

Technology will only encourage customers to exercise their choices. To meet these customer expectations, the bigger banks will have to beat the FinTechs at their own game. They have the capital and they have the customer - they only need to change their mindset.

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Will large banks wither away with the onslaught of the FinTechs/Big Techs? 
FinTechs have been nibbling away at the share of the banking system in basic banking activities related to payments, investments and now even lending. We have seen PhonePe, Mobiqwik, etc in the payments space take advantage of the favourable regulatory landscape with UPI, and strengthen their hold on the market.  Stockal, IndMoney, Appreciate etc in the investment space, and now LendingKart, KredX, etc. in the lending space can also been seen steadily trying to carve their space in the Indian finance sector We have seen the savings space also being disrupted through Google Pay tie up with small finance banks offering fixed deposits at differential rates.

Faster, cheaper and better technology has been leveraged by intelligent minds focussed on customer pain points to disrupt the existing business models in various sectors, and banking has been the easiest to disrupt. However, most of them have not been able to scale up and create an entry barrier for lack of capital as of now. How will this unfold in a World with surplus investible funds and with Big techs (Google, Amazon, Facebook) entering this space in a major way is yet to be seen.

Traditionally, banks have intermediated between the savers and the investors, offering safety for their funds and some returns to the former and pricing the risks for the latter, covering their operational and other costs, earning their margins and profits in the process. Transfers/ remittances, on behalf of the customers earned them fee based income, adding to their profits. Subsequently, cross selling to their customers for mutual funds, cards, insurance, broking etc augmented their incomes encouraging some of them to set up separate subsidiaries leveraging their customer relationships further.


The banking license provided exclusivity for accepting time and demand deposits at low interest rates affording a competitive edge for the lending activity. Additionally, the benefit of leverage on a low capital base, ensured decent returns for the investors and sponsors of the bank.
However, apart from cosmetic differentiation, customer and product segmentation largely remained replicable across the industry, partly also due to regulatory guard rails.

The introduction of the Aadhar and the UPI, post the exponential telecom growth, catalysed the development of alternates for payments, investments, and for data based non-discretionary low ticket loans.

Meanwhile, their deposit growth has continued unabated, risk aversion and lack of demand has inhibited loan growth. This has led to increased treasury activity at most of the banks.
While they are in a comfortable spot, using most of their growing liability book for deployment in higher rated loans and bonds to some extent, largely placing the surplus in G-secs, there is pressure on them to increase their program based agri and MSME loan books.

Meantime, FinTechs continue to proliferate, some of them with very imperceptible variances in their features and offerings. Some of them are able to raise successive rounds of funding at increased valuations based on customer penetration. Their presence is all pervasive and most of them have capitalised on the long felt need for enabling frictionless transactions. These FinTechs have also fulfilled a long term need for democratising investments as is evident from the exponential growth in demat accounts. Now with greater availability of data, as the economy gets increasingly formalised, they have also been able to provide loans to the previously unbanked using ingenious algorithms. This enables the creation of credit histories for a vast majority of people. Those who hithertobefore, found it difficult to even enter bank branches, let alone receive any loans from them.

India now boasts of 2100 FinTechs in various stages of evolution. Each of them disrupting an established business model, mostly around traditional banking, a few, however, offering services but bundled with finance for ex., the app for your intelligent car in India also provides facility for topping up your Fastag thru UPI. With the disruption from similar FinTechs and Big Techs services of incumbent banks are being gradually commoditised. Their income from transactions has already been reduced to almost zero, their ability to offer investments products is quite restricted and requires a push from their agency channels, and loans for purchases by their customers are also disintermediated for them courtesy some of the Big Techs. Essentially, while the incumbent banks own a large number of customer relationships, their ability to offer customised products and services is limited as their interests are inimically divergent to their customers. Banks have also not made exercise of choice by their customers any easier and have their persistency mainly on account of the difficulty in exercising such choices and partly also due to the unease of their customers, evident from the high CASA ratios of larger banks in India.

Globally, this is changing with the advent of Open Banks, encouraged by regulations in some countries, by markets in some others, and by technology in a few others. Further, the valuations that some of them have been able to attract, like Nubank in Brazil valued at USD 50.6 Bn, higher than their largest bank, Itau UniBanco and with only 4 MN customers and revenues of USD 1.06bn with losses of USD 99 Bn last year or for that matter our own Paytm, not a open bank yet, but valued at USD 20 Bn. Given the valuations of some of the Indian Public sector banks, SBI at roughly USD 63 Bn, and BOI and Central Bank of India at USD 3.45 Bn and 2.55 Bn, it will only encourage some of our bright young men to innovate and disrupt even further.

It has been maintained that while incumbent banks have large customer bases and access to capital, most of the FinTechs who offer convenience and customisation will not be able to scale up beyond a point for lack of capital. Precisely for this reason, there would be consolidation amongst FinTechs and the most successful of these would grow inorganically through customer, infrastructure or product/service innovations. Where would that leave the banks?

It is expected that most large banks, on account of legacy systems burdened more so by the in-agility of their inherited mindset and rigidity of their systems and processes, would yield space to the FinTechs . We have seen incumbent banks like BBVA setting up their Open Platform, HSBC announcing Banking-as-a-Service in collaboration with Netsuite, and nearer home, Yes Bank, HDFC, etc. probably experimenting on similar lines. Banking as a Service, BaaS, may become the norm, going forward. Depending upon regulatory allowances, if customer deposits are also allowed to be disintermediated, then margin compressions along with increased cost income ratios will, perhaps, force banks to consolidate and rely only on increased sharing of income with FinTechs leveraging their customer base. Who knows, with astronomical valuations, some of these banks could be acquired by these FinTechs albeit with greater regulatory oversight and supervision?

Let's look closer home. Depositors interest and protection is foremost with Indian regulators and for this reason alone, licensing for acceptance of customer deposits and the use thereof is bound to be regulated and supervised. And since it would continue to be so, the liability franchise of the Indian financial system, will continue to provide them the benefit of low cost deposits . With this differential advantage, they would continue to have large customer base, as custodians of trust. The other major functions of payments, investments and lending would, probably, get increasingly disintermediated. Since their customers would, going forward, be more digitally active, they would look for choices . Banks would, in such an event, to retain their customers, partner FinTechs by opening up their APIs. Such partnerships are expected to be non-exclusive at scale on both sides. This is already happening, as we speak but integration takes more time than the FinTechs would prefer and hence the banks with the more agile, modern, and state of the art systems would tend to be first movers here.

Some of the FinTechs could be acquired by larger banks. However, this may not be so possible in the case of public sector banks, as the acquisition values including intangibles would always be subject to subsequent questioning. They will have to be content with partnerships and at best a minor investment in a few of these FinTechs where they are able to justify potential. Ideally, the larger banks should be able to replicate the offerings of the FinTechs through in-house developments but the time to market would always lag behind the next fintech innovation rendering such pursuit sub optimal.

The larger banks in India would survive, thanks to their licensed liability franchise but without flourishing. They may be able to retain their customers, through active partnerships by investing in technology which would allow for faster integration., Compliance,data security issues and the resultant regulatory oversights may,however, increase their operational costs. Simultaneously, on the asset side they may well restrict themselves to higher rated exposures both on Corporate and Retail, preferably through market instruments, concentrating mainly on personal loans to their existing customers. Lending to small and medium businesses, beyond those credit comforted, and new to bank customers will be largely disintermediated. As in the UK, this could be disrupted through focussed FinTechs, perhaps, via co lending, norms for which could be relaxed to include sub investment grade loans on higher risk sharing basis. This would require most banks to shore up their treasury functions.

Technology will only encourage customers to exercise their choices. To meet these customer expectations, the bigger banks will have to beat the FinTechs at their own game. They have the capital and they have the customer - they only need to change their mindset.

Authors: Mr. Sunil Srivastav - Retd Dy Managing Director, State Bank of India and Mr. Anand Sinha, Retd Deputy Governor, Reserve Bank of India.

Disclaimer : Any views or opinions represented in this article are personal and belong solely to the authors and do not represent those of people, institutions or organizations that the authors may or may not be associated with in professional or personal capacity, unless explicitly stated.  Any views or opinions are not intended to malign any religion, ethnic group, club, organization, company, or individual.

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.


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Sunil Srivastav

The author is Retd Dy Managing Director, State Bank of India

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Anand Sinha

The author is Retd Deputy Governor, Reserve Bank of India

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