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Show Me The Money

The Retooling of Fintech and its Existential Challenge to Traditional Banking

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In recent times, there is a blinding halo around Fintech startups. Their potential for success is such that the largest players in venture finance are queuing up with investments. Successful IPOs are proving their bets right and further feeding this frenzy. The pipes that carry the world’s most precious commodity have always been important. That commodity is no longer money but ‘data about money’. There is a virtuous, mutually reinforcing, loop between data and money. The proliferation of smart phones and the universal growth in e-commerce is seen, by all, as a value accelerator. The pandemic has further made this accelerated innovation a dire necessity. As a result, more than 20% of all funds given to startups in 2021 went to Fintech. It was the single largest recipient.

Acquisition of promising startups has been a longstanding strategy of Visa and MasterCard. This is seen as muscle building by this duopoly to add technology and processing capabilities. Both Visa and MasterCard are still very much in play as acquirers, investors, principals. However, the game is now bigger. From an evolutionary perspective, the banking sector is ripe for disruption and traditional banking has been giving way to ‘new age financial experiences’ provided by the NBFCs and startups of the Fintech space. The new players have deviated from the traditional banking modalities and hence successfully caused disruption. For a thousand years, the core collateral based lending model has reigned supreme. That is changing and things will never be the same again. Startups with a wealth of first party consumer data assets are muscling into traditional banking’s turf by confident lending done seamlessly and in a heartbeat. This is a change in both the genre and process. It is a delight in terms of customer experience. Where the consumer is concerned, it’s ‘faster cheaper better’, cliché and all.

Just the other day, I received a notification from Cred offering a line of credit. What struck me was the ease with which I could have utilized this service without any documentation and then repaid, in installments, activated entirely from my smartphone. Compare that with how a bank lent me money to buy a home. It took endless documentation and several meetings to get the loan sanctioned.

The Chinese giants Alibaba and Tencent made their fortunes building payment networks, then reducing interchange fees and then launching integrated social and e-commerce platforms. The traditional 4-party model of Visa and MasterCard comprising the issuer, acquirer, merchant and customer is still flourishing but its underlying economics is being undercut in a big way.  The new challengers are armed with better information about customers today than any bank. They can lend with low risk and if borrowers do not pay back, they can be ostracized from social and e-commerce platforms which amounts to an existential matter today. This ‘information asymmetry’ is extremely powerful as institutions like Ant Financial with first-, second- and third-party data sets can triangulate in real time and make very sharp predictive assessments on a borrower’s viability and other information. 

Across the world, Fintech disruptors started small and serviced a particular need of consumers exceptionally well. Then they expanded into an integrated ecosystem offering a multitude of services like Lending, Ecommerce, or Insurance. This differs from case to case. The Economist reported that Fintech firms enjoy better ROEs (~20%) compared to traditional banks (~5-6%) which means they command a premium in valuation. Today, Fintech companies are valued more than $1.1 Trillion, a good 10% of the global banking and payment industry’s worth. Along the way, many shall deflate in value terms and more than a few will go bust but they are representative of the changed order and new scheme of things. PayPal and Stripe are valued at $310B and $95B, respectively.The Swedish ‘Buy Now, Pay Later’ startup Klarna is valued at $46B while Indonesia’s Grab is valued at $40B. Razor Pay and Paytm are some of the leading Indian startups in this space.

As these new age institutions become bigger and reach more consumers, they gain from network effects and offer better cost competitive products and this, in turn, boosts their growth even further. These companies are especially beneficial for emerging economies since access to banking is lower than in developed countries. One such Indian initiative was the UPI (Unified Payments Interface), created by the Government of India. It has disrupted the business model for e-wallets and even debit and credit card providers, all because of the convenience and hassle-free experience. 

It is because of such experiential differentiation that NBFCs and new age startups have been rising at breakneck pace and traditional banks have been losing share steadily over the last 2 decades. NBFCs have seen a surge in asset holding because of newer methods of lending and, as of 2019, they hold more than 50% of all financial assets, globally. 

With all this happening, central banks and regulators were bound to wake up and take notice. And they did. There are centrally sponsored experiments and studies running across the globe which study the benefits of digital currencies, cryptocurrencies, payment networks (like UPI) and information sharing across the financial space. For example, European regulators are looking at the possibility of sharing online consumer behaviour which can then be used by all financial service providers. This is akin to a CIBIL score in India but differs in the scope and depth of data used.After the experiments with the Chinese Digital Yuan, now even the US Federal Reserve has begun evaluating the pros and cons of a Digital Dollar and that obviously does not bode well for the commercial banks. Payments would be settled faster and transaction costs could be nullified among other benefits. The ECB is also looking at similar possibilities.

This relentless advance of Fintech will touch everything that money touches and will flow everywhere that money flows. We are going to see more innovations in the world of finance in the next twenty years than in the past five thousand years. 

Traditional banking offered a suite of services encompassing every aspect of a consumer’s requirement. They enjoyed this advantage for the better part of the last two centuries but it seems they have woken up to the rolling Fintech juggernaut only very recently. 

The race to save their lives has begun. 

Get set go !

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.

Shubhranshu Singh

VP- Domestic & IB, Tata Motors, CVBU

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