In the not too distant future, there may come a time, where we cease to interact with the banks as we know it. Banks which were monolithic organization who created the products, sold it directly and owned the customers are being slowly ceding ground to so called new breed fintech companies chipping away at the edges. While regulations and strict KYC/AML regulations still enable banks to continue to be in business, the power they once wielded is diminishing. As Niti Aayog Chairman, Amitabh Kant said “Debit cards, credit cards and ATMs might lose relevance in the next four years”.
Even Government has joined the fray and with an intent to ensure banking & financial services are accessible to all is pushing ahead with reforms. Powered by the Government’s push for digital India and cashless transactions, several opportunities have been created for fintech companies. The Government has also rolled out requisite infrastructure, the so called India stack comprising Aadhar as biometric ID, e-KYC, digital signature and a low cost NPCI/UPI transaction system. It has helped reduce friction for consumers, made it more convenient, less costly and has opened doors for greater services outside traditional banking channels.
We expect fintech companies playing a significant role in shaking the earning foundation of big banks, as they are significantly reducing costs for consumers. In the coming decade, there could also be a fintech company with a large enough market cap, as compared to banks.
As mentioned earlier, out of three buckets of products, delivery and customers, Fintech companies are already acquiring direct customers and are becoming delivery partners of banks. The core banking products will still be with banks due to prudential norms and regulations but in a competitive market, with hardly any product differentiation, owning customers and the sales channel becomes the key. Add to this the fact that having access to customers and customer data also enables providing add on services. We have seen this with marketplace models like bankbazaar.com, policybazaar.com who have reduced information arbitrage, lowered costs and provided greater choices for consumers.
While fintech companies bring in greater efficiency, transparency and have a stabilising effect on the entire financial system, this may also cause the demise of a few leading banks as we know it. With the influx of fintech companies in the system, there are high likelihoods of bank’s core operations such as lending and accepting deposits will undergo changes. Other high income generating activities like forex, wealth management and treasury operations will definitely be affected in many ways.
On the downside though, fintech companies are hobbled by extensive KYC/AML guidelines, digital identity authentication as well as lack of infrastructure compared to banks. Fintech companies also suffer from ambiguous regulations and still evolving nature of regulations and rules India. The most recent example was P2P lending which was flourishing in the regulatory vacuum till RBI came up with new rules [The Reserve Bank of India (RBI), on October 4, classified peer-to-peer (P2P) lending as an NBFC activity. While this is a step forward in the right regulatory direction, several aspects still need to be cleared up. Another example is cryptocurrency exchanges, where the government or the regulators seem unable to make up their minds.
Despite the challenges, where fintech companies excel, is in their customer engagement and experience along with data analytics and delivering services through newer paradigms. Some of these areas are which were peripheral to banks core operations like payments, have become saturated with companies already in the process of re-inventing their models.
However, not all is lost for the traditional banks, who are in fact the biggest partners and sometimes the backers of the fintech industry. They are taking the easy way out and instead of building capabilities within, are either investing or acquiring specialized companies to gain specific capabilities. IDFC recently partnering Capital Float a non-traditional lender to SMEs focusing on quick delivery, and catering to a wide variety of borrowers is a case in point. Similarly Axis Bank acquiring Freecharge, to get access to its customer base and technology platform. We see this sector to continue to attract funding and investor interest in 2018 and beyond.
The author is Executive Director and Partner, 7i Advisors LLP