The new tango between banks and fintechs: Rivals of yore turn partners

Banks and fintechs are realising that disruption has a huge collaborative aspect to it too

Last month, HDFC Bank picked up a 5.2 per cent holding in Mintoak Innovations, a merchant solutions’ provider, for Rs 10 crore. In February, ICICI Bank acquired 5.40 per cent in CityCash, a micro-payments player, for Rs 4.93 crore, and 9.63 per cent in Thillais Analytical Solutions — which operates the neo-banking platform, Vanghee — for Rs 6.03 crore.

These are tiny in terms of deal size, but major steps in the banks’ efforts at getting their digital act spot on. And it mirrors a global trend.

New York-based C B Insights has it that banks are future-proofing by investing in fintechs. In 2020, banks in the United States made over 65 equity investments in them. There are two reasons that explain such investments: First, the promise of high returns on such investments and to gain exposure to emerging sub-industries; and second, to invest strategically in fintechs to further their business goals.

Two examples of the second reason are: J P Morgan’s participation in Taulia’s $60-million funding in the third quarter of 2020 and its partnership with it to create a trade-finance solution; and Capital One’s 2018 investment in United Income, a retirement planning service and digital wealth platform. (A year later, Capital One bought United Income.)

An early mover in India was Axis Bank with its “Thought Factory” in 2016 to partner with startups and emerging technologies. Says Sameer Shetty, president and head of digital business and transformation at the bank: “We work closely with fintechs and startups across areas. And we are also open to selectively investing in startups provided there is an alignment in objectives, and an ability for us to benefit from these partnerships.”

In the first flush, the bank engaged with S2Pay, FintechLabs, Perpule, Pally, Paymatrix, and Gieom. HDFC Bank, too, has set up a “Digital Factory” and “Enterprise Factory” to fast-track newer technologies and ways of working, even as it fortifies its information technology backbone.

“Digital is a platform with its own unique capabilities, and the customer experience matters a lot. Look at what Amazon Books did to Barnes and Noble in traditional retail. Banks will have to start treating digital as a platform and not as just another channel,” reckons Yezdi Lashkari, founder and chief executive officer (CEO) at Flexmoney Technologies. “I think eventually there might come a time when banks and fintechs — as standalone, or in collaboration — may even patent some processes based on new digital products.” 

It’s not just banks that are in the fray. Visa International, for instance, runs a global incubator programme. “Our focus is on making fintechs’ solutions scalable. In perspective, India itself is a $1-trillion opportunity for cash displacement,” notes T R Ramachandran, group country manager (India and South Asia) for Visa. “We also aid fintechs in the use of the Reserve Bank of India’s regulatory sandbox to experiment on use-cases and by supporting the development of new initiatives like OCEN (Open Credit Enablement Network)”.

Raman Khanduja, co-founder and CEO of Mintoak Innovations, points out, “The bank-fintech relationship started as perceived competition and disruption. This is fast changing into collaboration.” Constantly rising consumer demands coupled with the large amount of headroom available and a fast-changing tech landscape “will warrant more strategic partnerships, including investments from banks into fintechs,” he adds.

Is it possible that we will see a new I-flex, which was incubated by Citi, later spun-off and now resides within Oracle? Or a Visa, which started out as a captive of Bank of America? “Possibly. But look at this way. The average spend on credit cards in India is up by Rs 2,000 to nearly Rs 14,000 levels per month, higher than what it was pre-pandemic. This would not have been possible if there was not a robust online payment ecosystem. And mind you, the entire overseas travel spend piece was mostly off,” says Stan Myers, managing director of San Francisco-based Card Analytics Consulting.

The new tango between banks and fintechs, “also helps the validation of newer concepts and provides both early-stage funding and initial momentum to startups. It effectively sets the ground for fintechs to look at raising capital from private equity funds once their initial business model is in place,” explains Gaurav Sharma, head of PE at Investcorp. In return, banks get access to a new set of customers, the ability to offer differentiated products and, equally important, access to high-quality technical talent.

“While the exit timelines from these investments remain flexible, the assumption when going in ranges between four and six years,” Sharma adds.

But there is a difference as well. Banks invest typically at an early stage, when the venture is still in the process of building its tech-stack and refining its go-to-market strategy; PEs are typically growth-focused, and would step in when the product-market fit has been established and companies need capital to ramp up.

What about Big Tech in this game? According to Monish Shah, a partner at Deloitte India, “Given our regulatory environment and customer protection laws, financial services are likely to be predominantly bank-led. While banks are willing to invest pre-revenue, the business case is from overall quantitative and qualitative returns. Several institutions are defining fintech RoI as ‘return on innovation’ in terms of client experience”.

What we are seeing now is something that was evident even a decade ago. In 2008, Telenor picked up a 51 per cent in Tameer Microfinance Bank in Pakistan, and it got Telenor-Pakistan a banking plate to hawk mobile financial services. In 2009, Korea teamed up with MasterCard, LG Telecom and Shinhan Cards to make ‘PayPass’ cut across the networks of Korea Telecom, LG Telecom and SK Telecom. And in 2011, Visa gobbled up South Africa’s Fundamo — a mobile-based financial firm — for $110 million.

For in the new digital disorder, nobody gets to beat anybody; you team up with anybody so that you don’t end up as nobody.