Can fintech companies and banks co-exist or will they make strange bedfellows?
One of the main reasons for fintech ventures mushrooming is that there are niche areas where it does not make business sense for banks to enter those areas, said Nithin Kamath, founder, Zerodha, a discount brokerage firm.
“In our case, the big boys are the likes of ICICI and HDFC. For them, to do capital markets trading with their app can be cumbersome and does not lend itself to the right experience,” he said.
It is in this niche area that fintech ventures are attempting to carve out a big space.
Take the case of Capital Float, a venture which disburses loans to businesses. According to Akshay Sharma, Lead, Capital Markets, Capital Float, fintech ventures are attacking spaces where banks are not present. “Disbursing certain kinds of loans is not profitable for banks,” he said, quoting an example of how unsecured loans of ₹10 lakh or below does not make sense.
So, ventures like Capital Float, co-lend with banks, based on KYC and other banking-backed data. What this means is that in case of a default, 20 per cent of the risk is with the fintech venture and the remaining 80 per cent with the bank. Fintechs being an extended distribution channel for a bank seem to have found takers.
Ritesh Aggarwal, founder-CEO of digital payments solutions start-up fonePaisa, pointed out that distribution cost is something that the banks are not able to cope with. “Banks have standard operating procedures, stringent disbursement processes, and compliance, amongst others. For them, to disburse small loans is not feasible,” he said. The rise of fintech ventures have been seen by regulators as somewhat of a welcome move.
Ashwini Mehra, who has three decades of experience with SBI in institutional lending, strategy, corporate and project finance, quoted RBI Deputy Governor SS Mundra, saying that up to 28 per cent of the banking and payments business would be at risk by 2020. Hence, it makes sense to partner and collaborate with these ventures.
So, are banks comfortable seeing their lunch eaten by fintech companies? Both Sharma and Aggarwal said that it is not a case of one or the other but how both co-exist.
Ram Periyagaram, partner, PwC, believes that fintech ventures can survive as long as they have commercial viability — by addressing white spaces. “It has brought a new normal to the banking industry,” he said.
Then there is the aspect of technology too and it is here that UPI is a game changer. For example, traditionally, banks have relied on vendors to build technology, a lot of which tend to be outdated and time-consuming.
“For fintech ventures, building technology ground-up for every bank is time consuming and difficult to manage. With UPI, that pain point has been addressed,” said Kumar. As an example, Aggarwal pointed to BHIM, which was built by National Payments Corporation of India.
However, not everything is smooth for fintech companies. Aggarwal pointed to a case wherein the company was called to a discussion with regulators on extending its payment-related services to co-operative banks. To which he said that a directive from the RBI to evaluate fintech ventures as one of the vendors makes more sense as fintech companies are not taken seriously by co-operative banks.
The discussion was rounded off with a general consensus that despite all the issues, Indian banks have partnered better with fintech ventures, when compared to foreign banks.