Can banks come up with models for flow-based lending as fintechs are, can they lend profitably to MSMEs?
Just as UPI payments are rapidly catching up with debit and credit card payments, will digital spell the death of traditional banking? Can banks come up with models for flow-based lending as fintechs are, can they lend profitably to MSMEs? Top bankers and fintechs discuss this. Excerpts:
Sunil Jain, FE Managing Editor:
If UPI-based digital payments really take off, and mostly through GooglePay, WhatsApp or PhonePe at the front-end, will this hit banks? These firms can, tomorrow, start offering mutual fund products or loans.
Flow-based lending is Rs 40,000-50,000 crore today, but with goods and services tax (GST) and Unified Payments Interface (UPI), this will increase; can banks lend here and to small firms?
Shikha Sharma, former CEO,Axis Bank: Digital is both an opportunity and a challenge. You have to see what works for the consumer and then deliver it. Six years ago, we reduced investments in internet banking and shifted investments to mobile banking. When UPI happened, we crafted equal partnerships where both sides win and no side is trying to squeeze out the other.
PK Gupta, SBI MD:
Historically, digital has been driven by the banks. We moved from bank-branching to ATMs, to internet banking and then, mobile banking. Moving to digital helps cut costs. It doesn’t really matter whether transactions happen on the banks’ app or third-party app as the transaction ultimately is getting settled within the bank; as long as banks get the deposit and CASA, it should not really matter.
Adhil Shetty, BankBazaar founder and CEO:
What we need to figure out is where a fintech can bring more customers to the bank. At BankBazaar, we have 37 million visitors per month, 90% go to a bank which is new to them on the platform. The next step is going to be a deeper collaboration. For example, data is showing us that a large proportion of the internet consumers who are millennial making Rs 20,000–30,000 a month are not able to get a credit card … now, can we collaborate and use data and technology to build something that did not exist 5 years ago?
Sharad Sharma, co-founder, iSpirt:
We are moving from vertically integrated value-chains to partnerships. No one knows who will make money and where the value capture will happen. Fintechs need to scale up dramatically and there are organisational challenges. But this is not a zero-sum game since India is so under-penetrated with financial services.
Hemant Gala, banking and financial services head, PhonePe:
Banks understand regulations and compliance and financial products in and out. For us, it is about innovating to addresses customer experiences and requirements in a great way. It is a journey where you will see us collaborating. UPI has given a great starting point.
Shikha: If you spend time on that debate, you do not develop the market. You have to partner to get access to customers which you won’t get otherwise. There was a lot of debate within Axis Bank on what FreeCharge was going to do and what the bank’s app was going to do. We find that there is less than 10% overlap between then FreeCharge customer and Axis Bank customers.
One can deliver a whole lot of products to that segment which you cannot deliver in the physical world. So our ability to write a Rs 15,000 loan in the physical world is very hard because the cost of that delivery is too heavy. I can only do this with a digital platform partner. So you experiment with models and then decide about scaling.
Jain: How do banks re-orient themselves?
Shikha: It is a mindset issue because the compliance and risk teams are designed to think about risk in a particular way. The way they will think of risk about a Rs 25-crore loan is not very different from what they will think about a Rs 15,000 loan. So if you do that you will never be able to run this experiment. That is why at Axis we did a lot of partnerships and some of those worked and some did not. One needs to have a discipline of experimentation and that culturally is not easy to do but if you do it, that is way you win.
Gupta: I think we are now going a little beyond experimentation. The fintechs and aggregators are there to stay. It brings a lot of transparency into the way products are sold and I think banks have to be ready for that. Commoditised products which can be sold on an aggregator platform are not going to get a lot of revenue, but for the customers it is very good.
We now have a lot more background data and a greater ability to process the data. The SME 59-minute platform which the banks launched it is pulling in data from various sources, data is getting processed and we are able to give these loans practically in no time. Going forward, lot more of these innovations will happen.
Jain: Are you hiring data scientists?
Gupta: We have a very large team of data scientists looking continuously at data.
Sharma: It is ultimately going to be a jugalbandi among the players. This is the new way of working which has come to the financial industry with big force. For the first time, we can expand credit while improving credit quality. Earlier, the traditional way to extend credit was to make it a priority sector lending, relax the norms and then you will have the credit-quality problem. If you take a platform-centric approach then you can deliver both.
Jain: So once one form of banking takes over, how do you rationalise the existing ones?
Gala: We have seen customers adopting mobile-first solutions where customers are coming of age. If customers adopt, the ecosystem will figure out a way to operate together.
Shetty: On the collaborative product development front, there are many examples. We were talking about millennial who cannot get a credit card, we along with banks developed a credit line to take care of the needs. The second thing to call out is that consumer experience is changing everything. I think one thing that has completely blown away the Indian consumer is the pre-approved 15-second loan. The question is how do we give this to every consumer out there. With the Digital India empowerment, we are seeing that we are almost there.
Sharma: We are building platforms like UPI that are truly world-class. That is what is making this whole revolution possible.
Shikha: I think the fight is not even between the two because the two together are creating a new market. And both will figure out a way while the new market is being developed.
Gupta: It is only the banks which are paying right now for all these transactions. Ultimately, some payment model will have to be worked out by the bank.
Jain: So banks will now give loans to SMEs without any government pressure?
Gupta: It is already happening. On a single day after launching the product, we are disbursing 5,000-10,000 loans a day. This can rise substantially as our data capabilities improve. The MSME portal that was launched … not only are you giving loans but you are mitigating a lot of risk as well. All these loans are happening after all the checks being done and proper risk management has been done. As of now, the value of data-driven loans is smaller but it is picking up.
Sharma: I think we are seeing payment costs falling and fraud is also falling. That is the nirvana we are looking at. We are seeing the early signs of it and we need to give 3-4 years to this and then we will look back to see how quickly it has grown. This is the non-linearity that we are talking about.
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