Battle for ‘next billion’ users: Fintechs need to collaborate with traditional financial institutions

Published: October 30, 2019 12:32:40 AM

In such a scenario, both traditional banking institutions and FinTechs are adopting business and operational models powered by cutting edge technologies.

This has led to increases in the cost of borrowing and players are grappling with higher unit economics implications. (Representational image)This has led to increases in the cost of borrowing and players are grappling with higher unit economics implications. (Representational image)

By Vivek Belgavi

Banks, Financial Institutions and NBFCs are now playing a pivotal role in meeting the financial needs of individuals and business, which have traditionally been un-served or underserved. Regulations and compliances have, however, become stricter in recent times. In light of recent macroeconomic developments and a decelerating growth environment, there is credit crunch, as well as growing scrutiny on the broader financial sector. This has led to increases in the cost of borrowing and players are grappling with higher unit economics implications.

To contest the current state of concerns and become fit for future, Financial Institutions and FinTechs are now turning their focus on niche customer segments, leveraging technology and partnerships to service ‘Aspirers’ and the emerging middle class or the ‘Next Billion’. FS players are fulfilling these segments’ financial needs with an impetus on digital, automation and hyper-personalised products and services. Traditional banking institutions, NBFCs and new age FinTechs are realising the potential of being agents of transformation and financial inclusion by focusing on developing innovative products and services, catering to low-income and intermittent earners in unorganised sectors and MSMEs, usually starved for credit or entangled in web of shadow banking.

In such a scenario, both traditional banking institutions and FinTechs are adopting business and operational models powered by cutting edge technologies.

Investing in new technologies and strategic partnerships among incumbent banks, NBFCs and fintechs has favoured such institutions to organically increase their customer base, lower customer acquisition, transactional and operational costs, reduce time to markets and manage portfolio risk while trying to increase formal credit and banking products penetration in a growing and enterprising economy.

Apart from fintechs, new-age banks and NBFCs are using technology more than ever and are harnessing partnership ecosystems across the value chain of lead generation, engagement, customer onboarding, underwriting, disbursement, servicing, monitoring and collection. AI/ML and big data have equipped traditional lenders to measure individual customer insights and build alternative credit scoring models. Low cost data, smartphone penetration and advent of social media are enabling both traditional banks and fintechs to identify, engage and on-board inaccessible and isolated customers. Robotic process automation (RPA) has enabled streamlining of operational workflows, increasing productivity, accuracy, cost savings and customer engagement, servicing and grievance handling in various vernacular languages too, with supporting technologies like Natural Language Processing. Financial institutions are also experimenting with distributed ledger technologies for various use cases such as e-KYC, data exchange, loan disbursement and collection and cyber security. And, application programming interfaces (APIs) are being built and tested for robust connected ecosystems of various institutions and stakeholders.

Market size, key trends and developments
Today, India is at the core of innovation to create a financially inclusive and connected world, given its favourable demographics dividend. India’s banking sector, NBFCs, other financial service providers and fintechs are presented with an abundant opportunity and are making remarkable progress riding on the country’s pro-financial inclusion policies and the growing use of mobile phones more than ever before.

Out of all retail segments, the Aspirer and Next Billion segments present a golden opportunity for prolific demand of financial services built on convenience, transparency and low-cost. These segments are expected to grow significantly in the next five years. This provides FS players with an untapped potential to provide financial services.

In the past, it has been very challenging to reach rural communities and provide them with savings, payments, credit and other financial products. However, with increased digital technology penetration, there has been a boost in the design and development of business models to reach last mile; this includes innovative service delivery models and smart partnerships (tie-ups and correspondence with kirana stores and e-commerce).

Future state: maximizing likelihood of adoption
India, in the near future, is poised to be a leader in innovations and disruptions in banking and financial services. In a diverse country like India, financial sector incumbents and nuevo fintechs have to focus on the trinity nuances of price, product and customer service to succeed, and these nuances change with cultures and consumer segments.

Adopting technological innovations across value chains will aid optimisation of resources and processes, reduce turnaround time, facilitate intuitive and automated decision making and ensure accessibility of credit for customers at rates and terms tailored to their socio-economic profile. The success of India’s financial sector companies to on-board and deliver for the Aspirer and Next Billion segments will largely be dependent on their ability to rationalise and maximise use of technology, human capital and cohesive financial and non-financial ecosystems.

One key strategy would be to provide financial services at the point of consumption, and thus an in depth understanding of the consumption needs of different segments is imperative. Lower income segment needs are more focussed on food and clothing, while as we move up the income pyramid, the needs shift towards housing and transport.

This presents incumbents with an opportunity to understand specific segments’ aspirations and challenges and provide for core user need offerings. Players should focus on providing a simple, clean and efficient user experience leveraging technology, analytics and partnerships at the point of consumption. This would facilitate the growth of a user base with lower acquisition costs. Once an adequate user base has been built, there is then the opportunity to pivot and upsell/cross-sell other financial products and services, such as micro insurance with a consumer good product or a micro-loan for small ticket size consumption. A number of players have cracked this model by first providing basic payments services, and then pivoting into higher margin financial products.

The winning strategy still seems to be through collaborations and partnerships: traditional institutions like banks and non-banking financial institutions have a large base of customers and fintechs have the right technological support; together, they can form a mutually beneficial relationship to amplify the processes of helping the un-served and the under-served customers with financial services.

The author is Partner & Leader, Fintech, PwC India. Views are personal

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