India is a global leader in digital banking thanks to the push given by, not just IndiaStack, but also UPI, DBT, Jan Dhan Yojana, DigiLocker, etc.
A month ago, the panel discussion at the Express IT Awards was on how, over the next 2-3 years, UPI payments—they rose from Rs 13,144 crore in December 2017 to `102,595 crore in December 2018—offered by various fintechs would overtake those made by debit and credit cards; no mean feat given UPI has been around for less than two-and-a-half years. A week ago, at the FE Best Banks Awards, the discussion was on how banks would need to rework their business models to deal with the challenge from young fintech firms that offered not just UPI, but a host of other services as well.
To take an example, if UPI payments continue to grow by leaps and bounds, and primarily through apps like Google Pay, WhatsApp and PhonePe, they would have a big influence in how banking evolves even though the consumer’s bank account remains the same, say, with an SBI or an HDFC Bank. The apps decide, for instance, which bank they will use as the back end for the transactions and, over time, can even start offering other services that traditional banks offer as users get hooked onto the app and start using it as the ‘bank’ for all practical purposes. Scripbox, for instance, one of the winners of the FE Best Banks Award, is a fintech that helps make investments in mutual funds less intimidating and, combined with, say, a WhatsApp or a Paytm can, over time, replace traditional banks selling mutual funds.
Fintechs are developing new loan processing models for SMEs based on GST filings or cash flow data of the type you can get from Amazon-Flipkart-UPI. One of the winners of the FE Best Banks Award this year, CreditVidya, helps lenders assess risk by using artificial intelligence to analyse various data such as the cash-flow ones. Once this catches on, not only are the fintechs in a position to drive the business to various banks—or away from some—significant chunks of bank lending can go to non-banks.
Right now, the numbers are small, and if banks retain the main business of giving loans, how does it matter if fintechs grab a bigger share of the front end? That may be true today, but a good way to think of this is to look at travel portals like MakeMyTrip and Goibibo—guests still stay at hotels, but the hotels are protesting against the travel portals since they are driving down prices by bringing in more players or by making the pricing more transparent.
Replace MakeMyTrip with a BankBazaar, a financial marketplace where you can compare various products offered across banks, and the potential impact becomes clearer. Such a marketplace drives down the spreads for banks and, over time, a BankBazaar can make recommendations and drive business to/away from banks in the same way a MakeMyTrip does for hotels and airlines. And this is just one such example.
It is precisely to meet such eventualities that, when she headed SBI, Arundhati Bhattacharya took her top team to the iSPIRT—iSPIRT is a think tank for the software products industry—office in Bangalore to chart out an appropriate SBI strategy to deal with the fintech challenge; that is also why, when she headed Axis Bank, Shikha Sharma bought wallet firm Freecharge even though many in the bank questioned the move since the bank had its own app.
What emerged at the FE Best Banks discussion (goo.gl/RFCTXb) was that, while various fintechs and banks will try and take away customers/business from one another, for now, both fintechs and banks will mostly be working together to serve the unbanked. As Shikha Sharma put it, a traditional bank’s ability to give a `15,000 loan is very hard because the cost of that delivery is too high; so a bank needs a digital platform partner to lower costs. Also, it is a mindset issue because the compliance and risk teams in a bank are designed to think about risk in a particular way: “the way they will think of risk about a `25-crore loan is not very different from what they will think about a `15,000 loan”.
PK Gupta, SBI’s managing director, spoke of the new MSME-loans-in-59-minutes platform that has just been set up which pulls in data from various sources—GST, income tax, bank statements—and processes this in 59 minutes to see if the loan should be given. Banks, both Gupta and Sharma said, were increasingly hiring “data scientists” to help process data more intelligently and design better algorithms to compete with fintechs.
Adhil Shetty, founder and CEO of BankBazaar, talked of how, along with banks, they were trying to develop products for every consumer along the lines of the 15-second pre-approved loans banks already give today to their customers. As iSPIRT co-founder Sharad Sharma put it, if the poor in the country and farmers/MSMEs can get loans that, at the same time are safe from the banks’ point of view given the data crunched to establish their viability, this is banking nirvana since governments will no longer have to categorise customers as ‘priority sector’ and then mandate banks to ensure a certain proportion of their lending to them. And such loans are cheaper than those from the informal sector.
Whether digital payments or delivery developed because of demonetisation is not clear—debit/credit card payments were growing fast even before demonetisation—but there can be little doubt they got a big push. And while the development of Aadhaar pushed innovations like the IndiaStack long before demonetisation, the country’s digital architecture got a big boost from the government pushing UPI, the Jan Dhan Yojana that ensured every household had a bank account, Aadhaar-based Direct Benefit Transfers that ensured these accounts had money—a quasi-Universal Basic Income will boost this further—and other platforms such as DigiLocker that allowed users to pull digitally signed documents from various government departments; you can, over time, apply for a home loan online and give the bank your digitally-signed ownership records and tax and bank statements; and because they are digitally signed, the chances of fraud are that much lower.
If, despite the digital revolution, there is no clarity on the future of fintechs vs banks, it is because, as Sharad Sharma puts it, India is so ahead of other countries in developing a world-class payments/digital infrastructure, there is no western or Chinese experience from where parallels can be drawn. To be a world-leader, needless to say, is a great place to be.