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Marriage of Convenience

From disrupters to partners, the Fintech-bank relationship has come a long way. What is the next level of this partnership?

Marriage of Convenience

Illustration by Raj Verma

A decade ago, the entry of Fintechs in the fast-growing financial services space was a shocker for traditional banks. Bankers were worried that at some stage in the future, Fintechs would eat their lunch. Be it payments, software as a service, or lending, the new age start-ups in the financial services space went all out with innovative models in underbanked and unbanked areas to woo customers. But banks, too, followed with their digitisation drives, pushing Fintechs back. Regulators also stepped in to fill the gaps and encourage innovations. For instance, the Unified Payment Interface-based platform hit mobile wallet players hard. On the other side, the entry of Techfins such as Google Pay, Amazon Pay and WhatsApp started changing the rules of the games. While the tug of war still continues, the jury is still out on the future of traditional banks.

A Win-win For Both

A partnership model has been evolving steadily between Fintechs and banks in the past few years. Fintechs bring in the perspective from the customer standpoint, which sometimes banks may not be able to because of multiple functions.

"Fintechs need banks as much as banks need Fintechs. We look at it as a collaborative partnership. We work in conjunction with Fintechs to deliver superior customer experience," says Shalini Warrier, Executive Director at Aluva, Kerala-headquartered Federal Bank.

Meghna Suryakumar, Founder and CEO, Crediwatch, a Fintech that deals with digital onboarding, credit assessment and risk management, says there are always going to be challengers and partners. "A majority of Fintechs end up partnering with banks," she adds. Banks need strategic technology tie-ups to focus on existing customers, whereas Fintechs bring technology, innovative products, and also a better understanding of risks by using databases. "The need of the banking sector is to use Fintechs to create an elephant called the bank," says a public sector banker.

Services On Offer

Banks currently engage with Fintechs for value-added services or software as a service, which help them influence customer experience through Artificial Intelligence (AI), Machine Learning (ML) and other digital tools. In fact, Fintechs are coming up with smart solutions for traditional banks to plug and play. Banks only need to open up their core banking solutions and Application Programming Interface (API) for Fintech players.

"A lot of automation and tech used in traditional banks is being pushed by Fintechs. The journey of digitisation in the banking sector has started," says Satyam Kumar, CEO and Co-founder at LoanTap, which offers personal and business loans.

Today, banks have hundreds of Fintech tie-ups. The countrys largest bank, SBI, for example, is using Fintech services for real-time KYC (Know Your Customer) verification, underwriting small and medium enterprises (SMEs), gamification for employee engagement, machine-based learning model, and data analytics. Today, Fintechs have become a crucial link for banks to provide better and faster services.

Bank-Fintech partnerships have also extended to agritech (the application of technology to make the farming process more efficient) space. A number of agritechs are offering information services. "These partnerships are now taking the shape of co-branded products. Banks are ready to pay for the information, which they were not paying earlier," says Yogesh Patil, CEO at Skymet. The private forecaster has tied up with Bank of Baroda for information, including weather forecast, crop advisory services etc.

"Banks and Fintechs share a symbiotic relationship. Fintechs bring in the idea and banks provide maturity. The idea and the maturity together offer a superior customer experience," says Ravindra Pandey, Chief Digital Officer, SBI.

Traditional bankers agree that the ostrich approach will not work in the current environment. Post pandemic, many banks, which were reluctant earlier, are now engaging with Fintechs.

In the payments space, banks have taken a lead, although Fintechs started as disrupters. Regulatory interventions and the launch of UPI gave banks a big leg-up. The interoperability in the transfer of funds under the UPI system has made the wallet business unviable.

"There is an expectation that payments are free. Customers don't want to pay for payments," says a Fintech player. Traditional banks with diversified and large operations are in a better position to fight Fintechs in the payments space since they can easily subsidise their offerings by crossing a loan and investment product. In fact, banks have taken big steps by launching super apps and through the addition of new features such as card-less withdrawals. "In terms of technology, banks are ready to deploy more capabilities in the payments space," says a private banker. He admits banks are a bit slow on the merchant side, but well placed for person-to-person payments post the UPI launch.

The QR code for merchant payments has served as a booster dose for Fintechs. Most Fintech innovations are now happening on the merchant payment side. The scrapping of merchant discount rate (MDR) on UPI RuPay payments from January 2020 came as a big jolt for Fintechs, who are now looking beyond payments. Currently, no fee is collected from the merchant or the customer in a digital transaction. The MDR money, shared between POS (point of sale) issuing bank, card-issuing bank, and payment network (Visa or MasterCard), is keeping players away from the payments business.

"Payment Fintechs have to morph. The money is not in providing banking services, but in the lending business," says Raj N., Founder of Fintech start-up Zaggle. BharatPe, for instance, is giving the QR code and POS machine free to merchants, but is building a lending model on top of it from the data collected. Many Fintechs in the payments space are now reworking their business models to foray into the lending business.

Clearly, the lending model is showing the potential for Fintechs to grow in the long term. There is a huge underserved and underbanked population not covered by both banks and traditional non-banking financial companies (NBFCs). Fintechs are making big inroads into small-ticket size loan segments like loans to security guards, maids, and tea sellers. Similarly, Fintechs have designed cash flow lending to micro-entrepreneurs. Some Fintechs are innovating 'buy now and pay later' models by analysing extensive customer data for crediworthiness.

"The relation between banks and Fintechs is a very symbiotic relationship. There are areas where collaboration is not only the desired way, but the only way forward," says Krishnan Vishwanathan, Founder at Onemi Technologies (Kissht). The balance sheet and cost of funds are very critical in the lending business, he says, adding, Fintechs will always require the support of banks because of the cost of funds arbitrage. For lending, one has to reduce the cost of lending.

"The model that is prevalent is the risk-backed model. Banks are willing to take 100 percent exposure on their balance sheet. They do it because of the risk comfort from the partnership," says Krishnan of Kissht. Under the agreement, the Fintech bears the first 10 per cent of the loss, or if the loans go bad beyond a specific time, it buys it from the bank.

"Fintechs have the connection, but not the capital to lend. Banks have both money and capital. So, they will coexist. The pie is very large and in absolute terms, both will grow," says Pandey of SBI.

A year ago, lending tie-ups had come under the scanner for unhealthy practices and customer-protection issues. In June last year, the RBI came out with guidelines on co-lending. The central bank has asked banks and NBFCs to disclose names of digital lending platforms engaged as agents or distributors. The RBI has also directed such lending platforms to disclose the name of the bank or the NBFC on whose behalf they are interacting with the customer for loans. Platforms have to issue a loan sanctioning letter on the letterhead of the bank or NBFC.

Growing Ambitions

Fintechs are looking to tap a large segment that doesnt have access to credit or can't access credit at a good interest rate. Given the boundary that banks operate within, Fintechs are filling the gap by innovating and using multiple data points to lend. "Fintechs backed by a different set of capital are filling the gaps as they are taking the risks," says Krishnan of Kissht.

There is a likelihood of some Fintechs making it big in the next 5-10 years. Bajaj Finance, for instance, has come up with a differentiated lending model by successfully creating a tech-based consumer durable loan market. Many banks are now working on a Bajaj Finance kind of model to create a consumer durable portfolio. The market potential in many loan segments is huge. Also, not all banks will be able to exploit the digital potential. Besides, there may be some Fintechs already operating with a marketplace model. BankBazaar is an example where multiple banks offer retail products.

Some banks are also responding to the new threat from Fintechs and Techfins through apps. Traditional banking is moving towards Neobanking, a nimble, agile kind of experience. SBI has plans to make its YONO app a marketplace for other banks. "It is not surprising at all. Banks will come to the forefront," says Krishnan of Kissht. Here again, the partnership model is emerging between Techfins and banks. Federal is one of the four banks that offers personal loans on Google Pay. The latter had announced its partnership with private banks to facilitate pre-approved loans instantly for Google Pay customers. Other banks on Google Pay include HDFC Bank, ICICI Bank and Kotak Mahindra Bank. Google Pay customers can get hassle-free loans via the app. The money gets credited directly into their accounts.

"More competition is welcome? The payments industry is getting revolutionised with new players and new modes of payments," says Federal Bank's Warrier.

But, there are bankers who still look at Fintechs with skepticism."Fintechs are like parasites using the banking system and gaining valuations," says a banker.

Today, Fintechs without banking licences, are enjoying billion-dollar valuations. These asset-light players are riding on the network of banks. In the past, banks embraced Fintechs and created silos. "This brought a lot of inefficiencies," says a banking consultant. Ultimately, banks have to know their customers well.

"If you know your customer well, your ability to assess the customer's lifetime value will be much better," he adds. This will also help banks offer customers better products. "If a bank knows the intrinsic value of a customer from the products used by him/her, the bank can easily calculate the lifetime value of the customer. The cost of servicing a customer also comes down," says another consultant.

Some predict a deeper partnership between banks and Fintechs going forward. "Fintechs will offer end-to-end services, from lead generation to collection. Banks will follow regulations, compliance, etc," says Suryakumar of Crediwatch. But the space is still open for new kinds of licences in the future. In the last decade, the RBI issued differentiated banking licences like Payments Banks and Small Finance Banks. "There is a space for digital banking. Globally, there are licensed Neobanks like Monzo, 86400, N26, Revolut, etc," says Raj of Zaggle.

Clearly, the field is wide open for disruption and new models in the near future.

@anandadhikari

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