In team sport events, team athletes compete with one another to secure their roles, but once through, they collaborate to bring laurels to the team. In the team of finance sector, banks and fintech firms are the team athletes. The former have the established customer base and the latter have advanced technology. Once their territories are marked, they need to cooperate in the larger interest of the finance sector.
Preamble
The Indian fintech market has received USD 29 billion in funding, till date (January 2017-July 2022). India’s CAGR in the fintech sector grew by 20 per cent, which is higher than that of the US, the UK, and China; according to ‘State of the Fintech Union 2022’ report by the Boston Consulting Group (BCG) and Matrix Partners India(1). Clocking over $800 billion annual payments transaction value, Fintechs, play a powerful role in the provision of full-fledged financial services to all Indians. Fintechs in India are well on the way of establishing themselves as systematically important financial institutions (SIFI).
Fintech Defined
Fintech, is application of technology to enhance or automate financial services processes so as to offer quick turnaround time for customers. Fintech is used to help corporates & individual customers to easily manage their finances and business processes using latest software. The technology is made accessible to the customers through their computer, smartphone and tablet devices(2).Fintech leverages new technologies like artificial intelligence, big data, and cloud computing to give customers a unique experience.
Services offered by Fintechs
Real-time payments, faster disbursal of loans, investment advisory, insurance advisory and distribution, lending to consumers & to Micro, Small & Medium enterprises, are now rapidly becoming a part of the digital Fintech landscape. The major Fintech segments in India are
- Payment segment: In this segment, the services offered includes wallets, bill payments and QR code payments. PhonePe and Google Pay are the major players in this segment (3).
- Lending segment: The services offered include buy now pay later (BNPL), personal loan, gold loan & auto loan. M-Swipe and Razor Pay are the dominant operators in this segment.
- Insurance segment: The services offered include insurance comparison platforms, digital insurers& employee insurance. Policy bazaar is a numero uno in this segment.
- Wealth segment: Services are provided related to wealth management through robot advisors, discount brokers &research platforms. Prominent firm in this segment is Zerodha.
Fintech vs. Traditional Banks
Fintechs, taking advantage of their technological prowess and lower operating costs, are offering more features such as analysis of customers’ spending and saving patterns, credit-builder products and lending products. Fintechs are able to attract younger consumers & have more robust technology than banks, they also have low overheads, giving them the ability to offer more low-cost or no-fee services than banks. Fintechs continue to add free or low-cost features, thereby attracting new customers &becoming the primary provider of financial services for their customers. The customers, once hooked, would not switch back to a bank even if the bank offers a compelling new product or service.
The legacy systems built up over the years and strict regulatory oversight that banks have to contend with, restrict their ability to encash on new technologies in time. Banks are more process-oriented when compared to Fintech(4)
Collaboration Holds the Key
FinTech has the potential to reshape the financial services and financial inclusion landscape in India. It can reduce costs and improve access and quality of financial services(5). The collaboration and cooperation between Banks and FinTech swill make a bigger impact for both the financial institutions. A few advantages of Fintechs and banks collaborating are:
- Banks have vast distribution network, loyal customers, track record in regulatory compliances and subject matter expertise which Fintechs can capitalize on by partnering with banks.
- Fintechs collaboration with banks will bring them closer to regulation and compliances, which will help build long term trust in Fintechs.
- The overall financial system will improve because of the advanced technology fintech can bring to banking.
The collaboration has already begun- Kotak Mahindra Bank Ltd acquired a 9.99 percent equity stake in KFin Technologies Pvt. Ltd (provider of investor and issuer services). HDFC Bank Ltd purchased a 5.2 percent stake in Mint oak Innovations (a digital payments platform). SBI invested in payment gateway company Cash free Payments(6). A win-win situation for Fintechs and banks is long term collaboration that combine the innovation aspects of fintech with the support and trust banks have built up over the years, to build the financial services sector to global standards and size.
Learners’ Opportunity
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Discussion Question
- What area of fintech do you find most interesting? Why?
- What are the challenges faced by the Fintech industry in India? Will increased regulation have an effect on the growth of fintech industry in India?
Key Words
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Source Articles
2. Monei Blog. (13/05/2021). Fintech vs Traditional Banks: Competition or Collaboration?
3. Bhardwaj. (09/06/2022). What trends are driving the fintech revolution in India
5. Shaktikanta Das. (April 2019). RBI bulletin. Opportunities & challenges of Fintech.