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The Post FinTech world: What does the future entail for traditional banks?

Arijit Sanyal

Issue 10 | August 23, 2020

Traditional banks have offered an array of services for years, which have shaped the banking and the finance sector. However, they are on the verge of being disrupted, owing to the fintech revolution. Though the banks have tried to adapt to changing times, it remains unclear whether or not they will be able to catch up this time.

The FinTech industry is on the rise in India and has, so far, continued to capitalize on the grey areas created by the incumbents. It may be argued that FinTech has contributed to an increased financial inclusion over the last couple of years, but it may have also contributed to an uncertain future of traditional banks. When we take a look at demand deposits, traditional banks continue to be acknowledged leaders, however, their presence, in other sectors, has been shrinking steadily. The fact that there is a wide range of services offered by the banks, but only a few are consumer-friendly, has given FinTech companies the perfect window to establish their roots deep in the banking sector.

Irrespective of government reforms, the non-availability of credit has been a recurring problem for small businesses alongside relatively lower-income groups. Firstly, the banks have a propensity to chase big customers and while doing so, prospective lenders below a certain margin do not fit into their usual business model.

Secondly, the obsolete credit underwriting criteria of banks has left people with no (or poor) credit scores with no other recourse than turning to the unconventional borrowings offered by FinTech companies. This is where the fintech companies have stepped in with their consumer-centric solutions rather than following the bank’s straightjacketed formula. By way of in-depth surveys and eccentric 24/7 support, a considerable portion of small businesses have been lured away towards FinTech-based lending. The banks have performed poorly even while dealing with those eligible to get credit by adhering to the tedious formalities which take up to months. On the contrary, AI-based lending platforms have not only done away with intermediation, but have also developed an algorithm which is far more inclusive when it comes to credit underwriting, assessing risks, and matching prospective lenders with borrowers, thereby making things easier for lenders and difficult for the banks.

Speaking of credit, India is largely a consuming economy and the demand-supply gap of credit has made things difficult for buyers and sellers alike. In a society plagued with stereotypes concerning credit cards and heavy sanctions, FinTech lending has once again stepped in with feasible solutions. Speaking of which leads us to Zest Money, a consumer-based FinTech company, which has partnered with e-commerce platforms and allows buyers to avail cheap credit at relatively lower interest rates. Furthermore, the initiation of “buy now, pay later” options across platforms has enabled buyers from relatively lower-income groups to enjoy benefits, similar to credit card holders, while also contributing towards the reviving economy. Thus, by rolling out such offers, not only do the alternative lending platforms contribute towards bridging the credit gap but also create a credit data bank- which can be used for lending.

The day-to-day payments in cash & through cards have been replaced by QR-based payments, which has aggravated the problem of India’s unorganized sector and has widened the gap which the banking sector has been trying to shrink. With companies like Amazon, Airtel, and Paytm offering services at parity with account holders via- payments bank, which has received the backing of the Reserve Bank of India, the demanding millennials are unlikely to visit banks and spend hours for opening accounts, when the same has become so hassle-free.

Another domain where the banks are slowly ceding control to FinTech companies is financial advising and investment. This is not because of excessive regulations or formalities, but mainly because of the geographical barriers and considerable charges levied by the banks. On the flip side, AI-powered advising portals have adopted a unique approach of reaching out to prospective clients using social media platforms. FinTech related investments have been around $800 million (according to Deloitte’s quarterly report) in the second quarter of the financial year 2020, irrespective of the severe impact this pandemic had on the global economy. Apart from this, digital transactions have been close to $4 million in the same quarter which reaffirms the Indian market’s potential to harness FinTech in due course of time provided we have the right policies in place.

However, even if the Indian regulators were to adopt the European approach by having the same regulations in place for banking and non-banking companies (dealing with similar activities), greater emphasis has to be given to NPAs in the Indian markets. So far, the RBI has been liberal when it comes to regulating FinTech-based companies and has provided several benefits in the form of merchant discounts, short duration between application, and approval of the license. However, this does not mean that it’s time for traditional banks to wrap up, rather a lot can be taken away from the Google Pay and SBI partnership for rolling out QR-based digital payments. Partnerships can also ensure the two sharing their expertise and developing consumer-eccentric solutions and disseminating the same through digital channels. Likewise, the banks can assist the FinTech companies in procuring customer data, spending patterns, and cybersecurity- which has been a concern for these companies.