Mumbai: Banks are fast emerging as accelerators for financial technology (fintech) start-ups, offering them opportunities to build proof of concept and scale in return for their products or technology solutions. Some lenders also provide the fintech start-up platforms to secure venture capital finance and allow them to co-develop solutions under their guidance.
State Bank of India (SBI), Yes Bank Ltd, Kotak Mahindra Bank Ltd, RBL Bank Ltd, HDFC Bank Ltd and ICICI Bank Ltd are among the top lenders supporting early stage fintech start-ups through mentoring and collaboration, by organizing hackathons or through programmes that offer early finance to start-ups that suit their requirements.
State-owned SBI, India’s largest lender, is setting up a 15,000 sq. ft innovation centre at Belapur in the satellite city of Navi Mumbai. It will house fintech start-ups as well as so-called “regtechs" which specialize in resolving regulatory issues arising from the emergence of newer technologies like blockchain.
“The innovation centre will house, incubate and accelerate fintech start-ups and will also act as a testing ground for these start-ups. It will be functional by next year," said Sudin Baraokar, head of innovation at SBI.
SBI is also conducting a hackathon in collaboration with Oracle India to spot fintech start-ups for various solutions such as facial and signature recognition, voice-based authentication and automated cheque processing, among others. The bank has also signed memoranda of understanding with IIT Kharagpur and IIT Bombay.
To be sure, most lenders are not looking at acquiring control of these fintech start-ups, but rather at using their solutions for their businesses, and in turn validating the technology offered by these firms, thereby helping them raise funds from venture capital funds.
“Most of these firms are not looking for funding from banks. They approach banks for validation of their business model, access to customers and getting strong referrals from banks if they are in the process of raising funds," said Deepak Sharma, chief digital officer at Kotak Mahindra Bank, which has set up an innovation lab in Bengaluru.
Asked if the bank is interested in acquiring these firms, Sharma said its intent is not to restrict fintech firms from accessing more customers. “The fintech ecosystem is still evolving and binding these firms at such an early stage does not make sense," he said.
“Over the past 18 months, we have worked with around 100 start-ups and have progressed to full-stage production with 12 of them," said Sharma. Kotak is partnering with these firms to build scale, enhance customer experience, gain operational efficiencies and build future technologies like artificial intelligence, machine learning and blockchain technology among others. The fintech firms Kotak is partnering with include Rupee Power which helps in real-time credit decision making, Decimal, which helps with sales force automation and Cointribe, which allows for automation of business loans.
Yes Bank has also been conducting “innovation" programmes for fintech start-ups, offering some of the chosen start-ups a platform to demonstrate their scalable business solutions co-created with Yes Bank to potential investors. “We offer them (fintech firms) scale and help them in gaining experience with a big financial institution. In turn, we have exclusivity agreements with them which allow us to access their product or technology exclusively for a limited period, giving us an edge over other banks," said Amit Shah, senior president and country head, corporate strategy.
Fintech firms say partnering banks and participating in accelerator programmes has worked well. “We have worked with both HDFC Bank and ICICI Bank. We got to work with HDFC Bank through their digital innovation summit and are helping them in automating various processes," said Shridhar Marri, CEO and co-founder of Senseforth, an artificial intelligence firm that helped HDFC Bank to launch EVA, a chat bot for handling customer queries.
Marri further said that partnering with banks boosts investor confidence and helps in raising funds quickly to scale up.
Yes Bank has so far conducted two innovation programs and is already working with nine start-ups. Four of the finalized start-ups were also able to raise funding through the platform. For instance, RedCarpet, a microlending fintech firm, and Numberz, a Gurgaon based cash flow management start-up, were able to get funding from investors through Yes Bank’s accelerator programme.
Yes Bank has tapped Israel, the US, United Kingdom and countries in the ASEAN region, among others, to choose start-ups for collaboration.
Commenting on acquisition plans, Shah said technology and regulations related to it are very fluid and hence, acquiring a tech firm is not a “great" idea. “The regulations are still evolving like we saw for e-wallets. Hence, we believe exclusivity agreement is a better deal than outright acquisition." He also said that the bank may consider launching an alternate investment fund to provide growth funding for such firms.
Apart from directly collaborating with fintech firms, some banks are also referring these start-ups to their large corporate clients. “We follow an open banking strategy where we not only co-create with fintech start-ups but also refer them to our corporate clients in case they are able to offer solutions for their business," said Sujatha Mohan, head digital and new initiatives at RBL Bank.
Most of the banks provide an open architecture through application program interfaces (API)—a set of protocols that allow applications to talk to each other—to fintech firms which leads to faster development of products and integration with banks. “Providing APIs to start-ups allows quicker integration of technology as compared to training them on various bank processes," said Baraokar.