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Bengaluru: Financial technology start-ups, with their disruptive ways, are essentially creating a new market instead of eating into the profit pool of banks as is popularly perceived, said P. Vaidyanathan, managing director and chairman at Capital First, a financial institution focused on providing debt financing to small and medium businesses as well as consumers.

Speaking at the Mint Fintech Summit 2016 in Bengaluru on Thursday, Vaidyanathan said fintech start-ups often lend to consumers on the basis of multiple unconventional parameters including social behaviour. Banks often do not find such consumers credit-worthy.

“We have to accept that this is opening a new market and not necessarily eating into the profit pool of the existing banks, because they will never lend to these customers. This is opening up a new market and fintech companies through their new approach are doing this at a dramatically reduced cost," said Vaidyanathan.

“When banks come to evaluate the portfolio and buy from us, they take only such portfolios which have been evaluated and lent in the conventional way. They want to see the banking statement, the profit and loss statement, analysis of ratios. What does this mean? That the system has not yet been configured. The gate thus opens up for collaboration and not confrontation," he added.

According to a June 2016 report by KPMG and software industry lobby body NASSCOM (National Association of Software and Services Companies), the Indian fintech software market is forecasted to touch $2.4 billion by 2020 from the current $1.2 billion.

According to Vaidyanathan, fintech will be to the new age banking system what computers were to traditional banking two decades ago.

Vaidyanathan said instead of nursing a grudge, banks should adopt the innovations and look at investing in fintech start-ups.

“Accept them, adopt them, nurture them, invest in them. But, at the heart of it, you have got to step back and see and accept the inevitability of it, because inevitability here is very real. When computers came for the first time to the banking system, we all know that unions marched, objected, said jobs will go, etc. From there, it has moved to a situation where it is not impossible, but inevitable."

Under the Digital India initiative, the government has mandated an open API policy for five key programmes, meaning data from these programmes must be made accessible for similar creative use. The emerging solutions could further the cause of financial inclusion and reduce complexities in transactions. The five programmes are Aadhaar, e-KYC (know your customer), e-Sign (a mechanism for digitally signing documents that is legally accepted), proposed privacy-protected data sharing, and the Unified Payments Interface (UPI), an initiative of the National Payments Corp. of India which will allow fund transfer between banks with the help of a single identifier.

Sharad Sharma, co-founder, iSPIRT Foundation, spoke of payments using India Stack and partnerships between big financial institutions and start-ups. “When you make a payment using a credit card and using UPI, the process will be similar—until you reach the payments page, all that UPI does is, it says you don’t need the chip on the card. The chip on the phone is good enough. You put in your UPI virtual payment address, and the PIN, and the transaction continues. With this, you suddenly have every Indian with a phone become a player in the payments space."

“This is radical because what it does is, it suddenly opens up this idea of anybody becoming a payment service provider. You will have lots and lots of people sign up with one payment service provider who’s going to handle all their payments for them. That payment service provider need not be an existing bank. This puts the incumbent banks in play," he said.

The estimate is that by April next year 100 million Indians would have at least transacted once using UPI. There’s also the data part of the India Stack, which is not yet formally launched, he added.

“Just the way that you have a custodian of your money, and that custodian of your money cannot send money out from your account without your permission, you will have a custodian of data. Let us say you are a telco, you have my billing information and as the data provider, you cannot give the data to somebody else without my permission. That permission is called data sharing consent. It is standardised and again, anybody can collect that consent," Sharma said.

Sharma expects a data sharing economy to emerge in India and that the country will become a pioneer in this “because we would have liberated the data at scale in India without compromising the power of the individual in the middle".

“No country has been able to do this right now. Europe has lots of regulation but it’s very easy to work around it. The US has great technology but there’s no protection for privacy and India may end up becoming the first country where you’re able to balance both of these demands, where data is liberated yet the user is in charge and it’s a large scale system in real time," he said.

According to Sharma, a healthy relationship between the big companies and the start-ups is absolutely essential for this industry to develop to the next level.

“We’re going to see three types of relationships emerging. One type of relationship is, start-ups may actually provide the technology that big players need. In the case of UPI, every bank has to have a payment service provider. Many banks will build it on their own, but others will buy it. They’ll buy it from tech companies. It’s a complicated process but they have to think of a new way of procurement," Sharma said.

“The second type of relationship will be in the online world. State Bank of India (SBI) has only 25 million online users. Therefore, it is in the interest of players like even the SBI to see how they can get their products out in the market and double the number of people they are serving.

“You will see online distribution partnerships happen between traditional financial players and the online players that can offer distribution.

“The third type of relationship is about the products themselves. Nobody knows what credit packages or what credit products will work for the 200-250 million people who have Jan Dhan accounts but no credit, and so you have to experiment multiple times and partner with start-ups that are also serving that market. Many of those bets will fail but some will succeed, and the big players have to double down on the success either by investing or acquiring the companies," he said.

The centre should take steps to incentivize consumers for going cashless as well as merchants for accepting electronic payments in an attempt to propagate such transactions in India, said T.R. Ramachandran, group country manager, India & South Asia, Visa.

Speaking at Mint Fintech Summit 2016 in Bengaluru on Thursday, Ramachandran said personal consumption expenditure in India currently stands at $1.3 trillion, of which about 5% is electronic payment. Besides, cost of cash to the economy is 2-2.5% of the gross domestic product (GDP), a “staggeringly large number".

The government should thus consider incentivizing consumers and businesses to encourage cashless transactions.

“There are two things that have driven this (cashless transactions) in many parts of the world. First, fiscal incentive and the poster child is South Korea. Basically, incentivise the consumer to pay electronically, say (by providing) an income tax break. And equally, the merchant accepting the payment should be benefitted. The obvious math was that the government saved by reducing the cost of cash," Ramachandran said.

Secondly, cashless transactions need to become as seamless as cash payments.

“Here is a very simple thing that has to happen. If I have to reach out to my pocket and take out a 500 note, the transaction is painless. Electronic payments need to be as painless as taking out a 500 note," Ramachandran said.

Ramachandran said the US is a predominantly credit card market while western Europe and many parts of Asia are predominantly debit card markets. In comparison, India has witnessed both credit card and debit card subscribers grow. The country currently has 24 million credit cards and 670 million debit cards.

“For the year ended March 2015, there were more transactions that happened on credit cards in India than the last 10 years put together. But, we need to solve for user experience. Making a transaction is not as simple as cash payment," Ramachandran added.

The Visa executive added that payments will take a momentum leap with technologies such as Quick Response code-based payment or contactless payment using radio frequency identification or near field communication. Besides, the push towards connected devices will also boost cashless payments.

“For instance, there are connected refrigerators. An egg tray has 12 slots. When there are four empty slots, it will order automatically. Amazon has the Dash button. And none of this can be cash on delivery. The days of David, the start-ups which are agile, slaying the Goliath, the banks, are over. They must learn to dance together," he added.

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