Fintech: collaboration or disruption?
These gale winds of disruption and innovation brought upon by technology, regulations and government action, will fundamentally alter the banking industry. Payments, liabilities and assets will all undergo dramatic transformation as switching costs reduce and incumbents are threatened,” said Nandan Nilekani, ex-chairman, UIDAI (Unique Identification Authority of India) and co-founder, Infosys Ltd.
Over the past couple of years, ‘digital’ has been a buzzword in the financial industry. Bank managements devote time to discuss digital strategies during analyst meets, in addition to the usual operating metrics. Amidst all this brouhaha, there are some fundamental questions that must be thought about: is the level of embracement of technology the same among all banks?
Is technology going to actually result in differentiation among them or is it an unnecessary expense for all? Are the new-born financial technology (fintech) companies going to disrupt the industry or provide an opportunity for collaboration?
Are the others in the financial industry—such as microfinance institutions, asset management companies, and insurance companies—reacting to technology innovations in a similar manner as commercial banks?
The business of commercial banks is simple to understand: they raise money from depositors and extend it as loans to borrowers, earning the difference in spreads. The business of banking is among the oldest known and has withstood the test of time.
So, it is safe to say that banks are here to stay and the chances of them being dis-intermediated are bleak, especially in a bank-led economy like ours. However, the pervasion of technology does possess the power to alter the banking landscape.
In the recent past, we have already seen media reports of certain foreign banks downing shutters on some of their branches in favour of adopting a digital banking approach.
Domestic banks have also reported a spurt in the volume of transactions being done outside of their branch network, to the extent of almost questioning the efficacy of a large branch network.
An argument can be made as to whether rural India, where a majority of our population resides and is served largely by public sector banks, would be a part of this change. The government through its Jan Dhan Yojana has seen an opening of over 200 million accounts. This, along with the Aadhaar card and increased mobile connectivity, could see rural India embracing technologically enhanced banking at an equally fast pace.
The collaboration of all these forces is popularly known as the JAM trinity.
The digitisation, or automation of processes, could help banks in cost savings; leading to an improved value proposition for the end customer. I do not think that any cross-section of the banking system would be disadvantaged with regards to access to technology. Each entity will have an equal chance to improve its systems.
A segment that has aggressively been targeted by a majority of fintech companies has been payments. Traditionally, banks have occupied this space through point of service (PoS) terminals and cheque payments.
However, with the increase in internet connectivity and higher penetration of smart phones, various new companies have entered this segment. They provide payment solutions for regular bill payments, e-commerce transactions and various business-to-business (B2B) transactions.
They say that customer-to-customer (C2C) transactions will lead the next wave of growth. These fintech companies are most certainly a threat to the traditional banking system, but payments-related revenue contribute a minuscule portion of their overall profit.
The advent of the Unified Payment Interface (UPI) opens up the potential for the entire country to shift to non-cash transactions, and could also impede the growth of the payments-focused fintech companies.
The other banking segments at a risk of disruption include: distribution fees on sale of mutual funds and insurance policies, credit card and debit card fees, and the remittance business.
Fintech companies and banks have little in common. The former is focused on specific ‘pain points’ while betting on software as compared to the latter, which has an established brand name, large customer base and distribution network.
An interesting statistic I came across suggests that approximately 85% of the capital that has been invested in fintech companies has been used to acquire customers versus building technology.
Also, banks have the capability of originating loans and creating purchasing power. There is a high probability of collaborations between banks and fintech companies going forward.
The level of disruption or dis-intermediation in other verticals such as microfinance institutions, asset management companies, and insurance companies seems low with the companies in these verticals adopting technology as a means to reduce cost.
Microfinance institutions have adopted tab-banking with their representatives using tablets to provide accurate log of information and also helping improve operational efficiency. Insurance companies and asset management entities are using technology to reduce agency-related expenditure by going ‘direct to customer’. The strategy adopted would help the entities in these two industries to reduce cost and prevent mis-selling.
Saravana Kumar is chief investment officer, LIC Mutual Fund Asset Management Co. Ltd.