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NEW DELHI : Few months ago, IDFC First Bank ended its relationships with fintech startups such as NiYo and OneCard. The move not just gave sleepless nights to the affected startups but the entire ecosystem. Then NiYo found solace in Equitas Small Finance Bank, whereas OneCard got its new partner in Federal Bank. At a time when the competition between banks and fintechs is at its peak, Federal Bank has become the new saviour of fintechs.  

“Fintechs see us much more receptive, agile and transparent while working with them. We are willing to enable to actually co-create with them because there’s so much of experimentation in this area so we don’t hard-box them and narrow-scope them into something," Shalini Warrier, executive director, Federal Bank, says. 

In an interview with Mint, Warrier talks about Federal Bank’s fintech strategy and how bullish it is on fintechs to grow its liabilities and unsecured lending base. Edited Excerpts: 

The thought process behind Federal’s fintech strategy? 

Five-six years ago, Federal Bank embarked on a very conscious digital banking strategy. What we did at that point was we actually carved out a digital banking as a separate vertical by itself. We said that given the way the world is shaping, digital banking has to be something that needs specific attention and its own set of KPIs. Therefore, if it makes sense then create a specific unit that is focused on digital banking, independent of all other units, work very closely with technology and product groups whether it is liabilities, asset, or corporate banking. So, we decided to set up a separate vertical. 

The purpose then was to start with the basics such as how do we get transactions out of our branches. We invested a lot of time and energy in making sure our customers as well as our own staff recognize the value of digital and migrate the transaction. When we started in 2015, for every 100 financial transactions that were happening, about 40 used to come from digital. Today, it is close to 90%.  

We were first to experiment with blockchain for remittance, mobile banking applications and while these experiments and efforts continue to go on, 3-4 years back we did a strategic review with our board and were watching the fintech space very closely. We internally evaluated on the kind of approach we could take and one of the approaches we could have taken was to look at fintechs as competitors, but we realized that the ecosystem will be better off if we look at fintech as collaborators.  

So, the first focus was in making sure we had the right infrastructure for our relationship with fintech; and the core infrastructure that was required was the whole API banking fleet.  

Talking of APIs (application programming interfaces), the industry sees Federal literally offering API banking as a service? Could you please tell us about your API banking? 

Three years ago, we invested in a completely new infrastructure for API banking. We invested in API banking gateway from IBM and crafted a slew of technologies. We have a great technology team literally devoted to creating APIs and we started off with saying ‘just go and build all the APIs you think any partner will require whether there is a demand or no demand, we will think about it in due course’. We had a great set of developers who started building these APIs and we started hosting all these APIs in the sandbox that we had as part of the API banking gateway.  

From infra standpoint, this is a huge investment we made three years ago, we built it, we have grown it and currently there are total 300 APIs we have. We allow our partners to experiment extensively with those APIs and give them access to our sandbox environment. 

Where does fintech stand in Federal Bank’s overall scheme of things? 

Federal Bank extended its branch presence quite a lot in 2016, but beyond 2016-2017, we haven’t opened any branch. We looked at fintechs as one of the channels who can identify and get customers for us. This was also in-line with our philosophy of ‘branch-light, distribution heavy’. 

The stance we have clearly taken is fintechs and us are perfect banking partner; and we have gone one step further now. Earlier the fintech partnerships was run by my digital banking team but recognizing the fact that there is an opportunity out there with multiple partners, we have actually carved out ‘Fintech Partnerships’ as a separate unit. Digital banking, mobile banking all that stuff is happening with one of my units, but working with fintech partners and providing right infrastructure to them to partner with us is now a separate unit. Both digital banking unit and fintech partnerships units report into me. 

That’s a broad framework from where we are from fintech standpoint. It’s an exciting journey and we are continuing to work with a range of fintech out there. 

How big is the new team? 

Digital banking team is probably about 40 people. The fintech partnerships unit has just been created and still very early days and we are looking at how much capacity we will need. We need to be agile also in this respect because the agility will come from the ability to scale up and scale down depending on which partnership is at which stage of evolution.  

But the unit is critical enough for us to have a senior person heading it. It is a separate unit and the unit is working collaboratively internally with various stakeholders, including technology, operations, risk management, transaction monitoring. The core fintech partnerships unit will be probably 8-10 people. This shows our importance for this sector.  

Fintechs see us much more receptive, agile and transparent while working with them. We are willing to enable to actually co-create with them because there’s so much of experimentation in this area so we don’t hard-box them and narrow-scope them into something.  

Which all fintech segments Federal Bank is particularly bullish about? 

The requirement for Federal Bank as a franchise: the first is high-margin lending product we need to expand our presence in because right now our asset book on the retail side as well as overall asset book is very heavily skewed in the secured assets like home loan, car loan etc. To expand return on assets and net-interest margins, we need to increase our unsecured loans, personal loans, credit cards etc. 

The second theme that we have is we do believe that strategically we have advantage in a granular liabilities base that we have. How do we expand that base and make sure it continues to remain granular and doesn’t get bulked up is another strategic priority. 

Third priority we have is growing our non-resident customer base.  

The fintech partnerships that we have in place are in some form and fashion linked to some of these strategic priorities. For example: we have a partnership with OneCard on the credit card side, this is a recent one because credit card is a new baby in our suite of products and we want to expand that. We have partnerships with Paisabazaar and Pine Labs to grow our unsecured loans; on the liabilities side, Jupiter and Epifi are some of the partners. Gold loans is another growth area, we have been working with Rupeek for quite some time and we are also looking for more partnerships on gold loans side. 

Also, we are talking to a few banks to see how best Federal Bank can partner with them in their neo-banking proposition. 

There was a concern once that if there are two neobank partners and both bring the same customer, then Federal Bank doesn’t allow the onboading of the same customer from the second neobank. Isn’t that a challenge since most neobanks are chasing more or less the same set of customers? 

That was a temporary issue.  

But how relevant is it for a bank to open multiple accounts for a same customer from the business standpoint? 

A customer can have multiple accounts with the bank. It gets consolidated under one customer ID on the system – one account he can open as savings account; another account could be a joint account with spouse; third could savings for future…so we allow that. That’s a normal banking practice.  

We do hear about fintech lending startups seeing double digit default rates. Is Federal Bank comfortable with that kind of aggressive lending? 

We do have partnerships on lending side. OneCard is one partner on credit card side but we are very clear that the credit norms under which we will approve it will be under the bank’s credit norms and the parameters of risk will be laid by the bank. The partner has no decision making on that and it is controlled by the bank.  

But we will experiment and we will experiment it even internally without a fintech partner, we will test certain segments and that’s natural for any bank to do. 

What kind of disbursements are you seeing via fintech partners? 

It is very small now. We just have OneCard partnership on credit card side and we are doing about 300-400 cards per day. On personal loans side where we partner with Paisabazaar and Pine Labs, we only offer loans to existing to bank customers and not new to bank customers. We wanted to start offering loans to new to bank customers a year ago but due to Covid, we decided to wait.  

Are fintech partnerships commercially viable yet or is it too early? 

Most partnerships are 2021 vintage, so it’s too early. But having said that, we are seeing a path to value creation for the bank. If you put a branch, it takes about 18-24 months for that branch to become profitable. So, that’s the same analogy I use it even here. We know this is going to be successful, we are past the experimentation stage, now we are seeing a path to revenue and we are also seeing an ability to scale up.  

Scale up, I mean, with the existing partners so whether we work with Epifi or Jupiter, we are seeing the scale up happening as well as in terms of multiplicity. We have two neobanks, for example, so we know that we will be able to scale it up with even the third one and a fourth one as the gestation period becomes shorter. So, scale up is both within the existing partners and the multiplication of that concept across multiple partners of same kind. 

We can see balance build up already happening. 

There’s a trend where we are seeing some banks – the previous backers of fintechs – scaling down their fintech partnerships and trying to do things on their own. Should we expect Federal Bank choosing the same path at some point? 

I can’t comment on what will happen 3-5 years down the line. I can clearly tell you now is that fintech collaboration is very core to our strategy, and if something is core to your strategy, you cannot walk out without thinking through all the repercussions and implications of it.  

Federal Bank has 50 partners. Do you have bandwidth to accommodate more? 

Strategic fit is important and second is meeting of minds. Yes, we have bandwidth to take up some more partners but only if it meets our strategic priorities. 

Is it a deliberate decision to not focus on payments startups because UPI is a loss-making game for all banks? 

Not a conscious decision. We have one partnership with BharatPe in person-to-merchant category. I think person-to-person category is quite saturated between Google Pay, PhonePe etc and I don’t think it makes sense to invest much on that. And, we don’t see many coming to us in the P2M category. 

 

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