Reserve Bank of India’s Deputy Governor T Rabi Shankar on September 28 said fintechs are in a position to enhance the efficiency of financial intermediation but cannot replace the core nature of financial intermediation (banks).
He explained how fintech is transforming the provision and delivery of financial services with help of digital technology which enables speed in processing information and communication.
Processing speed has reduced the cost and time of transactions and communication speed has enhanced connectivity of systems expanding the reach of transactions, he said while delivering the virtual keynote address at Global FinTech Festival.
Digital technology is changing the way financial services and products are organised and delivered, he said, adding, fintech is affecting not just one area but virtually all areas of finance.
Notwithstanding, it is important to appreciate the limitations of technology, he explained, by breaking down the essence of financial intermediations.
Between savers and the borrowers, the core part of financial intermediation is done by banks through accepting deposits and extending credit and making payments, Rabi Shankar said.
Banks are at the centre of the payments system; this basic structure is overlaid by other institutions. Financial markets enable direct intermediation from savers to borrowers bypassing banks to some extent, he added.
Entities like pensions funds, insurance, mutual funds assume varying degrees of importance in financial intermediation as alternatives to banks.
The funds eventually are held in bank accounts, so the banks are a key part of the intermediate system, he said.
Defining the key characteristics of the intermediate systems, he said, banks bridge the gap between space and time, between savers and borrowers. The spatial gap occurs when a saver and borrower do not know each other, the temporal gap occurs when the needs of borrowers and lenders arise at different points in time, he added.
Banks bridge these gaps by providing liquidity services, in fact, banks are defined entities that provide liquidity services in an economy, he added.
Banks are uniquely placed to provide these services because they can create credit that is by design and act as a liquidity provider. In the field of payment, where the fintech is most impactful, banks are uniquely placed since all digital transactions are from one bank account to another bank account, he said.
All other payment service providers facilitate the transfer of money from one account to another account.
It is easier to see, while financial technology can improve the efficiency of intermediation, it cannot replace the core nature of financial intermediation, he said. For that purpose, we would require banks to provide liquidity services, he added.
He said if any fintech provides liquidity services, it is effectively a bank, at least functioning as a bank and must be subjected to the legal, regulatory and supervisory regime that a bank is subjected to.
This is one reason why in almost all countries entities other than banks are not allowed to deal directly in deposits, he added.
Fintech can enhance intermediation by bringing down the cost and time, it poses a challenge to incumbents and forces them to adapt the way financial intermediation takes place, he said.
The ideal approach for fintech companies to be considered is to be enablers and partners in synergy with banks or similar financial institutions, he added.
According to him the proper way to look at is banks and other financial institutions don’t have competition from fintech companies. Competition remains within the banks, between banks who leverage fintech better and banks who are not good at leveraging fintech, he added.
This would eventually decide which institutions will survive the fintech revolution, he said.