Indian banks, fintech firms upgrade collaboration to acquisition of equity stakes

Last week, Kotak Mahindra Bank Ltd acquired a 9.99 percent equity stake in KFin Technologies Pvt. Ltd, which describes itself on its website as India’s largest integrated solutions and services provider for investor and issuer services.

It was only the latest in a recent string of equity stake acquisitions by India’s banks in new-age fintech companies that harness technology to offer a range of financial products and services.

In August, HDFC Bank Ltd purchased a 5.2 percent stake in Mintoak Innovations, a digital payments platform, following up on the December investment of an undisclosed amount in smallcase technologies, another fintech startup.

State Bank of India in June invested in payment gateway company Cashfree Payments. ICICI Bank Ltd too has bought stakes in fintech start-ups, in February investing in digital payments firm CityCash and Thillais Analytical Solutions Pvt. Ltd.

Globally, the investment arms of big banks like Citigroup Inc and Standard Chartered Plc have invested in fintech companies over the past few years. In India, the trend is only now gaining momentum, led by the adoption of digital solutions by a vast section of consumers.

Fear of Missing Out?

According to Industry experts Moneycontrol spoke to, banks are making two kinds of investment in fintech startups. One is with an eye on returns on their investment and the second from a strategic perspective aligned to their partnerships with the startups.

Banks have started realizing they themselves have distribution reach and a track record of regulatory compliance, subject matter expertise and consumer trust, and fintech start-ups have been capitalizing on these advantages through their partnerships with the lenders, said Abhishant Pant, founder of The Fintech Meetup, one of India's largest fintech ecosystem.

Some of these fintech start-ups, who partnered with banks five-six years ago, have grown exponentially and banks probably realized that they had missed out on the opportunity of value creation and are now going aggressively to tap it, he added.

Initial challenges

Banks initially didn’t have the expertise to decide on how to invest in these start-ups but had a ringside view of venture investing. Most of these banks were shying away from investments and evaluating how to go about it, Pant said.

As the procedures around investing, compliance and valuations became clearer, banks started acquiring stakes.

Most of the top banks have set up dedicated teams both on collaborating with fintech firms and to explore strategic investments, a senior official at a private sector bank said, requesting anonymity.

“As a bank we first work with a fintech startup, after the passage of a few cycles and as clear growth prospects emerge, we take a call; we bring our license, brand and trust to the table with our name,” the banker added.

Strategic investment play

Banks also invest in fintech start-ups as a strategic investment play. These are a little different from pure play venture capital and private equity investments, said Vivek Belgavi, partner fintech and alliances, PwC India.

The critical part of an investment has to be strategic to strengthen the core business of both the bank and the fintech firm, Belgavi added.

Banks are probably investing to build moats around the core business they have developed with fintech startups, so the product or innovation cannot be replicated easily.

What do the fintech firms have to say?

Banks have created trust, brand and distribution reach that are unparalleled, said Raman Khanduja, co-founder and CEO, Mintoak.

As banks have a problem with legacy systems and banking has become more tech-centered, especially delivery of services, fintech partnerships offer a win-win opportunity, he added.

Fintech firms too have realized they need the brand and trust that banks command. It starts with a partnership and then the relationship becomes more strategic.

The banks want a stake in the growth of their fintech partner and that’s why investments happen, Khanduja said.

Banks look at this in two ways. Pure play equity investments are front-ended by their private equity/investment arms and the strategic investments are done though their business teams.

SBI’s investment in Cashfree wasn’t a part of its digitisation journey, but more from an investment perspective, so Cashfree was able to pitch to its VC arm, said Reeju Datta, co-founder of Cashfree.

Strong banking relationships help fintech firms grow their business and size, strategic investment just takes them a level above.

Emerging areas

There is a wide range of areas in the fintech landscape banks are increasingly looking at.

Banks are looking to strengthen their consumer-facing solutions, to tap the buy now, pay later, or BNPL, opportunities, and interest in corporate solutions and integrating these solutions in their value chain, said Pant.

It also depends on at what stage the bank is in its digital transformation journey.

According to Belgavi of PwC India, banks are focused on three areas of interest– digitising capabilities across sectors like healthcare, agriculture and education; distribution or marketplaces, for example neo-banking platforms; and the ecosystem platforms like TReDs or NUE.

TReDS is an electronic platform for facilitating the financing / discounting of trade receivables of small businesses. NUE is short for new umbrella entities, which will operate their own payments infrastructure and compete with the National Payments Corporation. of India (NPCI).

The distribution of financial services is moving out of the banking applications and that's a massive milestone, said Datta of Cashfree.

Payments are happening outside banking applications and so is lending and that's where the next phase of growth could come from, Datta said. ​