The date was October 6, 2022. The stage was set, and the room was abuzz, flickering with multiple disco lights. HDFC Bank was all set to launch its newest digital initiative in one of Mumbai’s fancy five-star hotels. Bankers, fintech players and journalists were all there, revelling in one of the most glittering events in the banking landscape.
The event was the launch of the SmartHub Vyapar Merchant app, which would facilitate instant, digital and paperless merchant on-boarding for the bank’s customers. The app was developed by HDFC Bank in partnership with Mintoak Innovations, a merchant SaaS (software as a service) platform.
Such events, to launch their digital initiatives, have become the new normal in the banking space. Banks today are no longer confined to their traditional brick-and-mortar setup or the exhausting paperwork of old. They are getting with it.
Fintechs fuelling change
A major reason for banks constantly revolutionising and upgrading their digital services is the rise of fintechs. Relying on smartphones for almost everything is the new normal, particularly when it comes to financial services. Fintech companies have become an integral part of the country’s economy, keeping it on the move.
Today, India has more than 7,000 fintech startups, operating in various segments. Such is the breadth of their presence that they have a finger in every pie, from payments and online credit facilities to subscription management and peer-to-peer lending.
With the growing presence of fintechs, banks have realised that they need to gear up on the technology front. Banks are using artificial intelligence to ensure smooth customer identification and authentication, while also mimicking live employees through chatbots and voice assistants.
The use of Aadhaar and video know-your-customer (KYC) along with card-less cash withdrawals and paperless customer on-boarding are some of the tools that reflect acceleration in the digitisation of banking in India.
Gone are the days when consumers had to wait for hours to reach the front of the queue, complete formalities, fill forms and access customer care for assistance at banks. With fintech banking solutions, self-service capabilities provide customers with operational processes that were previously only available via a physical branch. Not just that, bank-to-bank payments have become the new normal.
The opportunity to tap this trend is huge. According to an E&Y report, only about 12 percent of Indian adults—fewer than 20 percent of account owners —had made a digital merchant payment in 2021. However, two-thirds of those who made a digital merchant payment did so for the first time after the onset of COVID-19. Also, the share of account owners with an inactive account in India is 35 percent, which was the highest globally in 2021.
Fintechs have been driving this change.
“The primary evolution that the fintech players in the country have brought in is that they have digitalised financial processes. One of the major trends in the fintech sector is digital lending, through which borrowers can avail of a loan through applications on their mobile,” said Mahesh Shukla, founder of PayMe, a fintech.
According to Shukla, fintechs have also significantly reduced and also simplified the documentation process. One of the major challenges in conventional banking is that it was earlier difficult for people in rural areas to access loans. Fintech has made it easy for people from all parts of the country to do so online, added Shukla.
Globally, too, cross-border remittance is a growing opportunity, with payment volumes expected to cross the $156 trillion mark in 2022, according to the E&Y report. Banks would require technology to cater to this growth, something that fintech companies are already providing.
Also read: HDFC Bank aiming to onboard 2 crore merchants in the next three years: top official
Rise in fintechs
As of July 2022, India had over 7,300 fintech startups, according to "The Winds of Change" report presented by EY during the 2022 Global Fintech Festival in Mumbai. The EY report said Indian fintechs received $7.8 billion in funding in 2021, way more than the $2.9 billion they received in 2020.
According to the Chiratae and EY report, lending AUMs in Indian fintech have the potential to grow from $38 billion currently to $515 billion by 2030.
Fintechs are increasingly looking to capture underserved markets with their presence, convenience and technology. With the growing number of fintechs in India, banks are beginning to feel the heat and are gearing up on the technology front.
Kotak Mahindra Bank, for example, hired a chief technology officer recently, while other big lenders such as HDFC Bank and ICICI Bank are ramping up tech teams through lateral hiring.
Fino Payments Bank has also appointed a Chief Digital Officer and plans to recruit many people for this division to drive digital banking among the youth.
“Several years back, most banks and large institutions began hiring Chief Digital Officers or Chief Data Officers. These trends are normal every time an industry goes through a massive change,” said Amit Das, chief executive officer and co-founder of Think360.ai, a Mumbai-based data science company.
“In a way, with the growth of fintechs, banks are aspiring to become savvier, and the advent of transformative technologies like AI (artificial intelligence) will force these realignments.”
Das’ views were corroborated by Kotak Mahindra Bank’s first chief technology officer, Milind Nagnur. In an exclusive interview to Moneycontrol on September 14, Nagnur spoke of an important shift — that of viewing the bank as a software engineering-focused organisation. In his view, the new definition of trust in banking for customers is not about the safety of assets, but about how dependable a bank’s digital offerings are.
Are banks worried?
According to bankers, the rise of fintechs has indeed revolutionised the lending industry, with most traditional banks trying to catch up with fintechs. If anything, fintech lending has only threatened the ‘traditional’ way of banking and lending, which is good for customers and the market. However, it is too nascent to say that they could replace banks altogether, they added.
Banks have superior funding franchises, arguably more underwriting expertise, and a widespread distribution or collection network that is also becoming a lot more digital. Fintech companies have better technology capabilities, user interfaces, and innovative solutions.
According to industry players, both banks and fintech companies have realised the advantages the other offers and have come together to offer comprehensive solutions.
“Over the decade, especially after the start of the pandemic, it has been clearly proven that fintechs and banks have a collaborative relationship rather than a competitive one,” said Murali Ramakrishnan, managing director and chief executive officer at South Indian Bank.
“I feel that fintechs will continue to have the role of an enabler rather than a competitor. Even with banks’ legacy infrastructural gaps, they do have a firmly established long-term client base that is unlikely for fintechs to replace,” Ramakrishnan added.
According to Akhil Handa, chief digital officer at Bank of Baroda, while technological advances are not new to finance, digital innovation has brought major improvements in the connectivity of systems, in computing power and cost, and in newly created and usable data. These improvements have alleviated transaction costs and given rise to new business models and new entrants like fintechs.
“Fintechs have demonstrated that they can transform the financial-landscape, where consumers get to choose from a larger set of options at competitive prices and build efficiency through lower operational costs,” said Handa. “Banks may have lost some customers to mobile fintech applications, but this has also created an opportunity like never before for banking institutions and inspired them to embrace change.”
Also read: Fintechs need to ‘live' compliance, knowing regulations is not enough: Axis Bank MD & CEO Amitabh Chaudhry
Large unbanked population
Another reason why there is a tremendous opportunity for both players to survive in this landscape is the large number of unbanked Indians. Around 200 million Indians are unbanked, according to the Global Findex Database –2021. That’s quite a large number for both fintechs and banks to tap into.
“In India, we have enormous unmet demand for credit and enough space for many players. So, thinking that fintechs are eating into banks’ business is rather odd,” said Sugandh Saxena, chief executive officer at the Fintech Association for Consumer Empowerment (FACE).
Saxena added that most traditional banks are trying to catch up with fintechs, which only pose a threat to the ‘traditional’ way of banking. Banks in India have capital, scale, credibility and a much larger mandate, he added.
Bank of Baroda’s Handa said that while there has been increased competition from fintechs in the last few years in segments like payments and lending, banks have taken on this challenge as an opportunity.
Fintechs, according to Handa, have to an extent inspired banks to make product delivery seamless and on the go. Banks are delivering products with enhanced user experience and have made customers transition back to using the products and services of incumbents, he said. Rather than fear, he feels it is “healthy competition” between two entities striving to constantly push each other to serve their clientele better every day.
Can fintechs replace banks?
For a while back in 2021, the question often asked was: will fintechs be a threat to banks? Today, the Reserve Bank of India (RBI) has left no one in doubt about the answer, going by the slew of circulars that it has issued to rein in fintechs.
“The RBI seems hell-bent on regulating fintechs through banks or NBFCs (non-banking finance companies), and hence our models will have to evolve around that,” said a fintech founder, on condition of anonymity. “Our wings are clipped, so we have to depend on banks and NBFCs for survival. With the kind of regulations that the RBI has brought in, it is impossible for fintechs to replace banks altogether.”
According to Rajat Deshpande, chief executive officer and co-founder of FinBox, the plan for legacy players—banks and NBFCs—looks like this: improve your technology stack, partner with fintechs where you can’t build it yourself, and convert the entire suite of offerings into a digital-first business where the cost of delivery is lower.
This way, there’s much more potential to increase revenue per customer, said Deshpande. Direct acquisition of customers, added Deshpande, is becoming increasingly expensive and hence eats into margins quickly.
However, some bankers said that while banks’ cost of spending on digital transformation has increased, the costs may be plateauing.
“I think we are plateauing; 50 percent is at an aggregate level. At an aggregate level we are clearly seeing a plateauing of costs already,” said Parag Rao, group head – payments, consumer finance, technology and digital marketing at HDFC Bank at the launch of the SmartHub Vyapar app.
The way forward: collaboration or confrontation?
At least seven bankers and fintechs Moneycontrol spoke to said that collaboration, and not competition, is the way forward. Rather than competing with each other, it would be best for fintechs and banks to identify each other’s strengths and play the market together, added industry players.
“It's no longer going to be an 'us versus them'. Banks and fintechs have both realised that they accomplish more when they are collaborating, instead of competing,” said Srikanth Mopidevi, managing director and head of technology at DBS Bank India. “By working in tandem, banks are able to provide customer-friendly technology, while fintechs benefit from the large-scale network and customer data available with the banks.”
The next few years, Mopidevi said, will see a host of new collaborations expected to further improve the banking experience. Bank-fintech partnerships have especially enabled smaller banks to innovate and become competitive. However, fintechs will complement and enhance the existing banking landscape and not replace it, he added.
HDFC Bank’s Rao concurred with Mopidevi’s view. Rao said that he believes “very strongly” in the partnership philosophy and that the bank is open to more partnerships with fintech players.
Fintech players, too, believe that the partnership model will work well for both sides. “We believe that neo-banks and traditional Banks can work together to increase the size of the pie and play off each other’s strengths,” said Kunal Varma, co-founder and CEO of Freo, a consumer neobank. “This would lead to a win for the consumer, reduction in costs, and rapid market expansion with sustainable profit pools for the industry.”
This trend is currently visible. In September, Axis Bank partnered with fintech firm PayNearby to launch savings and current accounts for last-mile merchants. IDBI Bank has also signed a memorandum of understanding with Vay Network Services as its first fintech partner for digital supply chain finance solutions (e-SCF). There are many such examples.
According to the EY report cited earlier, collaborations between traditional financial services players such as banks with fintech startups is “business as usual” now and enabled by the proliferation of APIs (application programming interfaces, which allow myriad software types to communicate with each other) and data sharing norms.
With limited new licences, fintech startups only have the partnership route to go to market, and that is being welcomed by banks, the report said.
(This is the fourth and final story in a Moneycontrol series highlighting the growth and evolution of the Indian fintech industry. The series intends to capture the changes fintechs have wrought in the business ecosystem and customer experience in the Indian market so far and what can be expected on the journey forward. You can read the first, second and third parts here, here and here.)