Fintech startup Slice to merge with North East Small Finance Bank

RBI officials have in the past mentioned that it is not in favour of fintechs gaining licences through backdoor by acquiring licence-holding regulated entities such as banks and NBFCs. The regulator had earlier approved Centrum Capital and fintech payments firm BharatPe to invest in Unity SFB. However, this is the first instance of a fintech firm becoming a bank.

However, the regulator’s approval for the merger indicated that the central bank has full confidence in the fintech’s shareholders to bring a sea change to the Small Finance Bank (SFB) landscape by advancing its financial inclusion goals.

Slice largely works with college students and new-to-job employees and used to provide them credit and payment services. NESFB has 208 branches across the seven North East states along with West Bengal and has largely focussed on customers from the rural areas and bottom of the pyramid segment.

“We’re grateful to the RBI for entrusting us with this immense responsibility. This approach allows us to serve a wider audience, including those often overlooked. We will further strengthen our risk underwriting through the use of technology and data. We see this as an opportunity to build a highly inclusive and responsible bank, underpinned by robust risk management and strong governance,” said Rajan Bajaj, founder and CEO, Slice.

Slice said that the merger will help realise the merged entity’s shared goal of integrating technology with grassroots financial inclusion across the nation. This merger is yet to get the requisite shareholders' consent and other regulatory approvals.

The new age in banking

"Fintechs went through a Darwinian phase last year and those who followed the regulator in letter and spirit are being rewarded now. Slice can potentially become the first bank with a digital first approach and revolutionise the modern banking experience for the smartphone generation," says Vikram Chachra, founding partner of 8i Ventures and one of the early investors in Slice.

Earlier Slice used to issue prepaid cards with a relatively low credit limit to its young customers and then gradually increase the credit limit as they gain confidence in the customers’ ability to pay back. However, the RBI stopped the company from issuing a credit line on a prepaid card last year. This diktat has up-ended the businesses of several startups that were issuing such cards such as Uni, Jupiter, Fi Neobank and a few others.

According to the central bank, the functionality of the product determines the regulation and if the product is similar to a credit card, it should comply with all the credit card regulations. In India, only banks and a couple of bank-owned companies are allowed to issue credit cards.

"Slice getting the regulatory nod at a time when Navi Technologies did not get one and Paytm Payments Bank is still struggling to get the restrictions on customer onboarding lifted means something. This also shows the regulator's forward looking approach towards fintech," says a venture capital investor, who did not wish to be identified.

A slice of banking

Most fintechs business model revolves around lending and the cost of funds become paramount, adds Chachra. Becoming a regulated entity that can accept deposits will help Slice to get funds for credit at better rates than most other fintechs and NBFCs.

"Slice already has one of the best credit underwriting for people who are new to credit and this will help in advancing the financial inclusion goals as it lends to a larger cross section of customers," he says.

The approval for this merger shows that RBI is willing to accommodate fintechs into the banking fold as long as their compliance, risk management and governance are in line with the regulator’s mandate, said a senior fintech executive.

Fintechs are often at the mercy of banks in running any regulated products and becoming an SFB means that Slice will get a head start over its competitors.

"This alliance with Slice marks an exciting expansion of our reach and enhancement of our services. Dedicated to supporting the underserved, our collaboration is bolstered by slice’s innovative technology and a keen emphasis on customer experience,” said Rupali Kalita, managing director and CEO of NESFB.

The companies will decide on the management positions and other strategic changes in the coming few months. “There will be an integration process with both entities working diligently to ensure a smooth transition for all customers,” the companies said in a joint statement.