Over the past few years, Kochi-headquartered Federal Bank has been at the forefront of partnering with fintechs. At last count, the bank had over 50 tie-ups with fintechs.
Since demonetisation, the bank had adopted a ‘branch light, distribution heavy’ model and partnered with neobanking platforms such as Fi and Jupiter, credit card issuer OneCard and gold loan platform Rupeek, among others, to widen its deposits and lending without having to make the heavy investments that branches require.
Last quarter the bank said it has flipped this long-time model to ‘light branch, heavy distribution’ and is starting to add branches. This move comes at a time when the startup ecosystem is seeing a slowdown in investments, with many finding it difficult to raise the desired amount of funding.
In an interview with Moneycontrol, Federal Bank’s Executive Director Shalini Warrier, who leads fintech partnerships for the bank, detailed what the change in strategy means for these tie-ups.
According to Warrier, fintechs with a strong customer proposition will not find it difficult to raise funds even in a tight liquidity scenario.
“I have personally been speaking to investors to understand their strategy. We do believe that there is money available. So, it does not impact our way forward with fintechs,” she said. Edited excerpts follow.
What was the idea behind the change in strategy to ‘light branch, heavy distribution’? Is this change in strategy to have a hybrid model or due to the changed scenario in the startup space?
From a fintech standpoint, our strategy remains the same. We do believe that collaboration with fintechs will enable us to expand our business potential and reach out to certain segments of customers who we probably would not have been able to reach in the normal course. So, that fundamental underlying proposition has not changed.
Earlier we had grown our branch network and then we took a pause and said, 'We've got a franchise now let's make sure that the franchise becomes as productive as possible.’ Therefore, we had paused on branch opening and had gone heavy on other alternative channels of distribution, like relationship managers, telesales, fintech, etc.
We have flipped the strategy to say light branch, meaning we will still have branches because we do believe that customers need access to branches. The branches may not be the big ones that we used to see earlier, but they will be lighter in terms of space, people and the kind of services rendered. So, the flip was not on account of a change in fintech strategy. It is now time to expand the distribution in places where we normally would not have been present.
Fintechs expand the market for us. So, if you look at whether it is our relationship with Fi, Jupiter, OneCard etc., this gives us a supplementary business over and above what comes from branches.
In the past few months the situation has changed for startups. Securing funding is hard and startups are cutting costs. Many including Rupeek have also laid off employees. As a banking partner will you be realigning some of your partnerships and cutting down on a few?
We have a fairly detailed and robust way in which we evaluate which partnerships we need to take. This includes checking if there is a market for the offering. Then we do a detailed evaluation of the founders and risk compliance.
We don't think funding will be a constraint for fintech partners who have the right customer proposition, a strong segment strategy, and founder capability that is quite proven.
So, yes, there is a little bit of tightening when it comes to funding. That will impact the ones who are still not very clear on what segment they want to approach or what product they want to offer. For the more evolved ones that we're working with, we don't think this is a problem as long as the fintech is very clear on the value they're creating.
I have personally been speaking to investors to understand their strategy. We do believe that there is money available. So, it does not impact our way forward with fintechs.
Eventually, the bank is hoping to get 25 percent of incremental deposits and 40-50 percent of lending from these partnerships. Considering the slowdown will it take longer to achieve this?
This is directionally where we want to go, whether it happens in FY23 or in the first half of FY24. It all depends on a lot of stuff.
We do believe in this very strongly and that’s why a separate fintech team has been carved out.
In the current scenario startups are looking to cut down customer acquisition and marketing costs to be cautious. Will that change the quantum of deposits or new customer onboarding for the bank through tie-ups?
The fintech partners we work with have done a lot of research to make customer experience seamless. Research has shown that if you make the customer experience seamless, resilient and robust, customers will stick to the app. There is very little that our partners have to do currently in terms of advertising.
So, advertising and acquisition costs are not the only way to build resilience or to build sticky account balances. There are various other ways and all our partners are pursuing that. So, we don't see any slowdown in that.
Going forward what areas will the bank look at for more tie-ups? Will it be both lending and banking?
Yes, our strategy remains the same. We've always maintained that the fintech partners will help us in three main areas — savings bank account, which is low-cost deposits, besides credit cards and personal loans. At some stage we may look at current accounts. There are also gold loans.
These are the spaces that will help us to improve our return on assets. Anything that is margin enhancing will help us; but we're not looking at, for example, home loans, car loans, etc.
How will the upcoming digital lending norms change fintech lending and partnerships in your view? And the new master direction on cards says that fintech partners can’t store data of customers. What is your view on this?
On the digital lending norms, we are waiting for the Reserve Bank of India (RBI). We do believe it's the right thing for the industry, because otherwise the industry would suffer in the long term. Whether you look at data privacy, customer consent, cybersecurity, collection practices etc., all of these areas require a fair amount of hand holding by the regulator. This will ensure that the right players work in the industry with the right set of norms and will create a level playing field for all of us.
For the norms on credit, debit and prepaid cards, there are some aspects that are more operational in nature, which the Indian Banks’ Association (IBA) has already given feedback to the RBI on. More like we need more time to implement some of them because it involves technology changes, etc.
But when card issuing fintechs are restricted to only being the distributor and are prohibited from accessing customer data, it stops being a good proposition for them…
There is a role for distribution and there is a role for data analysis. How we work with the partner will potentially change but I don't think it changes the proposition materially. Yes, there will be norms around how the data is conveyed, how it is used, who uses it… We are working through all those details.
FY23 is the year when the bank expects to monetise on fintech partnerships. What is the path ahead on that?
Different partners and product groups will go through a different monetisation path. Yes, the timelines may move a little bit because of what it is but we don't see a material difference.
How do you view the industry's preparedness on tokenisation? Is it likely to be fully implemented by the deadline or will we see issues in transactions starting July 1?
We have made all the arrangements from the token issuance standpoint — it's only the merchant end that needs to be worked on. From what we know, both Visa and Mastercard are working with merchants. But the customer will not be without a choice. Although they will have to put in card details. Yes, there will be some friction in the process. Every bank is doing a lot around customer communication to make sure they understand that it doesn't mean zero transactions just that you need to take those couple of steps more with merchants.
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