Last month, Equitas Small Finance Bank (SFB) and Google Pay inked an interesting deal, under which Google Pay subscribers could invest their savings in Equitas SFB’s special fixed deposit without opening a bank account. Under this one-year deposit scheme, the investors will earn an interest of 6.35 percent, which is similar to the interest available to Equitas SFB account holders. The Equitas-Google Pay deal marks the first of many such possible deals between traditional banks and technology players.
Banks usually rely on either their subscriber base or attract new subscribers for such offerings. Instead, Equitas SFB has opted for Google Pay’s subscriber base. Murali Vaidyanathan, senior president of Equitas SFB, said that Equitas “is using the Google distribution channel to democratise the deposit product.”
The Reserve Bank of India has raised concerns over the deal. The RBI is open to technology in finance, but is worried about the entry of Big Tech (Google, Amazon, etc.) into the Indian financial markets. In its June-2021 Financial Stability Report, the RBI listed three concerns with Big Tech. First, these companies do multiple economic activities making it difficult to regulate. Second, they could easily become dominant players in financial services given how finance and technology are getting interlinked. Third, is that Big Tech can achieve large scale by exploiting network effects — this can be seen as a reason why Equitas tied up with Google Pay. The RBI further adds that for regulating Big Tech, we need an entity based prudential regulation, and international co-ordination given their global reach.
These concerns are valid, however the RBI could look at the recent report by the United States Federal Reserve. The report analyses how US community banks can leverage tie-ups with fintech companies to gain new markets, and improve their technology. The community banks neither have the money nor the expertise to upgrade their technology, and partnerships with technology companies can help them overcome this obstacle. The Fed report lists three broad categories of partnerships:
First is operational technology partnerships under which a community bank deploys third-party technology to improve its efficiency. For instance, a partnership with a fintech specialising in loan services can help the community bank automate its own loan origination process. Likewise, community banks can deploy fraud detection and customer authentication software for better compliance.
Second is customer-oriented partnerships. A bank which becomes better in adopting new technologies will connect better with the customer who prefers digital banking services over the traditional branch services. Opening online accounts, planning savings products, and transferring funds can be managed more easily by partnering with fintechs which specialise in this segment.
Third, are the front-end partnerships, wherein a fintech combines the bank’s infrastructure with its technology, and offers services to customers. In the first two partnerships, customers interact with the bank, while fintech remains in the background; in the third partnership, customers interact with fintech, while the bank remains in the background. This can allow the partnership to gain new customers, and diversify their portfolio — something which is not possible for a traditional bank.
Any new financial transaction is open to risks, and these new partnerships will also bring new risks to the financial system. Fintech players may be dynamic and innovative, but they are mostly out of the regulatory net, and most of them will not be well-capitalised. If a fintech fails, it could put pressure on the partnering bank, and even lead to failure of the partnering bank. The report mentions the risks and argues for regulators to look carefully at such partnerships. This is what the RBI is doing with the Equitas-Google Pay deal.
The larger point which emerges from the report is the need to integrate the fintech players with the traditional players. So far, the discussions have veered around seeing these players as competitors or threats to the existing system. This must change for a more open approach. There will be risks, but that is part and parcel of any new financial development.
The Fed report talks about partnerships with community banks, but this can easily be extended to mainstream banks. In India, the large private banks may not need these partnerships but the ailing public sector banks and the troubled old private sector banks can gain from such partnerships. Partnerships and technology can benefit cooperative banks which have been on the RBI’s radar for a while now. Technology in finance is a powerful idea whose time has come for a while now. The question is how the financial market players and regulator can make it a winning proposition for the well-being of society.
Amol Agrawal is faculty at Ahmedabad University.
Views are personal and do not represent the stand of this publication.