Banks & FinTechs: Switching the default experience

Banks & Us

At the core, what Banks do is humble. You & I visit banks to open checking/savings accounts, do deposits (current, savings, and term deposits). Banks lend at a higher rate than the cost of funds. Margin between the cost of the funds and the interest charged, is the benefit a Bank makes.

The Net Interest Margin varies depending on the type and cost of deposits, ability to charge competitive interest rates and managing lower default rates. Conventionally this has been the role of banks, and sadly despite of several technological & product advances, the meaning remains the same.

Or is it beginning to change, one might think?

What are FinTechs?

Currently there is no standard definition of a Fintech and regulators are attempting to frame one.

The Financial Stability Board (FSB) defines FinTech as “technology-enabled innovation in financial services that could result in new business models, applications, processes or products with an associated material effect on the provision of financial services”

Wikipedia notes it as “Financial technology (Fintech) is the new technology and innovation that aims to compete with traditional financial methods in the delivery of financial services”.

Thus, one can conclude that, Fintech is critical to advance the delivery of financial services.

New things in New ways, or Same old things in old ways?

Delivery of financial services is a common goal for banks and Fintechs. Whilst banks have mostly been using traditional modes of customer acquisition through brick-and-mortar model; Fintech companies operate with technology as their foremost, fundamental, and distinctive characteristic. Thereby making sure that the indigenous logical thinking and products originating from it are comprehensible.

All of this is done, keeping technology and its advancement at the heart of everything.

Banks and Fintech, Possibility of a co-existence

Banking foundation system consists of three major elements namely, Conservative reasoning, Trust, Risk and Customer Relationship Management. While banks bring scale, distribution, relationships, risk, and operational excellence; the golden question remains whether they are agile enough to familiarize themselves quickly to the changes in technology, culture, changing consumer behaviour and expectations or not?

Consumers expect insights to be used to provide exceptionally personalized experiences. Non-traditional firms such as Fintech grasp this and are pushing the limits on delivery of solutions.

With an agile working environment, coupled with technology advances; Fintech paves the way for a brand-new consumer experience like never.

To thrive in this fast-paced environment, banks and financial institutions must re-imagine their roles.

During COVID-19 pandemic, the digital banking landscape has made giant strides in the last two years. Since the pandemic, below product lines and segments have seen a lot of momentum:

• Payments
• API and Open Banking
• Corporate Cards
• Neo banks
• Lending (Pay Later, Credit Cards, Business Loans, Trade Finance, Instant Loans)
• Cross Border Remittances
• Merchant Acquiring
• Account Opening, EKYC and Other support functions

UPI transactions in India have grown by 188% in the last 2 years, from 12.5 Bn in FY 19-20 to 38 Bn in FY 21-22 (as of Jan-22). Three prominent apps, Phone Pe, Google Pay and Paytm are all driving the adoption and usage of mobile payments.

Another area that has gained pace and grown in the last 2years is BNPL. BNPL and Pay later segment, which is an instant micro credit offered to consumers for online and offline purchases is expected to reach $40 Bn by 2025 from $3 Bn today.

Fintechs have launched physical BNPL /pay later cards in partnership with banks which will further grow the acceptance among the merchant network beyond online commerce. Lazypay, ZestMoney, Simpl, Slice, Uni cards and Postpe are few of the leading players in this segment.

In my experience & reading through industry reports, while most of the mid-size and large banks have fintech partnerships, banks like Federal Bank, SBM Bank India have been aggressively pursuing fintech partnership strategies, thereby embracing the change.

In essence, changing gears from competition to collaboration; we are now living in a world, where the Banks-FinTech relationship is not only surviving, but also thriving.