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How Fintechs Are Rescuing Banks From Operational Crisis Fintechs have disrupted all segments of the financial sector – be it giving loans or taking deposits, or dealing in capital markets, asset and wealth management, insurance, investments, money transfer or payments

By Vinay Kalantri

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Recently, there has been a course correction in the dominant narrative that technology has been the big disruptive dissonance in the banking universe ever since Lehman Brothers Holdings Inc. filed for bankruptcy in the peak of 2008 global financial meltdown. Instead, the sequel to the `constructive disruption' thesis now trending high on the financial discourse is "Coopetition" - a term recently coined by an imaginative mind working in an internationally reputed research agency and not an internecine competition between traditional financial intermediaries and financial technology firms known as Fintechs in financial parlance.

While the real meaning of the word `Competition' is yet to find its place in any known dictionaries of English or for that matter in the lexicon of economics or finance, going by the dictum it is safe to surmise that it implies a happy coexistence yielding optimum results for both banking sector and Fintechs. In other words, Fintechs help banks to square the circle or solve the seemingly impossible problems including the threat of "shrinking unviable banks", as the Economic Survey 2017-18 pointed out. Quintessentially the `Competition' theses is a perfect fit for banks with smaller balance sheet size whose fast shrinking space in financial intermediation can be enhanced with the help of Fintechs on a digital scale. There is no need to reiterate the fact that Fintechs have disrupted all segments of the financial sector - be it giving loans or taking deposits, or dealing in capital markets, asset and wealth management, insurance, investments, money transfer or payments. The confusion will get even more confounded going forward as the lending and payments space is poised to experience a high level of disturbance with the online platforms that facilitate lending and borrowing between individuals and businesses, peer-to-peer (P2P) credit, and innovative models for lending to micro, small and medium enterprises (MSMEs) are fast becoming the order of the day.

But, the `Coopetition' thesis moots an alternative for `disruption' narrative by giving an altogether new spin to the story pepped up by hard numbers. It cites a recent PwC report that collated data on 46 strategic partnerships and deals of different ticket size between financial institutions and Fintech innovators during last year. Further, the report also says that this trend is fast becoming the new
normal in the financial landscape with over 95% of financial services incumbents - meaning traditional bankers - scouting for different kind of partnerships with Fintechs. This fact in a way is revealing since it depicts a new story about the evolving relationship between traditional lenders and Fintechs. Narrowing it down to financial services the change in the relationship between Fintechs and banks purely hinges on technology-driven innovations that permeates all levels. Technology innovators are at the core of these power-packed actions and new innovations in the space, which may be even custom-made to suit the needs of lenders, will power the 'Coopetition' thesis going forward. It may be prudent for the lenders to watch out and make a direct connection with these evolving technologies to skirt the bitter medicine of `shrinking unviable banks' flagged by the Economic Survey 2017-18.

Big Data Play

The foremost among these trends is the data-driven financial inclusion push which forms the rationale of the digital-first economy drive kicked off by the government. During the past two years, migration to digitalisation has helped create more data than in the entire previous history of the humankind. This data has widespread applications including opening credit lines to individuals and institutions with lesser-known credit score and financial history by banks as well providing insurance and healthcare services to the poor. It
also forms the backbone of the nascent P2P lending industry, which is expected to grow at a compounded annual growth rate (CAGR) of 48% year-on-year between 2016 and 2024, according to Transparency Market research, an independent industry tracking firm.

India has all the trappings to cash in on this digital dividend. The government harnessed the power of digital technologies like big data, cloud computing and advanced analytics not just to improve tax administration and facilitate taxpayer compliance, but more importantly counter frauds corruption and the menace of black money. Governments analysis of GST data states that as on December 2017, there were 9.8 million unique GST registrants which is slightly more than the total Indirect Tax registrants under the old system. Big Data has helped unveil some subtle and basic facts about the Indian economy. Going ahead this big data will help in promoting financial inclusion.

Small Is Becoming Beautiful

Fintechs is not all about how to make everyday banking easier, but it also covers financially empowering new strata and players. Domains like cyber-security, workflow management and smart contracts et al are gaining momentum on the back of Fintech revolution and have a multiplier effect across sectors. For instance, workflow management solution for MSMEs is empowering the industry which contributes 30% to country's annual output (GDP in short) and helps them manage business-critical variables such as working capital, payrolls, and vendor payments. Foreign exchange and trade solutions provided by Fintechs shrink the timeline for issuing and processing of letter of credit (LC) to exporters by banks. Similarly, digitalizing trade documents and regulatory compliances go a long way in finding a lasting solution for the lagging export sector which has been picking up the threads thanks to a revival in international trade on the back of better than expected demand from overseas markets.

Regulators Turn Innovators

Textbooks on laissez-faire, or leave alone, economics propounds that the "least regulated market is the best-regulated market". This is because regulations are considered as factors impeding innovations leading to inefficient allocation of resources and thus chalking market-driven growth. But in the context of India's evolving financial landscape, this adage
seems to be fast fading in its relevance. This is because regulators themselves are becoming innovators. Globally, Governments have taken steps for facilitating an innovation-driven business ecosystem and Government of India is no exception to this trend. Initiatives like Startup India with an initial corpus of Rs 10,000 crore, Smart India Hackathon for crowdsourcing ideas of definite problem statements; DRDO Cyber Challenge and India Innovation growth Program are few such state-sponsored initiatives encouraging the innovative mindset among the young minds. This is what helped the Government to take the World Economic Forum (WEF) held in Davos by storm by saying `young Indian's will not be job seekers but job creators' in the future.

More In Store

The role of the Government in disruptive innovations has just started playing out. From monitoring and suggesting policies about how the business should operate to an advocate of how to make the life easier for business (ease of doing business in other words) the role of the state has undergone a sea change in the past few years. The new ecosystem which is supportive of innovations is bound to set in motion a chain of innovations that are sure to rock in the marketplace in the future. Two such steps are worth a mention here. One is IndiaStack which is a set of application programming interface or APIs that allows governments, businesses, start-ups and developers to utilise a unique digital Infrastructure to solve nation's hard problems towards presence-less, paperless, and cashless service delivery.

The second is Indiachain- country's largest blockchain being built by NITI Ayog, the government's think tank. NITI Aayog, the government of India think-tank, is working on building the country's largest blockchain network - IndiaChain - with a view to reduce frauds, speed up enforcement of contracts, increase transparency of transactions, and boost the agriculture economy of the country. IndiaChain will be linked to IndiaStack and other government digital identification databases. IndiaStack, a set of code developed around India's unique identity project Aadhaar, helps developers build products and services riding on the country's digital infrastructure.

Once these initiatives start to play out in full, nation's digital-first economy dream will be near neigh reality. So get ready to witness next-gen-disruptions coming from the formidable formation of private and public innovators.

Vinay Kalantri

Founder and Managing Director, tmw


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