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Article - FinTech and Banks: Creating Value for Customers

January, 2017

Dr. Subho Ray, President, IAMAI shares his belief on how banks and fintech companies can combine their strengths and bridge their weaknesses to create lasting value for customers.

Innovation and technology have brought about a radical change in traditional financial services. The prime driving force behind the evolution of FinTech is the desire to make the financial services more efficient.

Today, FinTech companies cater to the entire gamut of financial services ranging from innovative lending and credit facilities, seamless payment solutions, personal finance management to analytics-backed wealth advisory services among others.

There is a large untapped population of the country, which if directed will help the FinTech industry go a long way. The Prime Minister, Mr. Narendra Modi, since 2014, has initiated a lot of new schemes such as Skill India, Digital India, Pradhan Mantri Jan Dhan Yojana, Aadhar enrollment, Krishi Sinchai Yojana and the latest demonetisation drive etc. Rural India can benefit the most from such schemes, and this can be viewed as a potential up-surge for FinTech start-ups in expanding their customer base and provide services such as insurance covers (health insurance, life insurance ); mobile banking (helping them in managing their income and deposits); loans for agriculture, SME business, and other personal purposes.

Emerging FinTech solutions can help grow the market significantly and broad-base the provision of financial services to a wider target market. Driven by digital technologies, analytics and exceptional customer experience, these companies are already building propositions that are competing with the incumbent banks, both globally and in India.

Government initiatives at the central and state levels are including FinTech as a pillar in their planning; the Reserve Bank of India is establishing a blockchain committee; major banks are launching FinTech accelerators; leading towards capturing the opportunity in FinTech.

With the emergence of technology, banks are facing two challenges - managing their technology legacy stack and bringing the cost down for small transactions.

The traditional banks need to adopt the digital transformation route, which can bring in a fresh perspective for targeting customers, ensure agile operations and allow reinvention at every stage, thus enabling these organizations to remain on par with, if not ahead of, the competition.

The rise of FinTech is expected to displace banks. However, banking organizations would benefit from viewing FinTech companies less as rivals and more as innovative businesses that they can collaborate with, learn from, and even partner with.

Banks have a larger customer base and loyalty that has been built over the years. They also have strong financial backing that allows them to invest in upcoming trends and ideas that are beyond the reach of FinTech organizations.

Both Banks and FinTech companies have their own positives and negatives, and instead of working in silos and attempting to target the same customer segments, they will benefit from cooperating and combining their positives to compensate for each other’s negatives. Banks can provide a rapid reach with significant funding and support, and sustain customers’ growing demands. The FinTech sector, on the other hand, can offer the most efficient customer service solutions.

Besides capturing technology disruptions and innovations, FinTech companies can identify various use cases for technology adoption. Thus, they are able to create a value proposition which is both appealing and cost-effective for customers. Banks, on the other hand, are not able to focus on such innovative utilisation of technology and hence stand to lose clientele to upcoming FinTech organisations.

While FinTech companies offer product simplicity and seamless integration, they lack sufficient data security, compliance and regulatory certainty that banks possess. The industry is seeing a shift where both sides are coming to the realization of a new, mutually beneficial relationship, and ultimately create value for customers.

Banks must continue to enhance customer experience through their journey of digital transformation, but instead of undertaking this journey alone, they should partner with FinTech companies by utilising their innovations in their day-today functioning. Upon analysing their core strengths and weaknesses, banks need to associate and partner with FinTech start-ups which can bridge the gaps and thus create a win-win situation for both.

Many banks and traditional financial institutions that initially had reservations regarding the FinTech emerging as direct competition to them are now partnering with such innovative startups to offer smart solutions to their customers.

These new business models are focused around product diversification and advancement in financial technology. Recently, the State Bank of India has also allocated a fund of INR 200 crore dedicated solely for enhancement of financial technology space, and has tied-up with Society for Innovation and Entrepreneurship at IIT Bombay to promote innovation by FinTech start-ups.

The demonetisation announcement has fuelled the growth further and the bigger shift we believe will be in the financial behavior of consumers across India.

In India, hackathons, competitions and partnering with incubation platforms is the strategy adopted by a lot of incumbent banks. When you see so many top players taking a common approach, you have reasons to believe that this partnership is here to stay and create value for the end consumers.

Opinions expressed in this article are the author’s own.

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