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Article- Fintechs & Banks: Towards a Win-Win Solution

March, 2017

CFO Insights on Financial Services

Amit Sachdev, Co-Founder & CEO, CoinTribe Technologies, thinks that partnerships between Banks and Fintechs offer a win-win solution for the customers as well as both players through breakthrough innovation

Two speed world – Innovation friendly Vs BAU industries

We are fast witnessing the emergence of a two-speed world. One end of this world is witnessing technology driven disruption in innovation friendly industries such as e-commerce, telecom, travel and tourism, logistics etc, while at the other end there is Business As Usual (BAU) in industries that are insulated from significant competition due to regulations, government control, capital intensive nature or involving technical complexities such as infrastructure, utilities etc. The constant focus on building competitive advantage through enhancing user experience, simplicity, and convenience in innovation friendly industries, as experienced in Uber, Airbnb, Paytm etc. is taking customer expectations to a new high every day. With customers using the lens of innovation friendly industries to also judge the quality of products and services offered by BAU industries, the gap between customer expectations and what BAU focused industries offer is widening. The end-result on customer satisfaction levels in BAU focused industries is anybody’s guess and leaves room for a new entrant with slightest of innovation to cause disruption.

Banking - Innovation friendly or BAU industry?

This needs to be looked at in the context of three different aspects of banking – liabilities, transactions and assets. Opening up of banking industry to private competition in four different phases between 1994 and 2016 has led to liability customers benefiting from several technology-driven innovations. With internet banking, mobile banking, tab based banking, ATMs, Cash Deposit Machines and now Bots based customer services, liability side of banking has been one of the early adopters of technology. Given larger amount of bank’s focus on retail liabilities and the increasing competition, these innovations helped private banks garner large share of liabilities from public sector banks.

While some banks could build profitable models around small ticket retail transactions, most banks found this as economically unattractive. Since this area was opened-up to non-banking players, multiple Fintech models with technology led innovations have emerged with focus on easier transaction enablement such as mobile wallet, POS aggregators, payment gateways. The exponential growth of some of these models is testimony to how small ticket high volume segments can be made profitable using technology effectively. Banks have now begun to collaborate with these Fintechs to offer state-of-the-art solutions to their customers and leverage the tremendous potential this part of business offers.

Asset side of banking has seen the least amount of tech innovation so far. Less than 70% of bank’s asset base is deployed in loans and over 50% share is of the corporate segment in the loan market. Further compounded by vast unmet need in MSME lending, the competition in retail and MSME loan segments has been relatively less compared to liabilities thus reducing the urgency of technology led innovation. Consequently, the processes and associated efficiencies involved in retail and MSME loans and have largely remained the same over the years with plenty of manual intervention at each stage. Turn-around-times (TAT) of 15-20 days and complex processes involved for small business loans that was okay till a few years back suddenly seems arcane to customers who have become used to simpler processes offered by the likes of Amazon, Uber, Paytm etc. Just like it happened in transactions space, this leaves significant room for Fintech companies to emerge in each part of the loan value chain – customer sourcing, onboarding, credit risk assessment, pre-disbursement operations, collections, customer servicing. While several interesting Fintech models have emerged in online customer sourcing, little has been seen on use of technology in the complex area of risk assessment.

Banking ecosystem is structurally not conducive to technology led innovation. Multiple elements in banking ecosystem such as limited competition given licensing requirements, philosophy of (over) compliance, large and complex organizations with multiple decision contributors (not makers) that slow down decision making etc. make it difficult to incentivize and breed innovation in the banking DNA.

Partnership between Banks and Fintechs: Potential Solution?

Partnerships between banks and Fintechs offer a win-win solution for the customers as well as both players through breakthrough innovation. Banks have deep capabilities to contribute to such innovation in the form of significant experience and knowledge of customer needs and preferences, banking products, credit modeling, and operations. Banks have brands and large distribution footprints. They also have rich data on each of these areas to aid analytics and decision making for various aspects of business model innovation.

Fintech companies offer the nimbleness and agility required for quick pilots and experimentation in the form of flexible technology systems and new development at a faster pace. They also offer outside-in perspective and first principle thinking on how to solve some of the complex issues simply and with good user experience.

An ideal partnership model between Banks and Fintechs would involve co-innovating the business model leveraging the strengths of both partners. While this business model design would offer some clear answers, there would be quite a few hypotheses to be tested. The tech platforms of Fintech partner can be used for rapid prototyping and multiple pilots across segments and geographies to validate these hypotheses. Basis learning from pilots, the model and technology platform can be defined more sharply thus, significantly improving the chances of success as this model is rolled out and scaled up. More importantly, the partnership model 

should focus on a regular feedback loop so that business model and tech platform can be tweaked on an ongoing basis to keep pace with changes in customer needs and evolution of the ecosystem around.

There are multiple partnership structures – joint ventures, equity stake, acquisition, start-up incubation arms, Fintech focused VC funds, transactional partnerships - that can be potentially used for this purpose. As mentioned in a recent report - PwC Global Fintech Survey 2016, large majority of banks prefer to engage through equity participation with Fintech companies. This enables both partners to work in an open environment of trust and brings out the best from both partners. However, it is important for banks to be very careful in selection of Fintech partners. It is important for banks to partner with Fintech having complementary capabilities and focus on constant innovation. Trust is the hallmark of bank’s relationship with customers and banks have strong brands and reputation to protect. Hence, it is important for banks to work with partners who are credible, have strong management and promoters backing.

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