In many parts of the world, tech companies (TechFins and FinTechs) are beginning to dominate the FinTech scene except India. BATs (Baidu, Alibaba and Tencent) and Internet finance in China dominate the market now. PayPal (Braintree and Venmo), Stripe and the likes of Prosper/Lending Club/Sofi have made serious inroads in the US although not to the same extent as China where internet finance cos have more customers than traditional banks in some segments.
India is a bit different though. In FinTech, we see that everyone happily agreeing with everybody but what we need to do is to feel under the covers. FinTech is looking very different in India and the leader(s) that will emerge might surprise you. In this article, I take a contrarian view on FinTech here and analyze why young private progressive banks might not be so far behind as we usually think.
Tech as public goods
The Western world was different where proprietary systems were built in financial services and they proliferated over last so many years. India is following more of an App Store model – this is open innovation at a massive scale with interoperability built in. And this is available to the banks.
The financial rewiring in India has been a top-down process, led by visionaries like Nandan Nilekani and driven by government and central bodies like UIDAI and NPCI. India stack is public goods – not done the Alibaba way or Tencent (WeChat) where the keys to the kingdom are held by a few large players. Aadhaar and the keys to create new financial services experiences are available to everyone. And therefore, young private banks in India have a better chance than their peers around the world. As India (and many nations) is moving towards non-card payments, the NPCI, IMPS and UPI type of systems have become important weapons for these private banks.
Younger banks with less legacy
The source of funds would always be your bank account and so that is very important in India (and I would argue elsewhere as well). As you go from India (tier 1 cities) to Bharat (tier 2/3/4 and villages), you will see that non-banks have a challenge with managing trust. So that brings us back to banks. One thing to note is that in contrast to developed markets, Indian private sector banks are relatively younger (8-15 years on average) and have comparatively modern setup and less bulky infrastructure. Young Indian private sector banks don’t have legacy infrastructure (unlike the west) in many cases. Some of them are actually neo-banks in many ways. Some of them have a fairly modern mindset and are conceptualizing and rolling out new features all the time. From experimental new core banking solutions like Leveris, which can help set up a digital bank in no time to biometric ATMs that don't require cards (DCB bank) to using wearable tech where customers earn points while walking and those points can be redeemed from bank merchant networks, the leap of faith is evident. Look at the founding years of some of the private banks: ICICI Bank - 1994, IndusInd Bank - 1994, Kotak Mahindra - 2003, Yes Bank - 2004, Capital Local area bank - 2000, HDFC - 1994, Bandhan Bank - 2015 (banking license in 2014), IDFC Bank - 2015, and new payment banks and small finance banks.
A lot of bankers at these private banks are relatively young people as compared to banks in the western world. Many private banking leaders are smart and progressive thinkers. Experimentations are happening at a massive scale.
Profitability and market cap
A lot of these private banks are profitable in India, and these big boys have moved very fast.
(I want our global readers to understand this point while reading this story.)
In terms of market cap they are much ahead of PSUs:
Look at the ones on the right (private banks).
B2B startups empowering banks
Some very smart people and some very smart solutions are being built by banks or for banks.
CRMNEXT, a B2B FinTech startup, offers Bank-in-a-Box solution that is designed to provide solutions for inquiry to sales management, eKYC, biometric integration, ready adaptors for CIBIL, Aadhaar/PAN verifications, etc. As an example, this solution will enable Ujjivan to engage from day one with their existing 2.8 million customers from more than 450 branches across India.
IndusInd bank implemented a real-time enterprise-wide cross-channel fraud and AML management platform. It then began reusing in-memory data to offer simultaneous real-time cross-sell and upsell. It's fraud management and cross-sell ing together. It’s a fraud management system that is enterprise-wide and operates in real time across products (cards, current accounts, loans, etc.), channels (ATM, POS, branch, mobile, etc.) and customers, employees and third parties as explained by Celent. At IndusInd, a bank in India, CustomerXPs’ Clari5 solution has been integrated with 15 real-time and seven batch systems, and has revolutionized fraud and AML management within the bank. In addition, the bank began reusing in-memory data to offer simultaneous real-time cross-sell and upsell.
And in some cases partnerships – YES Bank and PhonePe and similar partnerships are great examples. Then there's digital onboarding and eKYC solutions from companies like Signzy. KredX, Rubique and other lending marketplaces and solutions are all helping connect borrowers to lenders in a better fashion. Active.ai is building chatbots for banks!
Where are the Techfins of India?
Well, Flipkart and Snapdeal had a great opportunity that they have missed so far. They have tried but because of the overall issues with these companies and the core business requiring attention, we have not seen Alibaba/WeChat-style aggression. Regulations also play spoilsport for them. Although they have moved a lot of local market grocers from kachha (slips) bills to e-enabled for knowing them better and giving loans, they have not been able to bring the transaction e-commerce data, financial data and payments together at a big scale. Flipkart and others have disappointed. No tech unicorn growing in FinTech in India the way they should have. China’s Ant Financial, the financial arm of Alibaba, and JD.com, another online marketplace, have masses of data about those who buy and sell on their platforms. They know their spending habits and how much cash they can spare, so an easy next step is to offer them small loans. Is this a great opportunity for private banks in India due to the lack of Techfins?
So what does this mean? What are we seeing?
- Kotak bank launched 811 wherein you can open a bank account sitting at home or while on the commuter train to office – complete digital onboarding and eKYC based on Aadhaar and PAN, taking away the need for branch visits and in-person verification. Kotak bank calls it India’s first downloadable account that can be opened in under five minutes.
Image: Landing page of Kotak 811
- YES Bank has had an amazing FinTech journey – it's a mix of internal and external innovation. YES Bank's "API Banking" is a one-of-a-kind ERP integration where the client's ERP system is integrated with the bank's system, and the client can perform its banking-related activities from its own ERP system using APIs. It is the largest user of APIs in Indian banking.The introduction of API Banking led to the acquisition of many new clients, and the deepening of relationships with existing clients. In the first 12 months, 62 clients were onboarded on API Banking (payments and collections) with overall throughput value over INR 5,000 crore. (USD $750 million) as reported by Celent. API Banking has enabled clients to reduce Turn Around Time (TAT) days to hours and provided operational efficiency through auto-reconciliation of transactions and has transformed many companies’ processes.
- DBS (Singapore) launched Digibank in India, a mobile-only bank which was probably the first of its kind in India. I wrote about it in the article A Glimpse Into the Future of Banking: India’s First Bank in an App. Digibank now has more than 1 million+ customers.
- Bajaj Finserv (NBFC) is a great company as well and has 70 million accounts between lending and insurance and a heavy duty data, tech and analytics play.
And don't get me wrong. There are 800+ FinTech startups in India (listen to this podcast for more). There are 39 FinTech unicorns globally and we might produce a few more. At LTP, we have helped 110+ startups connect with banks in various engagement models globally through our platform MEDICI. We are a big proponent of change tech is bringing to this industry. But many industry experts argue that they don’t expect that in the foreseeable future FinTech will have the kind of existential impact on banks that Netflix has had on Blockbuster. But they can force the banks to bring drastic reductions in pricing and profit margins on some key products. Banks have real advantages in serving the SME lending market, which should not be underestimated; banks’ cost of capital is much lower. These low-cost and reliable sources of funds help them in lending. With digital transformation they are undergoing right now, things will become interesting.
Nobody can predict the future, but customers won’t differentiate between technology companies, banks, startups or Techfins. We will see a more diverse market and more collaboration between product developers at small companies and tech teams in global banks as they create and distribute new products. There will be outliers from the startup world – Paytm as an example could be an exception. I am very hopeful of VSS and Paytm – instincts, speed, simple propositions, deliver at scale, tons of data (commerce and payments data) make it a remarkable story. Selling insurance and other financial products and more to come.
In true sense, FinTech is Fin*2 + Tech. It needs mastery over both financial services play and tech play. Plus, it's a very regulated market in India and banks have an edge over startups due to that. A progressive government at the center pushing cashless payments and digital banking is another factor. And launching payment products like BHIM app and providing impetus to the digital economy via demonetization – it's the making of a perfect storm. The Center is also asking banks to go fully digital from onboarding to lending – these exciting times to watch young progressive banks.
In this article, one thing I want to make clear is India’s public sector banking is a different ballgame. I don't know if the public sector banks will be able to catch up. There is a huge difference between public sector and private sector banks. I heard a top PSU bank saying innovation = buying software they like. :)
The pace of innovation overall is slow in banks. The number of builds and experiments are an example. Once in six months at banks vs. two-three weeks sprints for startups. UX/UI is another area where banks have quite a journey to cover. All this fosters co-operation between banks and FinTech companies. FinTechs gain access to banks’ scale and customers. Banks can exploit FinTechs’ expertise in programming and in analyzing mountains of data. You have read a lot on this subject from us already, so let me stop now.
We will keep updating you on the developments!