Shinjini Kumar, Leader, Banking and Capital Markets
Globally, the ‘fintech revolution’ is underway, and is slowly but surely inching towards ‘unbundling’ the bank. While regulators in other countries have largely adopted a wait-and-watch approach towards the fintech disruption; in India, the RBI is attempting to create a space for non-bank and digital companies to compete and collaborate with banks within the differentiated banking framework.
Here are the 10 ways in which I think the fintech-bank ecosystem will play out post-licensing:
1. Universal banks will struggle with complete process revamp, but will focus on digitising the front end
Globally, as well as in India, banks will invest heavily in changing customer perceptions and making front-end technology digital, while continuing with their existing technology largely for back-end processes.
2. E-commerce will shape customer expectations and put pressure on banks to catch up
Consumers are getting used to the high quality of service provided by Indian e-commerce players. Their expectations from the financial sector will be similarly aligned, and they will expect banks to continually improve on convenience.
3. There will be client segmentation at multiple levels
While income predictability will continue to be a key segmentation factor, banks will also start focussing on ‘new customers’, who are unlikely to have steady income streams, but still use technology to power their financial decisions and enhance their life conditions.
4. With greater competition will come greater collaboration
Since customers have multiple financial needs, niche players will look to collaborate with complementary service providers, in order to retain their customers and deliver value for ‘stickiness’.
5. Niche banks may be more transparent and facilitate price discovery
Unlike universal banks, niche banks will not have the ability to cross-subsidise and will need to bring in real value addition to their products, pushing customers to a ‘paid service’ model. This will facilitate price discovery in the market and a more nuanced understanding of customer expectations from banks.
6. The potential for disruption is high
As the market shifts away from rewarding RoE or market capitalisation and moves towards becoming valuation-driven, the potential for fintech companies to disrupt the financial services ecosystem will grow multi-fold.
7. Financial inclusion will be more meaningful under the ‘principal-principal’ collaboration model
The new paradigm under differentiated banking will change the existing ‘principal-agent’ dynamic as the ‘agent’ side acquires greater ability to create products and also greater ‘power’ in the relationship with the ‘principal’. This may finally provide customers with the opportunity to meaningfully access financial services.
8. Banks will be pushed to create real value for customers
It is likely that the fee structure in microcredit and remittance markets will get disrupted and revenues will flatten out quickly. Service providers will then need to think about going beyond servicing the ‘low-value, high-volume’ customer and create real economic value for each customer segment.
9. There will be a steep learning curve in designing efficient risk- and fraud-management techniques
In order to scale up and acquire greater numbers of customers, niche banks will need to move towards identifying consumers digitally and instituting time-efficient, convenient processes. Similarly, fraud management will also need to undergo a radical shift, become less invasive and facilitate faster, smoother transactional experiences, while picking up early warning signs and potential issues to minimise risk.
10. Regulation will need to be differentiated to fit the realities of differentiated banking
The existing guidelines for payments banks and small finance banks are largely drawn from universal bank guidelines. However, differentiated banks will not be able to bear the compliance cost structure of universal banks. As differentiated banks evolve and become more integrated into the formal financial system, regulatory approach may need to similarly evolve and differentiate.
For a more detailed discussion, read my blog on LinkedIn.