The new playbook: RBI steps in to stem the nexus between banks and fintechs

With the RBI red-flagging mushrooming of digital apps, the tango between banks and fintechs may be in for a big change, report Hamsini Karthik and Raghu Mohan

Last week, the Reserve Bank of India (RBI) red-flagged the proliferation in digital lending platforms and fintech applications. “This in itself tells you a lot about the close association which has developed between banks and fintechs,” says Ajay Garg, founder-managing director of Equirus Capital. 

To get a sense of what’s at play here, let’s step back and look at the early weld between electronic and mobile payment platforms almost a decade ago. In 2008, Telenor picked up a 51 per cent in Tameer Microfinance Bank in Pakistan; it got Telenor-Pakistan a banking plate to hawk mobile financial services. In 2009, Korea saw a jamboree, with MasterCard, LG Telecom (handset) and Shinhan Card (plastic firm) joining hands to make ‘PayPass’ cut across the networks of Korea Telecom, LG Telecom and SK Telecom. In 2011, Visa gobbled up South Africa’s Fundamo — a mobile-based financial firm — for $110 million. In the new digital disorder, nobody gets to beat anybody; you team up with anybody so that you don’t end up as a big nobody.

A free-for-all is what the RBI wants to curb. Four key terms-of-reference of the internal working group on digital lending are: Evaluate digital lending activities and assess the penetration and standard of what is outsourced in RBI-regulated entities; identify risks posed by unregulated digital lending to financial stability, regulated entities and consumers; regulatory changes to promote orderly growth of digital lending; and expansion of a specific regulatory or statutory perimeter.

How did we land here? Banks are burdened with capital and dud-loan concerns; nearly 40 per cent of the population is under-banked; and the live-in arrangements of finance and technology have spawned arrivistes: Bill-pay, P2P, plastic-vendors, hardware and software oracles, pure-play IT firms and consultancies, and telcos — all have jumped in. 

Alok Mittal, founder-chief executive officer (CEO) of Indifi Technologies, makes clear a nuance — banks’ capital constraints are on not being able to lend; not the capital to incur operating expenses. “So, banks are partnering with digital lenders, which have the capital to lend. And the latter have supported banks to expand their reach, which helps capitalise their funds in the right direction.”

There is also the aspect of rigour. “Banks bring in regulatory adherence requirements and robust processes. The ultimate beneficiary will be the customer,” adds Nilufer Mullanfiroze, country-head (deposit, cards and personal loans), at The Federal Bank.

Another factor is that historically, regulation was a hurdle for entry into financial services. The fintech route allows newbies to get more than a foot in. A case in point is payment banks, some of whom are in the hunt for a small bank licence, and hope over time to become a scheduled commercial bank.

What next?

“I see the system evolve more into an embedded financial services platform rather than one competing with another,” notes Rajiv Ahuja, executive director at RBL Bank. He foresees banks partnering with digital enablers in platforms like automobile or grocery retailers, where the enabler is more like an aggregator and helps meet the end-to-end needs of the customer, rather than being just a facilitator, or a point of contact.

“There is a huge opportunity in the consumer durables space, especially on the supply-chain part, which is currently underpenetrated. If somebody comes along with deep knowledge of the market and the customer, we would be happy to work with them,” Ahuja adds.

Fintechs still require banks’ infrastructure to move the money. Will this lead to banks acquiring some of them? “If you look at 2020, it was the biggest year for neo-banks, with signups at about 75 times more than those that happened in the previous year. Valuations went through the roof and cracked the $10 billion mark,” points out Raj N Phani, founder-chairman of Zaggle. For example, Spain’s BBVA acquired Simple, while American Express acquired Kabbage. 

“This trend will accelerate in the coming years and extend to India. Banks, however, are likely to acquire neo-banks that have built significant traction in addition to robust, cutting-edge technology, to ensure that they minimise the uncertainty around such acquisitions,” Phani believes. 

You may also see disruption from within, to stay nimble — First Direct, the telephony-only-please foray of Midlands Bank, now resides in the belly of HSBC. Or banks may incubate a fintech and scale it up in order to sell. Bank of America did so with Visa, a one-time captive; and Citi with i-flex, now part of Oracle.

Or, they may even merge into them. Though the analogy may be inexact, look no further than the ICICI Ltd-ICICI Bank reverse merger in 2001, and you spawn a bank (just replace it with fintech now, and you get the drift), and when regulation permits, put the offspring back into the womb. The idea is straight out of Hindu mythology — you take on an avatar for a specific task, and once the mission is over, it’s finito.