Will Fintech replace banks as an indispensable intermediary?

In the aftermath of demonetisation, Aakriti Chowdary writes about financial technology companies, their newly gained prominence and the road ahead for fintech companies and traditional banking services.

Digitisation acquainted the world with ease, Internet made the world befriend convenience and together, the world is on its route to rendering brick and mortar obsolete. The journey from liquid cash to plastic cash and now, virtual cash has been smoothened by a well-paved expressway – Fintech. Fintech – Financial Technology refers to using technology, to deliver a slew of financial services ranging from payment solutions and lending services to investment and personal finance services.

In India, cash is ubiquitous, with 78% of its people still using cash for transactions as compared to 47% in China and a miniscule 24% in US.  Thus, creating an opportunity that fintech companies have grabbed with both hands.  According to the data collected by VCCEdge, 1.3 Billion USD has been infused in 189 fintech companies in India since 2011.

Out of the 189 companies, 94 companies are constantly working towards innovating the payments sector. Payments sector has efficiently slimmed the process of settling payments, bank transfers and holding money in virtual wallets. Second in line are personal finance platforms, with 67 companies receiving funds worth 558 million USD, offering a substitute for bank’s third party products by providing superior technology and analytics-backed advisory services.

Modi Government’s policy to retract 500 and 1000 rupees notes continue to leave the people of this country high and dry. ‘This ATM has no cash’ persists to be more injurious than ‘smoking kills’ to tobacco lobbyists. Mercurial changes in the RBI policies post-demonetization has been leveraged by fintech companies especially in the payments sector.

Mobikwik, second to Paytm -leading payments solutions application, recorded a 75-times surge in transactions, a week post demonetization. Paytm recorded daily transactions averaged at 7 million, more than all debit and credit cards transactions combined in India. It has also seen unprecedented signs up, standing at 5 Million new users, post the cash crackdown. Seemingly, demonetization has shifted gears to digital money sooner than expected. It might prove to be partially responsible for building the trust in online payment solutions in an economy where green notes and the thickness of the wallet meant security.

Will the traditional banks eventually prove to be a dispensable intermediary?

Fintech has emerged as an instrument to efficiently provide financial services. It is acting as a tool to fix the anomalies within the banking sector. These anomalies are associated with costly distribution channels. Fintech will cut costs as they are far away from the regulator’s hawk eyes, data driven as opposed to being human driven in terms of algorithms being used to make lending decisions online vis-à-vis a branch officer making the same based on a single credit score and lastly, innovative technology as opposed to existing IT systems with the traditional banks.

The imbalance between cost incurred and revenue earned by the traditional banks has led to a large un-served and under-served market that fintech has tapped.

In India, there are only 16 ATMs to every 100,000 people. The number of savings account stand at 1.17 billion for a population of more than 1.2 billion.
Apart from this, despite the growth in debit and credit cards, products of the traditional banks, the growth in infrastructure is still lagging. While debit cards registered a growth of 64% between Oct 2013 and Oct 2015, during the same period ATMs increased by around 43% while POS machines increased by around 28%. Prima facie, such laggards can be attributed to high capital cost of POS (Point of Sale) machine, recurring maintenance / servicing cost, difficulty of servicing POS machines in rural areas, etc.

On the other hand, infrastructural deficiencies are not limited to the traditional banks but extend to the fintech companies. Only 1 in 4 Indians own a smartphone and even fewer have access to the Internet, an intermittent luxury, acting as a major roadblock for the fintech revolution.

Despite this revolution, banks will be indispensable because of an already established customer base, access to equity and debt capital market, their ability to be a full service multi offering intermediary and lastly, their inherent capacity to securely hold any amount of money in a current account that is accessible at will.

Therefore, the key for the banks is to collaborate with the fintech companies, expedite their process of automation and relieve themselves from the two way pressure – their competitors who are adopting these solutions early and the fintech companies.

This article was written under the guidance of Mrs. Nita Kapoor, Chief Executive Officer, VCCircle.

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