Banks have had a shift in their Fintech strategy from being "not interested" to being "interested" and more recently to "Fintech is hot". I have had the fortune to collaborate with some of the major private and PSU Banks in India over the last few years and understand their perspective on the move to digital and the role of Fintechs as we scaled disbursements to ~Rs 3000Cr+ across multiple Banks at Rupeek.
Given the pace at which changes have happened in the Fintech ecosystem in India, many Banks are still evolving their Fintech strategy and do not have a playbook yet. Here's an attempt to summarise how Bank CXOs and Product managers should look at the next Fintech collaboration opportunity they come across.
Why do Banks need Fintechs anyway?
During one of the conversations with a Bank's board members in 2019, I was surprised to hear that a particular leading Bank had envisaged a model we were proposing to the Bank at least 5 years back but the proposal was "shot-down" by the risk and compliance departments due to "various" reasons. Over the years I have heard many stories of how various product owners at Banks proposed bold changes to the products and the policies but the same were "shot-down" by the various approval committees at the Bank.
It is imperative to understand why is the innovation "shot-down" more often than not at the Banks and why do we need Fintechs to drive innovation over the incrementalism of the Banks. Let's understand the areas in which the Banks and the Fintechs differ.
| Traditional Bank | Fintech | |
| Regulations | Highly regulated | Loosely regulated |
| Size | Large | Small |
| Risk Orientation | Risk averse | Experimenting risk takers |
| Customer Orientation | Low owing to "no fraud at any cost" approach | High owing to "small fraud = cost + learning" approach |
| Decision making | Bureaucratic, Cross-department | Nimble, Top-down, Bold |
| Tech execution | Slow due to talent, outsourcing | Fast due to talent |
| Learning rate | Slow | Fast |
| Products | One size fits all | Custom |
| Distribution | Phygital | Digital |
| Trust | High | Low |
| Cost of capital | Low cost | Very high cost |
| Team expertise/baggage | High | Low |
| Sr. No. | Decision Factor | Build If | Partner If |
|---|---|---|---|
| 1 | Proven TAM | Large proven TAM which shall translate in a long-term presence of Bank in the particular product space (e.g. Payment related products - cross-border remittance) |
Unproven TAM (Bitcoin related products) |
| 2 | Criticality of Time to Market | Time to market is not very critical to product success | Product success is a market-share race or a one-time opportunity with an expiry date (Regulations, Competition, etc.) and the partner has a ready product |
| 3 | Alignment to Bank Strategy | The offering is aligned with Bank's strategy in terms of customer segment, product, risk/return expectations, etc. | The offering is not aligned |
| 4 | Product Insight/Expertise | The Bank has a sizeable product experience/expertise in the space | The Bank is new to the product and lacks people/management with sizeable experience/expertise |
| 5 | Tech Expertise/Bandwidth | The Bank has the technology bandwidth and demonstrated tech success in the primary technology used for the offering | The Bank does not have the technical expertise or bandwidth to take up the development required for the offering |
| 6 | Regulatory Clarity | The regulations are clear about the offering | The regulations are not very clear about the offering but do not explicitly prevent the Banks from providing the same |
| 7 | Cost | The Banks has the up-front budget available to engage in a full-fledged development effort | The Bank does not have a sizeable up-front budget |
| 8 | Competitive Interest | No competitor implications | The competition will have a relative advantage if you do not collaborate with the Fintech |
The role of neo-banks in innovation and why Banks should collaborate instead of compete
Fintech partnership is a "Build vs. Buy" decision for the Banks
Fintech partnership allows a Bank to create high risk silos with limited exposure and great learning
| Decision Parameter | Case: Build Internally | Case: Fintech Tie-up |
| Regulatory clarity | Clear regulations/guidelines are available on the product including edge cases (e.g. Loan against property, personal loans, etc.) | Regulations/guidelines do not explicitly disallow the offering but the regulations/guidelines are absent/hazy (e.g. Blockchain based offerings) |
| Speed to market | Can afford to go to the market at own pace without pressure from the market (e.g. Application of moratorium interest) | There's a pressure from the market to start the offering very quickly (e.g. Cards, Video KYC, etc.) |
| Current share of business | Large enough to have material impact in case of adverse regulatory/technology events (e.g. Home loans) | Negligible in the context of the overall portfolio (e.g. Loan against MF units) |
| Understanding of the problem - Business | Have in-depth understanding of the market size, target customer, product features and execution path | Do not have in-depth understanding of the market size, target customer, product features and execution path |
| Understanding of the problem - Technology | The team has developed the product/feature/technology involved before (e.g. ) | The team has not developed the product/feature/technology involved before (e.g. Digital signatures across all applications) |
| State of internal systems to tackle product | Technology team needs to develop a rigorous set of systems to tackle the launch | Technology team needs to develop a relatively lighter set of systems to tackle the launch |
| Internal budget allocation | Large budget already approved and the management is aligned | No large budget and management alignment |
The Fintech strategy for Banks
- Identify the key growth areas
- Set up a Fintech team
- Identify leading players and important technologies evolving in the key growth areas
- Define your Fintech strategy and plan your Fintech experiments
- Put Fintech collaboration as a "build vs buy" proposition to the management
- Revisit your Fintech strategy every year
List of RBI circulars
| Date | Link |
| 5-Nov-2020 | https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11991&Mode=0 |
| 21-Sep-2018 | https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11376&Mode=0 |