Fintech startups may be opening new vaults in the financial services industry in India today but will this disruption down the shutters of traditional banks? Innovations such as big data analytics, AI and blockchain may spur banks to adopt technologies to digitize money flows, but a scenario where smaller tech companies will displace long-established rivals is improbable – at least in the near future – even according to some of the most vocal proponents of the sector.
“Banks are watching fintech startups very closely and even partnering with them, perhaps with a broader view on developing these technologies themselves or potentially making a cheap acquisition later,” says MD of SAIF Partners, Alok Goel at the 13th edition of Nasscom Product Conclave in Bangalore on October 26. “But I do not think these establishments are looking at long-term sustainable partnerships right now,” he says. Adds MD of Matrix Partners, Vikram Vaidyanathan: “Banks are viewing startups as distribution platforms for their services. They are ironing out how they can use their books to lend to companies, and startups may be one way to go about it,” he says.
Top players in the banking industry may have an edge over smaller companies to provide better services, but according to Goel, fintech startups can become valuable companies too if they focus on three key things:
1. Easy access to customers
2. Operational efficiency in running the business
3. Cost of funds
“Startups cannot beat banks on cost of funds, therefore, it becomes imperative for them to build core competence on the first two,” he says. They can also cash in on the massive data they have curated over time – from mobile phone SMSs to consumers’ purchase information through credit card statements – to drive a new age of lending.
“Once you understand consumer behavior by way of multiple transactions on one particular platform, it could be prudent to build other businesses over this,” says Vaidyanathan. “A good example will be to start a daily EMI-based lending business, which will also create massive value for VCs investing in the startup,” he adds. This is best illustrated by PayPal, which has 45% of its revenue coming from payments and the rest from merchant services, that is, lending.
Fintech startups like Capital Float and Ezetap have been developing software that allows them to service a broader range of consumers than established banks and NBFCs, which mostly cater to the top 100 million users.
“Banks target the salaried class or customers who have a good credit history, without going below that segment where the cost of money becomes exorbitantly high,” says Goel. “For instance, a fruit vendor in any city in India will be paying interest rates of as much as 10% a day. They desperately need access to affordable credit and today technology has provided a way for us to access that credit and reach out to that customer base in a more scalable and low cost manner,” he adds.
These new technologies enable fintech startups to extend services to a broad range of under-serviced consumers who are either not online or have not been picked for lack of adequate credit history. However, that is not to say that all fintech startups are creating valuable products for these customers. “Most so-called fintech companies trying to solve lending issues have stayed in the top 50 to 100 million user category, which is a real travesty,” says Goel. “People either talk about the salaried class or students who already have access to credit and hence there is no clarity on how a 10x value is created for consumers by these startups,” he adds.
The market may appear ripe for a fintech revolution, but startups in this space face a number of challenges. These include regulatory scrutiny and steep customer acquisition costs. But the most important issue remains trust.
“The investment market is at a stage where nobody trusts institutions that sell you financial products because of a history of cases where these have been mis-sold,” says Goel. “So the first thing that needs to be established is consumers trust,” he says.
Goel perfectly illustrates this using an analogy around Baba Ramdev. “Fintech startups can learn a thing or two from Ramdev’s strategy, who taught people to do pranayam for ten years, earning their trust first and then selling his FMCG products,” he quips. “You need to be able to communicate to your consumers that they have trusted in you before and have had a good experience, opening up an opportunity in the future also,” he adds.
“No startup can emerge overnight and offer to do wealth management for consumers with 10% extra rate of return,” says Goel. “Trust needs to be established first. It is a long-term journey where a lot of valuable businesses can be built,” he adds.
Figuring out distribution and scale can also be a pain point in the financial services industry, especially in the lending category. “We tend to lean more towards companies that build vertical-specific solutions where markets are large – healthcare, for instance – or those that have an open shot at both offline and online play since they can scale better,” says Partner at Kalaari Capital, Bala Srinivasa. “It is not just about technology – we fundamentally look for companies that have strong distribution strategies, enabling them to think beyond the top 10 cities,” he adds.
Accountable to the future
Both startups and banks need to adopt new technologies to meet the growing demands of the consumer. Cyber security also needs to be factored in and going forward, bigger establishments need to make quick decisions about where they can build on innovation to meet these demands or cede those areas to new players.
“However, despite the optimism around startups and entrepreneurship in India, it is not a very easy market to work on – so much so that it may take ten years to do anything valuable here,” concludes Goel.