India Is Set For A Fintech Revolution
Stodgy banks, hunched over by capital and dud-loan concerns, their eyes off book-growth; a swathe of the populace (over 40 per cent) beyond the pale of formal finance; the gaggle of impatient millennials and the live-in of finance and technology have given rise to goblins
Because that’s where the money is.” It’s a quip widely attributed to Willie Sutton who was in the noble business of robbing banks — over a hundred in the US — and a resident on FBI’s “most wanted list” for two years in the 1950s. He denied having said so in his book ‘Where the Money Was-The Memoirs of a Bank Robber’ (1976), but few will quibble over the logic in any case. His on-record “You cannot rob a bank on charm and personality”, was a bit off-the-mark (!) but Sutton’s Law guides the many sharp suits who prowl with a new attaché by their side: fintech. It helps they can also shoot — from the lip.
Ask Vaibhav Lodha, co-founder of FTCash: Will fintechs have banks for a meal, or will they go out as pals for a bite? He finds a crutch in an African proverb: ‘If you want to go quickly, go alone. If you want to go far, go together’. And points to the cut-throat competition with unending discounts that didn’t serve e-commerce or food-tech well in the long run. “We are likely to see a lot more collaboration between fintechs and banks”. Adds Sanjay Sharma, co-founder and managing director at Aye Finance: “Once the variety of fintech innovations plays out, there could be consolidation. I expect a lot of jockeying…”. So whether fintechs and banks break bread at the same table or munch apart, the tab will be taken care of for sure — both charm and personality are at play here.
A Canyon of Gold
Stodgy banks, hunched over by capital and dud-loan concerns, their eyes off book-growth; a swathe of the populace (over 40 per cent) beyond the pale of formal finance; the gaggle of impatient millennials and the live-in of finance and technology have given rise to goblins. You have arrivistes — from bill-pay, P2P, plastic-vendors to hardware and software oracles; pure-play IT firms and consultancies; and telcos. Legacy and newly minted small-finance banks have their own vuvuzelas.
Just how big a booty is fintech? The answer depends on who you ask, but it’s billions and billions of dollars. There’s no study on its size to go by, but let’s look at the pure-play digital payments space as it stands (at a transaction cost of one per cent from the two per cent there abouts now)— assuming even one per cent of our GDP of Rs 150 lakh crore goes digital, the transaction fee pool is Rs 1.5 lakh crore. It’s a big game, and even bigger are the bets.
In the last five years, venture capitalists have invested almost a billion dollars in desi fintech. According to KPMG India, deals were relatively strong despite a dip at the end of the second quarter of calendar ‘17. Three made it to Asia’s marquee list: the $123-million (Rs 778 crore) buyout of ItzCash (Essel Group) by the Nasdaq-listed Ebix Inc; MobiKwik’s $50 million in Series-C; and digital general insurance company Acko’s $30-million seed-funding (see VC Investments In Homegrown Fintech). A full-throated lung-opener will be AGS Transact’s Rs 2,000-crore (or thereabouts) maiden float — a red-herring prospectus has been filed with the Securities and Exchange Board of India. If you saw infotech companies lunge toward the bourses in the 90s and in the early years of the first decade of the millennium, it will be fintech companies to head that way in the next rush hour.
“Payments and lending solutions continued to drive a significant amount of fintech investment. While ticket-sizes were relatively low, there have been numerous deals focused on personal lending and small-business loans. Those focused on providing short-duration loans (up to 15 to 90 days) attracted the most attention in the lending space, as bridge-financing is considered a relatively large issue for both individuals and businesses,” says Neha Punater, Head-Fintech, KPMG (India). While there are block-chain firms too, a viable model is a mirage. As for insurtech, “While it has not gained a significant amount of traction (in India), the tide may be starting to turn,” adds Punater; Acko may be a harbinger.
A billion dollars into fintech is a rivulet; in no way riparian. But it needs to be borne in mind that we are not talking “asset-heavy” businesses — it’s about payments, transactions and small-ticket loan-vendor platforms. It’s reflective of the fact most newbies don’t have to be an Atlas to take on the load of regulatory capital — Basel-III norms and dud-loan provisioning; or that due to the operational cost of physical rollouts or the huge disconnect between the wage bill and productivity indices. It’s also unfair to compare capital inflows into Chinese fintechs at $5 billion during the same period (the past half-decade) — the Dragon is in a different phase of evolution, be it in trend or trajectory. What you can’t deny is that the Indian fintech elephant will soon be caparisoned.
For instance, the Essel Group, the largest shareholder in the decade-old Itz, along with Matrix Partners, Lightspeed Ventures, and Intel Capital had put in $51 million over time (the exact holding is not known as these are closely held firms); the recent $123-million Ebix-Itz deal more than doubled the investment. Another example is the killing made by Winvest Holdings (India), Sequoia Capital and Axis Bank when Hitachi Consulting gobbled up Prizm Payment Service for Rs 1,540 crore three years ago. Prizm’s founder and managing director Loney Antony will give you a Sphinx-like smile when you ask him if he made a killing. “I have worked hard all my life,” is all he says.
ATM management services firm Prizm may have hit pay dirt, but others too in this space are leapfrogging with the times. Look at AGS Transact’s Kochi-1 Smart Card that allows you to hop on to the city’s metro-rail network and feeder-services. Ask AGS chairman & managing director Ravi Goyal: Is it like Oyster Pay in the UK? “Yes. With the smart cities’ project, the potential is huge,” he says looking pleased as punch. It shows how these entities are set to shape new living spaces; and tells us how in the demonetised regime, the pulse (and price of exits by early birds) will only race.
Rajat Gandhi, founder & CEO of Faircent.com, finds comfort in the natural tendency of banks to reduce the supply of credit when faced with large dud-loans. “It decelerates the cycle of lending-repaying-borrowing,” he says. But it will not be a free-pass. Sqrrl founder Samant Sikka says fintechs are to be looked at differently. “The list of things that you cannot do is longer than the things you can do. There are huge regulatory oversight and compliance responsibilities. Which is not the case in e-com or food-tech,” he says. This leads us to the coming together of the regulatory and technology — or RegTec.
Historically, regulation was a big hurdle for entry into financial services. “Now we see the reverse. Many incumbents are hampered by complex processes and governance they have built up around risk and regulation, and many have also developed a significant degree of risk aversion given some of the headline-grabbing issues of the last decade. It’s not surprising, therefore, to find innovation influencing this area,” says Manoj Kashyap, Partner & Global Fintech Leader, PwC-US. A growing body of complex regulations such as Basel-III, Dodd-Frank, Comprehensive Capital Analysis and Review and General Data Protection Regulation among others lend themselves to solutions that can leverage technology.
It’s daybreak for fintechs; it’s going to be a long day.
Who Gets To Be The Mahout
In the startup world, it’s fashionable to toss around the word “disruption” — even a mere re-arrangement of office furniture or a promoter’s Mohawk haircut gets by as one. If this isn’t bad enough, Vijay Shekhar Sharma’s Oscar-worthy role — no less (!) — as Pied Piper in the block-buster scripted by him, Paytm, has led many to hallucinate that banks will roll over and die. Not that Paytm didn’t cause genuine disruption, but the brouhaha around the e-wallet firm led HDFC Bank’s managing director Aditya Puri to comment: “The current loss reported by Paytm is Rs 1,651 crore. You cannot have a business that says ‘pay Rs 500 bill and take Rs 250 as cash-back’. So, come up with something else.” Puri helms the world’s most expensive bank; he has been at his desk since 1993. In terms of longevity, Joseph Neubauer led Aramark for 31 years; Ray Irani did so at Occidental Petroleum for 21. You can’t ignore somebody in the Neubauer-Irani mould.
Paytm is right behind the record set by the Indian Bank, which in 1996 ran up a loss of Rs 1,712 crore. It’s then boss M. Gopalakrishnan — a disrupter and thought leader of his times — had said: “NPAs are a matter of perception.” If the Chennai-based bank is knocked off the podium, you can’t grudge Paytm’s Sharma if he were to turn around and say, profits are also a matter of perception. It’s unlikely though — BW’s intelligence network has it that Jack Ma of Alibaba is an expert in Chinese water-torture! The fintech-bank debate has been distilled to one of air-fairy valuations; it has hijacked the discourse.
“We have never said we are out to disrupt banks. All talk of e-wallets eating up banks, then UPI (Unified Payments Interface) eating up e-wallet players, makes no sense. Over 80 per cent transactions are still in cash; more than 40 per cent is outside of the organised finance mart. Let’s first get all of them on formal platforms, and then we will come to who gets or keeps what market share,” says Bhavik Vasa, chief growth officer at Itz. He points to Itz’s annual pre-paid plastic spend of nearly $3.5 billion (Rs 20,000 crore), and it’s stroll with HDFC Bank, Kotak Mahindra Bank and RBL. “We work together”.
Seconds Navin Chandani, Chief Business Development Officer, BankBazaar.com: “There are fintechs that compete directly with banks. Like in payments. The former uses its own infrastructure whereas the latter uses credit cards. But even here, with UPI, competition becomes collaboration. So, depending on what the goal is (of the solution), it can be a completely collaborative approach; or they go in a completely opposite direction as competitors, or find a middle ground.”
What’s unsaid about the collaboration is that it is a clever way to dance around a fault-line with political overtones. Demonetisation saw a campaign unleashed in sections of both mainstream and social media that pointed to the covert ploy to transfer the cream of fee-based business to fintechs — Paytm’s Sharma’s face was plastered on the dart-board. It made no sense to shout over the din that he had surfed the digital wave way ahead of others to valuations; or that banks had started partnering with scores of fintechs for the utilitarian solutions a long time ago; or that Sharma’s El Dorado (e-wallets) may also become part of the sand dunes.
To get a sense of what’s in store, let’s step back and take a look at the early weld between electronic and mobile payment platforms that forced traditional players to join hands or buy outright the gate-crashers.
In 2008, Telenor picked up a 51 per cent stake 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) to make ‘PayPass’ cut across the networks of Korea Telecom, LG Telecom and SK Telecom — nobody missed a bank at this party. 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 somebody so that you end up being a big nobody.
Mine, Yours and Ours
A big plus that legacy banks have as on date is, the access to cheap current and savings accounts (Casa), a ready base of customers, and a brand. It leads us to two engaging issues in the immediate: How will the liabilities game playout? Will fintechs emerge as white-label agents of banks? The fountainhead of these posers is, well, Sutton’s Law.
Lodha feels that “with the advent of crypto-assets and the possibility of folks moving part of cash savings into them, the blow to Casa is going to be much more severe”. While this may take some time (at least, the crypto aspect part), ahead of that inflection point, you have other things to ponder on. And its ubiquitous. As Sikka explains: “Savings’ bank (account) interest rates have fallen below the 4 per cent-mark, mutual funds offer almost double the returns (though not guaranteed) with daily interest gains, no lock-in, instant liquidity up to Rs 50,000 and a Visa debit-card, all this being more tax efficient at no minimum balance and access with as little at Rs 100. So there’s no reason for anyone to keep money in such an account.”
The asset-side will see new field-settings. Abhishek Kothari, co-founder of Flexiloans, says a fintech may get capital at 10 per cent, but can lend at a mark-up of a 1,500 basis points. “To top it, it will be able to reduce operational costs beyond the capability of the bank-branch-model of banks by going digital”. What’s even more ominous (for banks) is that fintechs are constantly evolving their algorithms through machine learning. It’s no wonder that Kothari’s firm has raised Rs 100 crore in seed-funding — the highest for any Indian startup till date — from marque angel investors such as Sanjay Nayar, CEO of KKR-India (and former head of Citigroup-India); Vikram Sud (who used to oversee operations and technology at Citi); and Anil Jaggia (former CIO-HDFC Bank).
It’s not that this game is going to be easy. Says Praveenkumar Vijayakumar, chairman & CEO at Belfrics Global: “Except for the few extremely popular innovations and products, most of the fintechs will struggle in creating a sustainable and loyal customer base. Fintechs will have to find common grounds with the legacy systems and NBFC’s to get their innovations to the masses.” Another point of stress, he adds is for those banks that have not responded to the latest fintech revolutions, there will be a definite impact on their payments-related revenues. “In fact, I foresee a major impact on the FIAT currency’s dominance in the remittance market,” adds Vijayakumar. It’s one area, where disruption could be severe.
So, to the extent fintech players’ solutions still require banks’ traditional infrastructures to move the money, will this lead to banks acquiring some of them?
“This assumption is correct in the short-run, but as and when the crypto-currency space stabilises, the innovations in block-chain technology will decouple the FIAT and crypto-remittance space. Having said that, a lot of consolidation will take place to establish the dominance in this market, which will lead to bank and fintechs jointly moving the money through the block-chain,” explains Vijayakumar.
Naveen Kukreja, CEO & Co-founder, Paisabazaar.com, says banks would always be the custodians of money, and hence, would play the primary role in providing payment services. Yet he says: “Tomorrow, it could be through Whatsapp, Google Pay… the rapid pace at which technology is transforming and the increased relevance of data and artificial intelligence means banks will not be able to do everything themselves… We have already seen one example of that recently, when Axis Bank acquired Freecharge.”
If we were to look deeper at the shape of things to come, we have China where Wechat is an extremely popular medium of payment through the mobile. “Whatsapp or Google or a single and easy to use UPI app could make similar penetration in India. But while these payment apps would lead to further accessibility and ease of use, it will still need banks’ systems to move the money. Fintechs that will succeed in this environment will be the ones who truly add value to both customers and banks,” adds Kukreja.
You may also see disruption from within to stay nimble. For instance, First Direct, the telephone-only-please foray of Midlands Bank now resides in the belly of HSBC. Or, banks may incubate fintechs, scale them up to palm off. Bank of America did so with Visa; and Citi with i-flex — now part of Oracle. Or who knows, banks may even merge into them. You can loosely think of ICICI Ltd to ICICI Bank in 2001 — you spawn a bank (just replace it with fintech now; and you will get the drift), and then, when regulation permits, put the offspring back into the womb. Step outside the financial — you have Facebook’s induction manual, which is all for a gargoyle from within to cannibalise itself. The idea’s straight out of Hindu myths — you take on an avatar for a specific task; once the deed’s done, it’s finito.
The report of the Sudarshan Sen Committee — an inter-regulatory working group set up by Mint Road to study the issues relating to fintechs — was still not out at the time of writing this piece. But when out, it will give enough pointers to what Stewart Brand said: “Once a new technology rolls over you, if you are not part of the steamroller, you are part of the road.”
A clean break
Mint Road’s Annual Report says there appears to be a structural break in the volume and value of retail electronic payments, coinciding with the onset of demonetisation and the special measures put in place to promote digital payments. The payment and settlement systems continued its robust growth during 2016-17, with volume and value growing at 55.7 per cent and 24.8 per cent, respectively on top of an increase of 49.4 per cent and 9 per cent in 2015-16. The share of electronic transactions moved up to 89 per cent in total volume of non-cash payments from 84.4 per cent in the previous year. As remonetisation gathered pace, the currency in circulation (CIC) moved up week after week and reached 74.3 per cent of the peak by the end of the financial year. At end-March 2017, CIC amounted to 8.8 per cent of GDP, down from 12.2 per cent in the previous. year. At this level, our currency to GDP ratio compares well with a host of advanced and emerging-market economies (such as Germany, France, Italy, Thailand and Malaysia). Yet another fallout that will please the tax man is the rise in funny accounts. During 2016-17, the number of suspicious transaction reports filed by banks and other financial intermediaries with the Financial Intelligence Unit saw a quantum jump.
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