Wednesday, April 26, 2017

Disruptive influence of FinTech on Indian Banks

Indian banking & financial services industry has endured a tumultuous months following November 8th 2016 announcement of demonetization.

Banning of high value currency notes and the subsequent cash shortage and financial crisis is still taking their toll on banks. Indian banks were already under tremendous pressure due to bad loans and are now facing increased demands from retail customers. Many banks are still struck with slow & archaic online payments, with users needing to type in user names, passwords, 16 digits from the credit card and more. It is no wonder that the public trust and confidence in Indian banks is arguably at an all time low.

It is no surprise that consumers and businesses alike have moved enmasse to newer financial services which are enabled by FinTech!

FinTech is a catch-all term for the nascent revolution in the financial services space. Mobile payment systems that use technology and Internet platforms to offer a wide range of financial services. FinTech now offers a genuine alternative to traditional banking and payment systems offered by financial services firms such as Visa & Master card!

Indian customers & businesses are tired of the oligopoly of the state owned banks and duopoly of Visa/Mastercard in payments services sector.

Mobile payment systems offer an exciting, democratizing development which offers tools and services needed to meet the demands of vast majority of Indian small businesses and consumers. This denotes a major paradigm shift in banking and it will disrupt existing financial systems.


Last few months post the demonetization, Fintech based payment systems in India - PayTM, MobiKwik, Freecharge, mPesa etc., have moved aggressively to get new customers and businesses, thus loosening the vice-like grip of banks & card payments. PayTM has made a huge splash in the 2016 and has changed the way consumers view payments.

Small Merchants in India have openly embraced FinTech payment services - mainly because of ubiquity of smart phones. More and more Indians are using smart phones, which enables banking and payment transactions to be completed electronically.

This transition to mobile payments also coincided with rapid adaptation of 4G data services.  In last 4 months alone, more than 125 Million users have taken 4G data services. This enabled rapid movement to digital payments. Rural businesses & merchants are accepting mobile payment through services like PayTM, MobiKwik,  UPI, etc.

Given the increasing usage of smart devices and mobile payment methods, there will be rapid growth of FinTech industry. I think in the near future we will see everything being paid for with our mobiles– for example paying Rs 10 for cup of coffee!

The movement towards mobile payment systems with newer payment companies using FinTech is just the beginning. Eventually customers will stop using credit/debit cards or cash, opting for mobile payments instead. This denotes the first move away from traditional banking transaction.
Given the increasing usage of smart devices and other contactless payment methods to complete transactions, business to consumer growth seems a natural direction for the FinTech industry.
In the next phase, people will start investing from their mobile platforms. Mobile payments systems will evolve to offer interest bearing investment opportunities - in form of fixed term deposits, Recurring Deposits or Mutual Funds etc., which can be accessed directly from user mobile devices.

As technology and consumer tastes continue to evolve, the market for financial services must keep pace, and learn to evolve. Newer FinTech companies will lead this new revolution.

Traditional banks, insurance & financial companies will struggle to change and adapt to this new paradigm. Banks in India will particularly find it hard to change because their customer experience management, based on legacy systems and legacy thinking, is lagging behind.

FinTech companies on the other hand have no technical debt, and they design the solution based on end user experience, therefore FinTech companies will have the upper hand when it comes to building better services.
Closing Thoughts

In the short term, FinTech in India will evolve & grow around the consumer banking space - with focus on consumer banking, making it easier for consumers to pay, and making it easier for small businesses to transfer money to other business entities. FinTech companies will unbundle banking & financial services and pick the 'cherries out of the cake', focusing on high-margin, highly scalable product and service areas, while leaving the commoditized or low margin services to banks.

Banks have the choice of either becoming 'platform utilities' or turning themselves into FinTech companies and building up their own FinTech ecosystems via various FinTech partnership and innovation models, and corporate venturing strategies.

The paradigm has shifted. The influence of FinTech is sure to be felt for years to come. Thanks to a perfect storm of changing banking rules, market forces and business cultures, FinTech has proved to be a disruptive force in Indian banking circles, a trend which looks set to continue well into 2020.

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