Learning to Live with Fintech

Willie Sutton, who was into robbing banks in the U.S., reportedly quipped:“… Because that’s where the money is.” He denied this in his book, ‘Where the money was’ (1976), but did say on-record, “You cannot rob a bank on charm and personality.” Early on, Sutton’s worldview guided fintechs in a big way — ranged against banks as they were — but the protagonists have since smoked the peace pipe and decided to tango.

This change of heart is on the growing realisation by fintechs — and private equity (PE) players which back them — that they have to ride on the customer base of legacy regulated entities — be it banks, non-banking financial companies (NBFCs), or shadow banks. It’s the only way fintechs and PEs can unlock value in the run-up to an eventual listing. This and the fact that fintechs are now on the radar of the Reserve Bank of India (RBI) which set up a dedicated department for them in January this year. The move is seen by central bank watchers as the first step towards “mainstreaming fintechs” given their growing collaboration with legacy regulated entities. Banks, on the other hand, have been more than keen to shake hands. Having taken the bashing from the technologically superior and vastly more nimble fintechs, banks have finally overcome the Ostrich Syndrome and acknowledged the presence of new business models.

In the new world

Take debt collections, for example. Banks and NBFCs reportedly shell out $3 billion–plus annually to ensure the loans they sell are serviced — as in, the installments are paid. This should be seen in a larger context: top-line banks have in excess of 50% in aggregate and 75% plus in incremental retail exposure on their books. Delinquencies are going northwards, and unlike corporate loans, it takes thousands of crores to chase millions of retail customers. And going about it with boots on the field and running it through in-house departments, is a no-brainer. It explains why the digital debt collections mart is expected to grow at a CAGR of 10% to $4.7 billion in 2024 (from $3 billion in 2019).

It put Credgenics — a digital debt collections firm — in the spotlight and in a sweet spot: ICICI Bank, Axis Bank, IDFC First Bank, Yes Bank, and a raft of shadow banks have shook hands with it.

“While investments have been made in digitising banking services, debt collections have lagged,” says Rishab Goel, the firm’s co-founder and CEO. That there’s money to be made in this business is evident from the $25 million raised by Credgenics by way of Series-A funding led by Westbridge Capital, Tanglin Venture Partners, and Accel Partners (on top of an earlier $3.5 million pre-Series A-round) valuing the company at $100 million!

Bengaluru-based Avanti Finance — a digital platform to foster financial inclusion — raised $26 million (`195 crore) last year (in debt and equity). It saw the participation of Oikocredit, Nomura, the Bill and Melinda Gates Foundation, Ratan Tata, Nandan Nilekani, and the Michael and Susan Dell Foundation.

“A decade ago, banks would lend to customers at the bottom of the pyramid, and credit losses would mount. Then, microfinance companies created a new category. What we are trying to do is to also create one for five years hence,” says Rahul Gupta, CEO of Avanti. In the new arrangement, banks tap Avanti to grow their priority-sector loan book. These loans have an average ticket-size of `25,000, and not many banks have the ability to underwrite them. Also, if customers are more than 60 km away from banks’ branches, the cost structure makes no sense.

“So, why not collaborate with Avanti to marry your (banks’) balance sheet with access to customers, and hyper local product development that we can do through our partners?” poses Gupta. His point: There’s no single player which is going to solve this problem of reaching 120 million households in the country.

Another is CashFlo — a multi-funder platform that offers a one-stop solution for financing the entire supply-chain for companies starved of working capital — post-pandemic. Even though the Centre brought in schemes to infuse liquidity, bank credit growth hit a decadal low in June 2020. For micro, small and medium enterprises (MSMEs), North Block approved a `3 lakh-crore liquidity injection deal, but nearly 5.4 million MSMEs which were not formally registered couldn’t hook into it. Again, delayed payments from companies, longer cash-cycles and the ineligibility to access collateral-free debt put nearly half the MSMEs at risk of closure. That’s because a majority of them still follow the traditional one-size-fits-all supply chain financing model that applies a standard single discount rate and credit period for vendors. What makes the Cashflo interface unique is that it enables funds-starved MSMEs to get funding from both banks and cash-rich treasuries of the Tata Group, Aditya Birla Group, Vedanta, Arvind Mills, and Haldia Petrochemicals even as it links them up with a 50,000-plus strong SME network.

“In the context of our solution, the programme becomes ‘on-demand’ instead of being dependent on one-to-one outreach and negotiation,” points out Ankur Bhageria, founder-CEO, CashFlo. This helps existing vendor programmes achieve significantly higher scale than the typical 2-3% of vendors, manually. A current client, says Bhageria, had been operating a vendor-financing programme in partnership with banks for several years. “It included roughly 2% of all vendors: about 200. The remaining long tail of vendors had not been reached and inducted into the programme. With CashFlo, it was able to scale rapidly. Within just a few quarters, participation rose to 25% from 2% of the vendor base and continues to increase steadily.”

That said, Credgenics, Avanti or Cashflo shaking hands with banks are relatively straightforward.

Banks and their moves

HDFC Bank has set up a “Digital Factory” and “Enterprise Factory” to fast-track newer technologies and ways of working even as it fortifies its information technology backbone. “We started the ‘Venture Investment’ initiative in 2018, with the intent of strengthening the engagement with the start-up ecosystem. The early intent was to take a nominal strategic stake in vendors and, or partners, while they continue to scale operations due to the bank’s growing business,” says Smita Bhagat, head, government and institutional business, ecosystem banking, inclusive banking group, and start-ups, HDFC Bank.

Axis Bank has a “Thought Factory” to partner with start-ups and emerging technologies. It engages with S2Pay, FintechLabs, Perpule, Pally, Paymatrix, and Gieom. It also has a ‘School of Fintech’. According to Rajkamal Vempati, president and head, human resources at Axis Bank, this partnership with the Manipal Academy of BFSI, is aimed at equipping graduate students with necessary knowledge and skills for a career in banking with Axis Bank. “The quality of training is as per our standards and students are assured of a job with us. This is a crucial step in skilling the professional workforce and re-strengthening the economy”, she says of what the trade terms as an “intervention programme”.

But, what about banks incubating fintechs? Take The Federal Bank. It’s not incubating fintechs, but works with the larger purpose of co-creating unique products and customised experiences. ”Our partnership with EpiFi and Jupiter (fintech start-ups), as well as with FPL Technologies (“OneCard”) are examples of this. We are also continually evaluating start-ups that we can work with,” notes Shalini Warrier, its executive director and business head, retail.

For example, the first digital passbook in the country ‘FedBook” was developed by mobile Internet company Mobme. Later, it went on to work with 30-plus entities. Similarly, the recruitment application used by the bank for an end-to-end digital hiring was developed by Zappy Hire Technologies. “Our AI-based omni-channel ‘Personal Assistant Feddy’ is being developed by Riafy Technologies. Through an association with our bank, such entities get the required experience and expertise to enable them to scale up,” says Warrier.

The plot thickens

What makes it even more engaging is that fintechs are also incubating fintechs! Says Bhavin Patel, co-founder and CEO of LenDenClub: “It’s not that we are pouring money into fintechs, but we pass on our learnings to start-ups. It’s quite different from a theoretical understanding. As for funding, that comes later anyway.” Again, it’s also not that only erstwhile rivals are teaming up.

A classic case is that of Mswipe — the country’s leading point-of-sale (PoS) deployer — which “was never a competitor to banks”, but as CEO, Ketan Patel puts it, collaboration with banks could see it morph into an altogether different beast. Mswipe will continue to do its core business of investing in capex and manpower, but partner banks get to have more current accounts and float-money (from merchants outlets) even as they improve their ability to cross-sell other products.

But then, what happens to Mswipe’s traditional PoS business?

“It will morph into a one-stop shop for payment acceptance, topped up by revenue-generating streams like micro-ATM, buy-now-pay-later, and insurance enhanced by lending and current accounts,” says Patel. Over time, Mswipe hopes to become an inventory management platform — with a few clicks, merchants can come to know what sells and doesn’t; and this data can be fed to wholesalers and up the chain, to manufacturers. More so, since bar-coding has become near-mandatory. Over time, there won’t be much by way of unsold stuff on shelves. And, at the systemic level, it will lead to less reliance on working capital.

Join the dots, and what’s basically on is an updated version of a trend that reared its head well over a decade ago. In 2008, Telenor picked up a 51% stake in Tameer Microfinance Bank in Pakistan; it got Telenor-Pakistan, a banking licence to hawk mobile financial services. In 2009, MasterCard, LG Telecom and Shinhan Cards teamed up to make ‘PayPass’ (of MasterCard) cut across the networks of Korea Telecom, LG Telecom and SK Telecom. In 2011, Visa gobbled up South Africa’s Fundamo — a mobile-based financial firm — for $110 million. You might say that this was because in the new digital disorder, nobody gets to beat anybody; and you team up with anybody so that you don’t end up as a big nobody. It’s partly true, but not as simplistic. What we are talking about now is true-blue interoperability.

A classic case in this genre is PayCraft, which not many would have heard of. Set up in 2013, it’s into payment cards for both offline small-ticket payments in the transit segment, and routine retail purchases and spends. It’s been a key player in creating the interface for the National Common Mobility Card (NCMC). The issue on hand was that every transport operator had its cards, QRs, and cash-ticketing models. The challenge was to get multiple government agencies to agree on a common method for ticketing and payment. Who would hold the funds, and who would settle with the respective operators? Neither was there an answer, nor was anyone willing to let another operator handle it.

“The problem statement looked easy to solve provided we were able to bring the right technology, and then collaborate with the payment schemes and banks. The thought was simple: ‘If I can use a card issued by SBI on any merchant of ICICI Bank, then why can’t I use my Delhi Metro card for paying for my bus-ticket in Mumbai’,” says Ambarish Parekh, the firm’s chief experience officer. After all, such interoperability had been in vogue in the retail world for decades on the Visa and MasterCard networks.

“We were able to easily pitch this idea to the National Payment Corporation of India in 2013 and they were convinced in our very first meeting that this is a big opportunity to solve a complex problem. We needed a central body to drive transit offline payments where operators (merchants) didn’t have to sign with one another, but only chose a partner bank (acquirer). And we got one!,” says Parekh.

It doesn’t end here.

The new variants

Banks are now investing in fintechs. By doing so, according to the New York-based CB Insights, they “are basically future-proofing.” In 2020, banks in the U.S. made over 65 such equity investments into fintechs. It promised them high returns and access to new sub-industries. Another driver: A window for strategic investments into their business goals. Like JP Morgan’s participation in Taulia’s $60-million funding (in Q3 2020) and a partnership to create a trade-finance solution; and Capital One’s 2018 investment (undisclosed) in United Income — a retirement planning service and digital wealth platform. A year later, Capital One bought United Income!

A similar plot is unfolding here. In August last year, HDFC Bank picked up 5.2% in Mintoak Innovations, a merchant solutions’ provider for `10 crore. Earlier, in February, ICICI Bank acquired 5.40% in CityCash, a micro-payments player for `4.93 crore; and 9.63% in Thillais Analytical Solutions (it operates neo-banking platform Vanghee) for `6.03 crore. These may be “pitter-patter” in terms of deal-size, but are major steps in banks’ journey to get their digital act spot on.

What now?

It all boils down to the reality that fintechs need regulated railroads. So, are we to see banks’ gobbling them? “Look at 2020, it was the biggest year for neo-banks with signups at about 75 times than those that happened in the previous year. You saw valuations go through the roof to crack the $10-billion mark,” points out Raj N, founder-chairman of Zaggle. Like Spain’s BBVA acquired Simple; American Express acquired Kabbage.

It could also be that you may see disruption from within to stay nimble — ‘First Direct’, the telephony-only-please foray of Midlands Bank now resides in the belly of HSBC. Or, banks may go back to incubating fintechs to later hawk them. As Bank of America did with Visa, a one-time captive; Citi with i-flex — it’s now part of Oracle. Or who knows, even merge into them. Think of the ICICI Ltd-ICICI Bank (2001) back home: you spawn a bank (just replace it with a fintech now; and you get the drift), and then, as and when regulation permits, you put the offspring back into the womb. It’s straight out of the Hindu myths — you take on an avatar for a specific task; once the deed is done, its finito.

We are living in interesting times!