Thursday, May 19, 2022
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Who will own the customers: Banks or FinTechs?

This decade is dedicated to Fintech companies both nationally and internationally. With companies like Square, Zerodha making it big because of their innovation and acquiring millions of customers, the battleground for financial services has become a little tough.

The world has seen a rise of big tech companies in the USA. Governments across the world have hit them with antitrust bills as well. Even the USA Congress is hitting them with enquiries now. These companies have acquired large customer bases, thanks to their huge network effects. In India, the regulator and custodian, Reserve Bank of India do not want the FinTech companies to meet the same fate. Probably,  because we have seen how the big tech companies utilise this endless power.  In India at least the Reserve Bank of India does not want that to happen. So, here Fintech companies collaborate with banks (both public and private alike) to deliver financial services. For example, Neobanks are quite popular in Australia. However, in India they still do not have the license to operate on their own. They offer services under the blanket of a bank.

But this in no way means that there is no scope of innovation in the country. With the type of products offered by FinTechs increasing and widening, they might not always need the help of banks in order to operate. Think about this. Cred, a popular application in India that lets users earn cashback and rewards every time they pay their credit card bills, has started peer-to-peer lending on their platform. The typical process to take credit from a bank looks very tiring and lengthy. There is a high chance users will start lending and borrowing from more such peer to peer lending apps. There are BNPL apps that provide loans of small amounts to customers easily and instantly. Banks could not have thought about such a product or offering before BNPL became famous.

With this comes the question, who will own the Customer, and will have the upper hand with FinTech changing the face of financial services and the way they will be delivered?

You may wonder why this question is relevant.

This is because FinTech companies are essentially an aggregator or a platform that just takes a pipe from one or more institutions to deliver financial services. All the customers are on-boarded on both platforms, but it is the FinTech company that serves these customers.

What if suddenly the FinTech company decides to cut the pipe of one of the financial services providers to them, due to pricing or any other issue? Will big banks or financial service providers be able to reduce their prices or negotiate? So now comes the question: have the FinTech companies achieved the stature to negotiate and flex their muscles with biggies and incumbents? Will FinTech grow so big in the future that banks and other Financial Services Providers will just become a warehouse of their own services?

Let us answer these questions one by one and understand who will own the customers; Banks or FinTechs.

1. What if suddenly the FinTech company decides to cut the pipe of one of the financial services providers to them, due to pricing or any other issue?

FinTechs have become too big to ignore. This is why even banks are using them to reach out to new customers who might not use their services directly. If a Fintech company decides to cut the pipe of one of the financial services providers to them, due to pricing or any other issue, banks will have three paths.

Firstly to reduce the prices as demanded by the companies. Secondly to ignore the phenomenon and keep doing their operations. Thirdly, to play the FinTech game too.

The last one requires full attention. Banks can play the FinTech game as well. If we look closely, Fintech companies take up a niche and then concentrate on it very well, innovate them accordingly and gain a good Customer base. A McKinsey analysis of a sample of startup data shows that 62% of startups are dealing with the retail banking segment, while only 11% focused on large corporate banking offerings. It also shows that payments is the most popular area to disrupt and lending is the most lucrative area of banking by revenue being targeted.

Banks can use different methods like better branding, gamification, better customer services, flexibility in operations etc to appeal more to the customers. The aim should be “Customers are kings” just like FinTech to attract more customers.

Our advice to the incumbents will be not to copy or buy the FinTech product and company but adopt their thought and nimbleness.

2. Have the FinTech companies achieved the stature to negotiate and flex their muscles with biggies and incumbents?

Fintech companies are more desirable than banks (for the users primarily) for a number of reasons like innovation, flexibility, leaner virtue operations to name a few.

So the answer to the question might be yes. What is more desirable and profitable will be better in the longer run. However, there are other reasons as well.

Based on the current situation, banks are sitting in the top left quadrant because they have shown low motivation despite their high ability to respond to fintech. Though they have the wealth and staff numbers to respond to the disruptive potential of fintech startups, their responses have been either dismissive or passive. If you follow the news, you would have seen that not a week goes by without a financial services chief scoffing at Bitcoin or robo investing. Banks are passively invested in these sectors as they have mostly engaged with fintech through soft touch accelerators or direct equity investing which, in its purity, is a form of outsourced innovation.

So FinTechs are in a position to negotiate with the legacy institutions (under the radar of RBI of course). If a bank indeed wants to respond to the fintech movement constructively, they need to stop scoffing and start adapting. They might fight or flight.

3. Will FinTech grow so big in the future that banks and other Financial Services Providers will just become a warehouse of their own services?

The answer to this question is tricky. India, unlike the USA, has a custodian in the Reserve Bank of India. So, the monopoly of big FinTechs might not be a reality here. However, this in no term means that banks are not supposed to innovate themselves. Else the FinTech companies will invent one or the other way to avoid the collaboration with banks or the banks will just be the warehouse of their services while the FinTechs will be the face.

A response contrary to this (but one that is worth considering) is that banks acknowledge the inevitability of the unbundling of financial services and retreat back to their roots. They can use their infrastructure to be “enablers” of financial services, like custodians for deposits, while also applying their scale to limit themselves to the form of “human interaction” which is being avoided by fintech.

The last word

At the end of the day, banks also need to look at how the importance of certain staff roles has shifted inside the current environment. In Fintech firms, technology has always played a key role in banking and banks have a chance to possess competent resources in this regard given their huge financial abilities. Yet, in a tech company, coding and development skills are lauded and the employees with these roles play pivotal parts in business design. The tech in Fintech has played an important role in their popularity and growing usage. Banks, on the other hand, look at technology as a horizontal operation to support their teams agnostically. Maybe this is the reason why we can even think of FinTech growing so big in the future that banks and other Financial Services Providers will just become a warehouse of their own services.

References

  1. https://fintechpaymentbanking.com/2018/08/19/who-will-own-the-customers-banks-or-fintechs/
  2. https://www.toptal.com/finance/investment-banking-freelancer/fintech-and-banks

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