Fintechs have made deep inroads into banking and financial services. There is a feeling that over the next few decades it would make traditional banks redundant. Will it happen?
Fintech products have got wide acceptance among customers as they provide personalised service and superior experience. As India marches towards a cashless society, fintech takes centre stage. As per the Department for Promotion of Industry and Internal Trade, there were more than 2000 fintech start-ups in India as of March 2022, and now, it is currently placed at about 3000.
India’s Fintech scene
India is the third largest fintech market, following the US and the UK, with several unicorns, startups and funding. It is poised to grow at a CAGR of 31 per cent till 2025. With this number growing fast, India’s digital payments market is expected to more than triple from USD 3 trillion today to USD 10 trillion by 2026. As a result of this unprecedented growth, digital payments will constitute nearly 65 per cent of all payments by 2026 (Source: Deloitte and PWC studies).
EY and Chiratae’s recent study shows in the next decade, the market will record a 10x growth and achieve USD 1 trillion in AUM and USD 200 billion in revenue. It is expected to reach USD 150 billion in valuation by 2025. Indian fintech startups have raised USD 10.6 billion in 2021. As of 2022, India minted 100 unicorn startups across sectors with a total valuation of over USD 333 billion, out of which 21 are fintech unicorns.
People have found comfort with digital payments. As per NPCI data, total digital payments comprising RTGS, NEFT, UPI, BHIM, credit and debit cards rose from Rs 4371 crore to Rs 11,395 crore transactions in volume and Rs 1415 lakh crore to Rs 2087 lakh crore in value, during 2020-21 to 2022-23. Of this, UPI alone accounted for Rs 8375.10 crore in volume and Rs 139.21 lakh crore in value in the year 2022-23.
Fintech segmentation
Fintechs have established their presence mainly in payment, app based lending, investment advisory, crypto currencies and blockchain. UPI payments and digital currencies are the most significant disruptive fintech products in payment services. Success of UPI is well known in our country and it shows how banks have fallen behind in embracing technology. Digital lending is one of the fastest-growing segments from USD 9 billion in 2012, almost to touch USD 350 billion by 2023. The startups aim to meet the credit gap especially in lower ticket size segment and are increasingly becoming popular. This is in direct competition to the microfinance companies and only to a limited extent on the retail lending segment of banks. Neobanks have helped users invest in stocks and cryptos. Traditional financial institutions were unwilling to provide this, as it entailed heavy reliance on technology which is prone to cyberattacks.
Disruption by fintechs
While a bank is like a supermarket that caters to all sizes – retail, priority sector, MSME and big corporates with varied products tailormade to its customers; Fintech is like a street corner kirana store, catering only a subset of banking products/aspects in the lower end of the customer needs spectrum. Traditional financial institutions differ from fintech in many ways, particularly in technology, cost and services apart from regulatory framework. Nowadays, fintechs have also started providing a bouquet of products to expand their revenue stream like Paytm going into bill payments, recharges, payment banks apart from the main UPI payments to merchants. Several individual segments of banking are now occupied by fintech startups. Paytm, Pine labs, Zerodha, Groww, Upstox, etc are examples. These were once the banks’ forte and it clearly shows customers will gravitate to whoever provides easy, convenient and cost-effective solutions.
Will banks turn Dinosaurs?
The fintech revolution has woken up banks from their slumber. They too have started to hire digital innovators. The World Economic Forum noted that AI is significant in creating value for banking as a whole. High entry barrier and inefficiency in earlier banking systems paved way for fintechs to take over banks’ business in piece meal, one by one. The retail segment only is targeted by fintechs. Being starved for funds due to funding winter, they cannot handle big corporate loans. Therefore, retail customer retention is a key challenge to the banks. Customers prefer everything online and branchless banks are gaining ground.
Most payment services (over 75 per cent) are now being done using mobile banking. This has been the primary enabler of cross-border transactions. Over 28 per cent of traditional banking services will be disrupted by financial technology in the next four years. Robotic process automation yields an ROI of 100 per cent to financial institutions within a year. According to McKinsey, fintechs are catching up with traditional finance houses in customer trust. Tech-based financial products grow at a CAGR of 27 per cent, while the traditional financial sector has a CAGR of less than 10 per cent. Are these enough to replace banks?
Fintech is less than 1 per cent of banks…
Emphatic, no. Purpose of fintech is not replacing banks; but providing quicker and 24/7 customer-friendly and cost-effective financial services. These aspects were found lacking in banks. Despite encroaching into banks’ activities and exponential growth over the past decade, the fintech sector remains small in comparison with the banking sector. For example, while global fintech activity reached around USD 210 billion in 2021, the size of global financial services in the same year was USD 23,319.52 billion, fintech was just less than 1 per cent the size! Even in the lending market, fintech’s reach remains small.
Comparing banks and fintechs by size is apparently not a correct measure as their business profiles are different. Based on RBI quarterly statistics, total business of all scheduled banks in India was at Rs 318.55 lakh crore as at the end of 2022, whereas, the total fintech size (viz. digital payments and neobanks together) was estimated at Rs 15.51 lakh crore; it is below 5 per cent of banks’ size. Banks are 20 times bigger!
Huge funds availability is the biggest strength of banks. But they are heavily regulated, in part because of size –“too big to fail” – and public deposit taking. This offers protection to depositors and enhances their trust. Fintechs are yet to establish and enlist public trust fully. So far, fintech lenders are left out of the prudential regulatory and reporting framework. There is no single regulator and perhaps they may be governed by multiple regulators (SEBI, RBI, IRDA) based on the products and services. In near future, fintech firms are likely to be brought into either existing or new regulatory frameworks.
Banks are here to stay!
Considering the size of banks, the range of products, as also the regulatory strength together with cornering almost the entire corporate and industrial credit, treasury and forex operations, fintechs cannot catch up with the banks in the near future. They may carve out some of the niche areas, especially with respect to retail, but it is hardly 25 per cent of banks’ business. Once the regulatory prescriptions also kick in, the free ride of fintechs might slow down.
India’s unique demographics further highlight the enduring role of traditional banks. A sizable portion of the population still resides below the poverty line (15 per cent as per the National Family Health Survey) and millions lack access to basic banking services. Around 50 per cent are still employed in agriculture sector; while literacy is still less (85 per cent of males and 70 per cent of females are literate), financial literacy and digital proficiency is much less than desired levels. So, the banks’ extensive brick-and-mortar presence, especially in rural areas, provides vital support to these underserved communities—something that fintechs currently lack.
Fintechs have undoubtedly disrupted the financial services landscape, but traditional banks are far from extinction. Both have their strengths and weaknesses. It’s not a matter of “us versus them”; instead, it’s about collaboration and co-operation. As the former CEO of HDFC Bank, Aditya Puri, aptly puts it, both banks and fintech companies can thrive through collaboration, ensuring there’s space for everyone in this evolving ecosystem.
