The Fintech space is witnessing significant activity with a number of startups and incumbent financial service players adopting innovative business models to deliver solutions to customers. Buoyed by the boom witnessed in digital and mobile technologies, FinTech solutions are redefining how financial services are monetised, delivered and consumed, especially in the retail banking spectrum.
According to a CB Insights report, which examined startups that were disrupting key retail banking areas (lending, investment management, personal finance and bill pay/money transfers), 2015 was a record year globally for startups in the FinTech-banking space:
•Total funding in this space was estimated to be $6.5 billion as of 10 December 2015 — a 201 per cent increase over the full-year 2014 figure ($2.2 billion) which itself was a record-breaking feat
•The number of deals jumped from 24 in 2010, to 110 in 2014 and stood at 144 deals as on 10 December 2015
•Lending startups dominated dollar share of funding, taking more than half of all funding in this space.
These trends highlight the growing presence of FinTech startups that are providing consumers with specific banking solutions which pose a threat to existing players. The potential impact of FinTech is visible across different banking business streams, be it asset, liability or wealth advisory businesses.
Disrupting Deposits & Payments Space
A number of mobile-wallet and payment startups are providing convenient solutions to consumers. This could disrupt the deposits, remittance and payments business of traditional banks. By providing services through mobile technologies and combining these services with strategic tie-ups that facilitate direct payments to end-merchants, these solutions are reducing consumer reliance on traditional transaction avenues and influencing the choice of consuming deposit products.
One area that FinTech companies have heavily focused on in the entire deposit-payment value chain is the end-consumer of customer payments. By entering into smart tie-ups with popular merchants who facilitate smoother transaction flows, e-wallets are drawing in customers. Paytm, for instance, has been able to maintain its presence through some smart partnerships across industry segments, including transportation (Uber), food (Pizza Hut, Costa Coffee and Vaango) and even insurance companies such as ICICI Prudential Life, Religare Reliance Life and Reliance General.
The emergence of payments banks in India, and their focus on integrating innovative FinTech solutions is a clear signal of the new order in this space. Unlike traditional banks, payments banks can only provide services in the deposit, remittance and payments space; they are not allowed to play in the lending space. This leads to a shift from a traditional bank business model based on float revenue streams to a transaction-driven model. By providing customers with similar interest-bearing deposit options as traditional banks, but with more convenient and mobile-oriented payment options, these payments banks are exhibiting how FinTech solutions can revolutionise service delivery.
Redefining The Lending Model
A number of technology-backed solutions are replacing the way loans are underwritten, processed and serviced. Concepts like P2P lending and alternate credit decisioning (ACD) are allowing the sector to reach out to a larger audience and make lending to traditionally under-served segments a reality.
P2P lending platforms act as market-makers, connecting borrowers and interested investors by leveraging digital and social media. Unlike traditional banking models where the capital is predominantly provided by the lending institution, P2P lenders do not lend out their own funds. The revenue streams for such a business are from origination fees charged to borrowers and from a margin on the interest earned by investors, as well as additional charges and fees associated with the loans. The cost advantages of running only on virtual channels allows these platforms to be flexible with pricing and ticket size.
Another differentiating factor of P2P lenders is the leveraging of alternate credit decisioning techniques to underwrite borrowers. By going beyond traditional credit data sources and using options such as social media behaviour, mobile usage, e-commerce/utility bill spend behaviour, psychometric data, etc., these platforms are able to build more comprehensive credit profiles and, in the process, include a larger audience of consumers who do not have sufficient credit records and therefore find it tough to pass traditional bank underwriting policies. All this is achieved without opening up the business to increased credit risk — last year, some of the top established players quoted bad loan rates below 3 per cent.
Models such as P2P lending and ACD provide numerous insights and approaches for banks to consider. Developing digital and analytical capabilities through a technology-first approach would be imperative to competing in this evolving industry.
Digital Investment Advisory
The investment advisory space — already well established in the Indian market — has also benefitted from digital technologies and analytics. Various models have come up that are redefining how advisory services are provided by differentiating themselves on three fronts: advisory, delivery and cost. Robo-advisory model is one such example.
The model leverages the power of analytics to provide tailored advisory solutions to customers. Using refined analytical techniques, the robo-advisor studies customer needs and pin points investment portfolios that would match such customer investment profiles. Customer profiles are developed by analysing a wide range of information, including age, income, savings, asset holdings, investment time frame, investment goals and risk appetite. These profiles are then matched with investment portfolios based on smart algorithms. While this may sound familiar to the investment advisory processes of most leading banks, the difference in the advisory is brought about by real-time analytics to justify investment decisions which fit risk appetite and investment goals.
Some players have combined their services with a personal finance management front. This allows these platforms to have a single view of a customer’s holdings across asset classes and thus provide even more relevant investment solutions.
While there are real gains to be had from the opportunities that FinTech solutions provide, existing banking players need to align their organisational processes to facilitate technology-driven growth. The key will be to find a balance between internal capability development and faster inorganic expansion through collaborations, partnerships and acquisitions, so as to compete and succeed in this evolving market space.
(This story was published in BW | Businessworld Issue Dated 08-02-2016)
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