Introducing Inquisitorial by Indianaut, a long-form newsletter where we explain and analyze important stories stemming out of the Indian entrepreneurial ecosystem & economy. New articles every Saturday & Sunday.
18th June 2021 marked a watershed moment for the Indian Banking industry. The Reserve Bank of India (RBI) gave its in-principle approval to Centrum Financial Services and BharatPe for the takeover of scam-hit Punjab and Maharashtra Cooperative (PMC) Bank. This marks the first instance of an Indian Fintech receiving a banking license in India.
(Image Credits: ET)
The joint partnership between Centrum Group and BharatPe, will collectively infuse $250 million - $300 million (or upto ₹2224 crore) in Punjab and Maharashtra Cooperative (PMC) Bank, over the next two years, according to BharatPe co-founder Ashneer Grover.
“By Q4 of 2021, we are expecting PMC to be a fully functional and operating bank. But how different depositors will be able to withdraw their deposits is what we will disclose over the next few weeks [...] We hope to start providing our merchants with banking and account opening services with PMC Bank on the BharatPe app by January 1, 2022," added Grover in an interaction with Mint.
This isn’t the only move BharatPe has made recently. BharatPe has acquired 100% of Payback India, a multi-brand loyalty programme, from American Express and ICICI Investments Strategic Fund for an undisclosed amount. Payback claims to have 100 million users in India.
The acquisition will help BharatPe increase customer engagement on its platform and enable its six million merchants to roll out loyalty services to customers, the Noida-based startup said in a statement.
BharatPe isn’t the only trailblazer making such moves. Flipkart’s co-founder Sachin Bansal’s start-up Navi Technologies has made a series of acquisitions in the past couple of years and has applied for a universal banking license from the Reserve Bank of India through its entity, Chaitanya India Fin Credit. NAVI’s acquisitions now allow them to offer numerous financial services such as Insurance, Home Loans & Personal Loans to their customer base seamlessly. The result of receiving a universal banking license is something unfathomable at this stage.
The Champion (Indian Banks)
The Banking industry of India is both far more complex and ripe with opportunity than any other industry in our country. While it is a deeply regulated market, nothing quite mimics Banking in its scope, nuance, and size. Banking products are usually quite homogenous in nature too, i.e., all banks look the same because they rarely offer unique features or functions. Businesses have to solely fight one another on acquisition spend and brand building rather than meaningful product differentiation or innovation. Coupled with legacy physical infrastructure, with complexity and regulation acting as a significant barrier, the gap between what customers expect and what traditional banks currently deliver has never been wider.
For consumers, financial Products are incredibly complex in nature and are further segmented, leading to complex choice architecture. Applications such as Instagram, Uber, and Netflix provide customers with an outstanding experience that they are no longer willing to settle for something worse - and that applies to financial services too. Disruption has occurred in virtually all industries in the last two decades, and it’s also starting to transform the banking industry too. Banks, which maintained their dominant position thanks to factors such as highly regulated environments, are seeing the emergence of new competitors in the form of Fintechs that threaten to steal a substantial market share, if not displace the incumbent banks from their leadership position.
The Challenger (Indian Fintechs)
Fintechs in India have traditionally been startups that focus on a single financial product or service with a lean organization structure, advanced technology, and an exceptional user experience. They usually have a clear customer orientation and focus on solving extremely specific use-cases (example - CRED, a $2 billion startup that focuses on transforming how Indians pay their credit card bills). They usually use some sort of advanced technology to achieve a competitive advantage.
Some Fintechs in India are trying to solve the problem of traditional banking. Sadly, while globally ‘neo-banks’ are essentially 100 percent digital banks, which offer services ranging from accounts, credits, and payments without the burden of a physical network, In India, regulations, do not permit 100 percent digital banks, therefore ‘neo-banks’ in India offer services built atop a traditional bank’s offerings.
Even India’s largest Fintech, Paytm, only has access to a Payments Bank license which comes with severe restrictions and doesn’t allow much disruption. But with recent moves by the likes of NAVI and BharatPe, that status quo might be changing soon too.
Who Wins?
The success of neo-banks and fintechs globally must give traditional banks in India nightmares. With the global pandemic pushing digital transformation, what banks cited as their competitive advantage (their many physical branches) over neo-banks, is now over. Today, the biggest hurdle of traditional banks is that they have to bear higher costs than fintechs by maintaining physical branches.
Traditional banks need to start digitizing soon or get eaten by software. HDFC Bank’s example comes to mind. In December 2020, the RBI took the unprecedented step of stopping HDFC Bank from selling any new credit cards and also launching new digital services, because of a series of network outages. If digitizing themselves isn’t possible, Banks need to embrace partnering with Fintech players for delivering essential banking solutions even more. This will allow traditional banking players to offer an on-demand experience for new-age customers.