Fintech Challenges for Banking Industry
Nagamohan Gollangi*
Most of the technology disruptions across the globe this spells the end of conventional financing. To quote
so far, have happened in the service sector, be it Bill Gates, “Banking is necessary, banks are not.”
Amazon, Uber, OLX, Wikipedia or Google, they have And that may be true. Digital financial technology is
made easier the process of retail buying, availing taxi all about improving the lives of users and Fintech is
services, selling/buying of used goods, replacing disrupting financial industry.
Encyclopedia Britannica and providing searching
Traditional financial institutions are at present not
tools for information. One consistent common
able to catch up with Fintechs on account of their
characteristic one may find in all these disruptors is
slower adoption to change, legacy issues as well
‘easing of process to obtain service’, which is the key
as regulatory limitations. Bourgeoning proliferation
behind their stellar success.
of Fintechs is now posing a serious challenge to
On similar lines, by making easier the process of traditional financial sector and hence, has ignited the
obtaining financial services by way of fast, efficient urgent need for latter for faster change management.
and customer-friendly means, Financial Technology
(Fintech) firms have lately gained popularity and In India, there are more than 2000 fintech companies
eventually started mushrooming across the globe. right now and, according to ‘The Economic Times’,
Thanks to Fintech, it is no longer about who is their market capital totals up to 31 billion US Dollars
the biggest, but who is the fastest and the most in 2021. More than two-thirds of Fintechs have been
responsive at effectively addressing the ever-changing set up during the last five years itself.
consumer demands. The solutions offered by Fintech There are currently about 200 Fintech ‘Unicorns’
companies are no longer “one size fits all”. Instead, worldwide, and about 10% of them are based in
they offer targeted – often niche – services that fill the
India (A Unicorn company is a start-up valued at
gap of a particular financial need, sometimes at much
a minimum of one billion US Dollars). Some of the
lower costs than those offered by traditional financial
popular examples are Acko, BharatPe, BillDesk, Coin
providers.
DCX, Cred Avenue, Groww, MobiKwik, Oxyzo, Open,
Thus, becoming so popular in a short time, Fintech Paytm, PhonePe, Pine Labs, Policy Bazaar, Razorpay,
startups are significantly disrupting the financial and Zerodha.
industry. They have a number of advantages over
Different Fintech segments in India
traditional banking institutions that let them be more
creative and offer customers services quicker and Peer-to-peer lending, real-time payments, quicker
more affordable. People are speculating as to whether loan disbursement, investment advice, transparent
*Former Chief Information & Security Officer (CISO), Bank of India.
12 July - September, 2022 The Journal of Indian Institute of Banking & Finance
insurance advisory and distribution, and a number of the major companies involved in digital banking.
other services that previously required human capital
InsurTechs: Provide services including employee
are now quickly integrating into the digital-native
insurance, digital insurance, electronic insurance,
Fintech landscape. Now that lending to consumers
and insurance comparison platforms. By providing
and MSMEs is a priority, the Indian Fintech ecosystem
services like claims management, sales platforms,
has started covering these segments too. The sector
underwriting risk management, insurance
also includes more conventional financial services
infrastructure API, insurance product configurator,
like insurance, personal finance, and gold lending.
and policy admin system, fintech can be utilised in
Let’s have a look at some of the popular Fintech
this market. One of the prominent market player in
segments in India.
this niche is Policy Bazaar.
PayTechs: Payment security, card networks,
WealthTechs: Through discount brokers, robo
Application Programming Interface (API)/White label
advisors, mutual fund investment platforms, research
solutions, and payment gateways are all examples of
platforms, and alternative investment platforms,
PayTechs. Paytm, PhonePe, MobiKwik, and Google
WealthTechs offer wealth and expense management
Pay are the leading competitors in this market.
services. Examples of Fintech services applicable in
LendTechs: Provide business and consumer- this market include white label robo advisors, portfolio
focused services, including corporate cards, fixed management suites, and CapTable management. In
term finance, and trade finance, as well as Buy Now this market, two well-known companies are Zerodha
Pay Later (BNPL), personal loans, salary loans, gold and Smallcase.
loans, auto loans, education loans, and P2P lending. RegTechs or Regulation Techs: AML, KYC,
Among the Fintech services used in this market are digital onboarding, fraud detection, Anti-Money
collections management, credit bureau, alternative Laundering (AML), and banking compliances and
credit scoring, lending as a service, Loan Origination risk management solutions are just a few of the
System (LOS), and Loan Management System compliance and regulatory requirements that are met
(LMS). Leading lending platforms for both customers in the financial sector by using Fintech.
and businesses are emerging, including Google Pay,
M-Swipe, and Razor Pay. It is interesting to note that Payment and Lending
segments contribute to more than three-fourths of
Digital banking: In this segment, technology is Fintech business.
being leveraged through the establishment of digital
What are the major challenges affecting Fintech
subsidiaries of banks, retail neobanks, and Small and
adoption in India?
Medium Enterprise (SME) neobanks. Neobanks are
essentially digital platforms for commercial banks. While Fintech adoption in India has been
Conversational platforms, account aggregators, API unprecedented, it continues to face challenges such
providers and aggregators, banks with open APIs, as the risk of data security and privacy leaks, platform
Banking as a Service (BaaS), and core banking are downtimes, a lack of financial literacy and awareness
examples of Fintech services used in digital banking. in India, and disparities in adoption rates among
YONO of SBI, Khatabook, and Crazybee are a few of MSMEs, which dominate the Indian economy.
The Journal of Indian Institute of Banking & Finance July - September, 2022 13
Furthermore, the changing nature of the sector’s Following this, in early 2021, the Chinese Government
regulations creates cost-related challenges for issued a ban on banks selling deposit products via
users and businesses. For Fintechs, regulations for online platforms, fearing that the rapid expansion
investment exists whereas cryptocurrency, payment of the largely unregulated and uncontrolled Fintech
regulations, data security, infrastructure security, and sector could increase risks in the wider financial and
consumer protection are still evolving. social system.
As per the findings of the Working Group on Digital As a result of this ban, the deposits of a few lakh
Lending (WGDL) constituted by RBI, there are customers were locked up and it resulted in unrest
approximately 1100 lending apps available for Indian among the common bank customers fearing
android users across 80+ application stores and extension of ban to other institutions. Due to the scale
around 600 are illegal lending apps. These digital of the challenges, there are signs that the Chinese
lending apps were discovered to charge high interest Government will reverse its antagonistic policy
rates, use unethical and harsh recovery methods, towards Fintech companies in China, embracing and
and operate in an opaque manner. collaborating with them as opposed to vilifying them.
Reforms intended to centralize control of fintech
Lack of timely enactment of regulatory controls may
companies will have to be made long-term aim as
pose some serious consequences, like it happened
opposed to short-term measures, and confrontation
in China. Let’s have look at these.
with said companies and business leaders will have
Regulatory challenges – China’s example to reduce if China hopes to reignite its economic
The extent of disruption ‘unregulated’ Fintechs may growth and fortunes in the industries of the future.
cause in an economy has been witnessed in China RBI’s regulation of August 10, 2022
by the acts of two internet giants, Jack Ma’s Alibaba
The Reserve Bank of India (RBI) issued the first set of
and Tencent, the arch rivals in Fintech industry.
long-awaited regulatory framework for digital lending
These two, the then unregulated giant Fintechs of
on August 10, 2022. The central bank has taken a
China, became bigger than any of the local banks
position on key issues and provided clarity on topics
and could dominate the whole banking sector in the
such as direct loan disbursement to borrower account
country especially in the segments of retail banking
and borrowers’ consent before increasing credit limit,
and retail payment. The rise of the two companies
among others.
has been both a blessing and a curse for China. In
the meantime, another two Fintech biggies, Baidu The process of developing guidelines for the
and JD.com joined the wagon. While the investment burgeoning sector had begun a long time ago. The
and innovation they offer have helped the economy, initial work began in January 2022, after the RBI
the sway Fintechs held over China’s people and formed a Working Group on Digital Lending (WGDL).
economy was a concern for the Government.
The RBI has addressed malpractices committed
In late 2020, the Chinese Government shocked by illegal Chinese apps in the digital lending rules,
financial markets when it suspended the most putting a stop to activities such as data scraping from
anticipated IPO of the year. i.e. Jack Ma’s Ant Group. consumer phones, obtaining explicit consent for data
14 July - September, 2022 The Journal of Indian Institute of Banking & Finance
collected for lending, and upfront disclosure on all money. Banks have developed a solid foundation of
costs involved and a cooling-off period for borrowers customer loyalty over many years, whereas Fintech
to exit digital loans startups will need to be patient and gain customers’
trust over time.
The regulator has also barred automatic increase in
credit limits. The significant exchange between banks and Fintech
startups through collaboration is a crucial factor to
The majority of participants see the new lending
take into account. Through mergers, the purchase of
framework as a positive step, with digital lending
startup companies, and mentorship programs, banks
Fintechs finally being recognised as an agent of
acquire technology and insights. These partnerships
banks/NBFCs and legally permitted to do business.
help Fintech startups expand their customer base
On the other hand, the new framework is expected
and market share. This collaboration over market
to increase regulatory pressure on Fintechs, which
competition will be beneficial for both banks and
will have to collaborate with the existing lending
Fintech startups.
infrastructure.
Is it worthwhile for banks to invest in fintech?
The guidelines, on the other hand, will result in the
emergence of newer banking solutions, with Fintechs Certainly, there are expenses and difficulties to take
collaborating with banks and NBFCs for underwriting, into account when implementing and maintaining
loan disbursement, and collection. Fintech. Fintech, however, offers tremendous
opportunity for banks to reduce operating expenses
As opposed to what happened in China, RBI has
and increase efficiency, which will ultimately result
taken timely measures in Fintech regulation, neither
in better services for their clients. Those who do not
too early nor too late. Had the regulator’s action been
keep up with the growing demand for Fintech run the
too early in the nascent stage of Fintech evolution, it
risk of being left behind by their rivals’ technological
would have hampered innovation and if it had waited
advancements. The financial services sector will soon
too long to initiate regulations, it would have hurt the
be impacted by fintech; it is up to the banks to decide
Fintech firms as they would have already evolved to
how they will adapt to meet customer expectations.
the extent where it would have been a painful path of
return. Conclusion
Having understood the present day scenario of Former Chairperson of State Bank of India (SBI),
Fintechs in India, let us try to answer the following Smt. Arundhati Bhattacharya, having been at the
questions. helm for four years, shared her views in one of her
recent interviews in this respect. According to her,
Do Fintech startups pose a significant threat to
the banks have a long history, a sizable clientele, a
traditional banks?
comprehensive understanding of who their clients
Fintech startups are unlikely to displace established are, and have amassed sizable portfolios over
banks for a number of reasons. First, consumers time, whether it be of deposits or credit, in addition
continue to put their faith in established banks rather to having a strong balance sheet. In contrast to
than new businesses to responsibly manage their Fintechs, the liability side of banks’ balance sheets
The Journal of Indian Institute of Banking & Finance July - September, 2022 15
has a variety of sources. In that sense, the banking problems, something that banks have not yet done.
industry as a whole is stable, which is very difficult to If they collaborate, they will have the concepts and
say for smaller players like Fintech startups. answers, and the banks will have the clients and their
confidence. If both are combined, you find a win-win
Because the banking system offers stability, customers
solution.
will continue to use it. All things considered, the
customer might receive either quicker service from Many Fintech startups are eager to collaborate with
Fintechs or a lower interest rate from banks. Fintech banks because it provides them with stability. It
startups cannot charge lower interest rates due to the allows them to enter an already established market.
lack of more affordable funding, but they can deliver They simply enter the market with their solutions. As
faster service. a result, a good collaboration between the two would
be the best outcome.
Therefore, collaboration is the best solution in these
circumstances. Collaboration between Fintech If this occurs, the consumer would be the ultimate
companies with innovative, good-quality ideas that winner.
improve the lives of customers and deal with their
:
, (18 2021)
, - , , - ,
, , , , , -
( ) , ,
, ,
-
,
, /
, ,
( ) (
) ,
,
, ,
- ,
( ) ,
,
,
- -
,
- ( - 2 ) ,
,
( ) - m$eesle: Jeeef<e&keÀ efjHeesì&, 2021 - 22, Yeejleer³e efj]peJe& yewbkeÀ (DeejyeerDeeF&)~
16 July - September, 2022 The Journal of Indian Institute of Banking & Finance
