Impact of the Digital Banking

While this is the side banks want to show to the world, the curiosity and, possibly, fear within is getting the better of them. Many bankers have reportedly been visiting China to understand how the fintech revolution has transformed the ecosystem there.

While trips to China may help in future gazing, right now banks must deal with pint-size fintech firms that have emerged as ‘disintermediators’. Wallets, digital lenders, payment solution companies and, of course, payment banks are piecing together a fintech ecosystem that will be held together by data, an open regulatory environment and cost structures that are very different from those of banks. Even if most of the fintech firms perish in a way that startups usually do, they would have still altered the way business is done forever.

Who cares about fintech firms?
Question: Why did the banking chickens cross the road?

Answer: To discover a world beyond the staid and slow world of banks; to experience dazzling things like experience and ease of use.

Fintech firms have been quite sneaky in their run-ins with banks. Because they appeared to focus on financial transactions that brought people back to the banking fold, like helping choose the best insurance policy or loan products, banks paid little attention to them over these last five years. And in areas like payments, largely left to card companies, banks didn’t bat an eyelid as they considered it a low-margin business.

“We used to consider payments as a subset. Five years ago, no one would have thought of payments as a product by itself. Think about it realistically, will you sell one large loan or one lakh wallets,” asks Ritesh Pai, the country head for digital banking, Yes Bank Ltd, rhetorically.

Banks also had other king-sized fish to fry; tackling the ever-mounting non-performing assets and chasing defaulters.

But in the last two years, banks have really taken note of fintech firms possibly after the attention heaped on them by the Reserve Bank of India (RBI), which gave licenses for wallets in 2013. This allowed wallets to also become payment banks. Since then banks like Yes Bank, Axis Bank, State Bank of India (SBI) and HDFC Bank have developed their own wallets and now collaborate with much smaller and younger fintech startups.

“When you see a readymade solution, it makes sense to collaborate than spend money on it ourselves,” says Nitin Chugh, country head, digital banking for HDFC Bank. “But it is not like if we don’t collaborate, we will get disrupted. Moreover, he adds, that the bank had many of these ideas in-house.

So if they had the ideas, how did the banks miss the wallets bus?

“In the wallets space, fintech firms may have had a headstart, but we have caught on fast and are getting better. We have a PayZapp wallet, which you can pay through one click. This along with other features on PayZapp, we feel has no parallel,” says Chugh.

Customers clearly felt otherwise. They flocked to download and transact on apps like Paytm*, MobiKwik and PhonePe after demonetisation. These apps saw their users grow 1.3-3.3X.

At the same time, the National Payments Commission of India (NPCI)—an industry body of banks—also launched a new payment solution called United Payment Interface (UPI). With UPI, one only needs a mobile number to transfer money. And any bank or nonbank entity’s app can be used to transact.

Banks, like most highly regulated businesses, typically like to own their customers. They were not entirely pleased about now having to share customers with upstart apps and startups. So, like most large regulated incumbents, some responded in expected ways. ICICI Bank blocked its customers from using Flipkart-owned app PhonePe after a mutual blame game on who was flouting the UPI rulebook. And the country’s largest lender SBI also blocked its users from being able to transfer money to the Paytm wallet.

With that, the big banks officially earned the ‘bully-tag’ while the rest watched all this unfold, uncomfortably.

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