The Pattern #40: Why FinTechs must become banks if they can’t beat them

Mayank Jain   /    Head - Marketing and Content    /    2022-12-16


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    Welcome to the 40th edition of The Pattern, a weekly newsletter where we unpack the rumblings from the world of finance, technology, and the economy. This has been a relatively calm week but chock full of exciting events worth delving into.

    Let’s get started. 

    Lenders’ love-hate relationship with MSMEs.

    Over the last two years, quarterly disbursements of formal credit to MSMEs in the country have grown over two-fold on the back of increased credit demand and the lender’s increased willingness to lend to small businesses. 

    However, all isn’t well. A comprehensive report released earlier this week suggests that even as the disbursements to the segment are increasing, the approval rates aren’t. In fact, the approval rates have plateaued around 30-35% for banks and have actually fallen for NBFCs, according to the report published by BLinC Invest, a venture capital firm. 

    “While quarterly MSME disbursements have grown 2 x over the last 2 years, this is primarily on account of increased credit penetration and not on account of additional risk taken by the financial institutions in terms of loan approvals This is indicated by the fact that approval rates for the medium risk tier segment has remained unchanged for private banks in the last one year and has decreased for PSUs and NBFC over the last 2 years,” the report states. 


    It goes on to say that the additional boost to the MSME sector in enabling formal credit will come from more holistic underwriting that evaluates alternate data and unlocks access to credit. We’ve written a lot about how this can be achieved through point-of-sale data and user data, blending it with Account Aggregator to enable small-ticket loans that can help borrowers graduate along the formal credit ladder. 

    As of now, however, it seems that MSMEs shall continue to depend on MFIs, NBFCs and banks willing to turn risk into an opportunity - far as few as they might seem. We have a detailed whitepaper on this subject that I urge you to read too. 

    FinTechs must become bank-like

    Last week, I wrote about how the RBI Deputy Governor reaffirmed that it’s impossible to dislodge banks from the Indian financial system. This week, the RBI governor himself met with industry associations comprising FinTechs and gave out a strong but clear message - take a leaf from the banking regulation book and become more governance-focussed. 

    This follows the recent hullabaloo around the RBI’s digital lending guidelines, its action against prepaid credit cards, and the regulator’s overall stringent surveillance of the fast-growing FinTech space. 

    It seems that while FinTechs might aspire to be more agile, edgy, and fun than their banking counterparts, the regulatory prescription is for them not to forget the systemic risks and start acting like responsible adults. 

    The RBI Governor urged FinTechs to “pay close attention to governance, business conduct, data protection, customer centricity, regulatory compliance, and risk mitigation frameworks,” according to a report by the Economic Times. 

    Message received. 

    On the subject of FinTechs and banks, we wrote last week about how banks ceded space to FinTechs in the UPI ecosystem and how most UPI transactions go through FinTech apps like PhonePe and Google Pay as opposed to banks’ own apps - a point reiterated by the RBI Deputy Governor T Rabi Sankar. 

    But it’s only fair that banks get their say. Well, some have. 

    Axis Bank’s CEO and MD Amitabh Chaudhry said that the banks don’t have the luxury to burn thousands of crores on marketing and make a loss. 

    “We didn't have Rs 3,000 crore of money to make a loss on... Today, the problem with tech is that there are companies who are being funded through capital who can then spend the money to acquire the customers, make huge losses and get more value in the process. Banks or other institutions that have been around forever cannot afford to play that game," he said.

    Between the digits 

    70 crore - Projection of total digitally transacting users in India across platforms by 2030, according to Redseer. The firm said the current base is closer to 35 crore users, and a lot of this growth is expected to come from...real money gaming

    41%  - Decline in FinTech funding in India in the year 2022. Despite this fall, the FinTech space was one of the most-funded sectors in the country. One wonders about how cold the winter is outside of the FinTech world.

    84,102 - Total number of startups as recognized by the government of India. The recognition relates to the startups that are eligible to receive tax rebates, easier norms and host of other incentives as part of the Startup India program. 

    This is all from me for this week. As always, leaving some reading recommendations below. 

    Reading list 

    1. ‘Faster, Open and Embedded’: A Journey into The Fintech State of the Union Report

    2. RBI rule on loan securitization may hit fintech lenders

    3. FinBox Guide To KYC for Digital Lenders

    4. How do credit cards really work? Unpacking the magic stack that makes tap and pay happen

    5. Embedded finance is the magic potion for customer retention. Here’s why.

    6. NBFC-MFIs group overtakes banks in microfinance lending

    Thank you for reading. If you liked this edition, forward it to your friends, peers, and colleagues. You can also connect with me on Twitter here and follow FinBox on LinkedIn to never miss any of our updates.  

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