Collaborate and conquer

High-stakes rivalry is under way between traditional banks and fintech startups with nearly every old-style service that banks offer under threat from innovative business models. Up until now, consumer banking and payments have been the most vulnerable to disruption. But with peer-to-peer (P2P) and online lending fast gaining ground, micro, small and medium enterprises (MSME) servicing is the next segment likely to come under attack in the next five years. According to a McKinsey report up to 25 per cent of banks’ revenues and 35 per cent of profits will be at risk from fintech companies by 2025 under SME lending. Given these credible threats RBI Deputy Governor SS Mundra’s advice to banks to collaborate with fintech players in the MSME space has come not a day too soon.

There are a number of factors working in favour of P2P lenders. For one, online lenders rely on non-traditional data for customer credit scoring, which, along with the use of data analytics, means a quick turnaround time for processing loans. This is one of the biggest draws for MSMEs that require lenders to be highly responsive to their needs. Typically, MSMEs commence business with small equity that fails to keep pace with the growth in the company. Low networth and weak balance sheets, leading to low ratings from rating agencies, make MSMEs highly reliant on bank funding. But tedious paperwork and banks preferring to lend to their own customers due to easy access to past data has left many small businesses, particularly those with weak financials and collateral, starved for funds. There is also the issue of high cost of funds. According to a PwC report, P2P lenders are able to generate cost advantages of over 400 basis points compared to traditional financial institutions.

But just as technology has been the great leveller between traditional banks and fintech companies, regulatory intervention in the online lending space can swing the balance sooner than later. With regulators weighing in , cost structures of online lenders could change dramatically. Also, the risk assessment models of most fintech companies are yet to be tested under times of severe downturn: this could lead to high delinquencies and dissuade investors. Traditional banks backed by stringent regulatory framework, large customer base and strong financial backing always have an inherent advantage over fintech companies. As long as they invest in technologies that enable fintech startups to level the playing field, they will continue to stay relevant. Collaborating with fintech companies that have focussed business models can help traditional banks regain lost ground. Drawing lessons from large global banks that are pouring billions into innovation by partnering with fintech companies in one form or the other can help Indian banks better embrace the fintech revolution.

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