India need not rush on digital banking licences: BCG

Ruchin Goyal, Managing Director and Senior Partner, Lead-Financial Services, BCG India, and Ernest Saudjana, Managing Director and Senior Partner, Leader of Financial Institutions Practice, Asia-Pacific, discuss with businessline the changing contours of fintechs in India. Edited excerpts from an interview:

From questions of survival earlier, the theme this year was all about growth and innovation. How do you view this?

Goyal: It is true that we’ve seen a whole host of regulations for fintechs and it’s a positive step. Whenever there is more regulation, there is long-term stability in the sector. The big theme now is about changing the mindset of (fintechs) from burning money to earning money. The founders have to find a balance between growth and profitability.

Do fintechs understand this well?

Goyal: The funding winter seems to have taught them that they can’t keep burning money endlessly. In terms of business models, there are many kinds of fintechs — B2B [business-to-business] and B2C [business-to-customer] models have worked quite well. They could just be service providers and help solve KYC [’know your customer’ verification] problems or handle collections better and yet provide valuable services. These models have a better path to profitability. In B2C, the efforts are unique, trying to establish a brand and reach, which costs money. Some of the large tech companies burn a lot of money. But now even they are trying to find economics to sustain themselves.

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The Indian market, particularly for fintechs, is seen as more regulated vis-à-vis other South Asian markets. Your take?

Saudjana: Maybe it’s (regulations) more sudden. But many countries are moving towards the same goal. When you’re dealing with people’s money, governance is very important. Entities should be sustainable and ensure that the customer doesn’t lose out. In Indonesia, they also brought in interest rate ceiling, because it wasn’t sustainable for customers. Globally, people are thinking about future-proofing their business models, to be sustainable from a profitability standpoint. Some have opted for a digital bank licence and they quickly realised that they have gathered a lot of high-cost deposit with nowhere to deploy. So they have recently acquired NBFCs [non-banking financial companies] with a successful business model in the traditional space and are able to channel deposits from the digital businesses.  

In India, is there a case in favour of digital bank licences?

Goyal: There is a strong use case for digital banks. But, apart from very few areas, a fintech that is not a digital bank can still operate in large parts of the financial ecosystem. Perhaps with an NBFC licence they can get into lending.

Saudjana: There is no shortage of banks in India. A market similar to India would be Indonesia, which has 100-plus banks and [digital banks] on top of that. These players entered the market by buying some of these banks. What’s good from a regulatory standpoint is that they bring in capital and it’s good for the stability of the system. In other jurisdictions, where the number of banks is constrained, you need a digital licence to attract new players into the industry. When you allow digital players to come in, the incumbents can partner with them and accelerate new business models. It promotes innovation. Secondly, the new entrant comes in with a large digital ecosystem. Embedded finance will be a big factor going forward and, if they succeed, they can enter the banking sector. Singapore has done this. But you shouldn’t be giving new licences unless you tick the boxes, because there is no shortage of financial providers in India.

Why is the partnership model gaining traction?

Goyal: It’s something unique in India, given how digital public infrastructure has been created. It allows for open collaboration, a lot more than in any other markets. The RBI has now opened credit lines on UPI, including usage through credit cards. It democratises access for many users. The other unique thing is the way we have thought about open banking, through account aggregator. By allowing in newer players, even though they may not have a full bank licence and they don’t need it, we can disintermediate the entire value chain.

Saudjana: Collaborations are also happening because there is demand from the incumbent side — the institutions. Much of the capability built is niche. It’s more about technology priorities, which incumbent banks cannot cope with. I’ve known examples where the institution is built by the capability of embedded financial services while the partner (fintechs) build the technology required to deliver this business.

Fin and tech, can they survive together as a single word?

Goyal: Between fin and tech, there’s something in the middle which was missing. This is basically compliance, which a lot of fintechs did not pay enough attention to. They jumped into tech, also understood ‘fin’ a bit. But, ultimately, it’s public money and compliance and governance will come in. Fintechs have become better, but it’s still a journey.

Saudjana: The playing field will be evened out. Fintechs need to adjust to the new reality. In the next 3–5 years, the good ones will still survive, because there is demand for the fintech play. But there will be a sliver in the wood that cannot adapt to a new reality from capability, governance, and business model standpoints. The industry will consolidate and strong fintechs will emerge.

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