Can SFBs, fintechs combine?

In 2014, the RBI established two specialised banking licences with specific purposes: small finance banks (SFBs) and payment banks. SFBs aimed to enhance financial inclusion by offering savings options and extending credit to small enterprises and the unorganised sector. Payment banks, on the other hand, were intended to provide payment services to the public, but they were prohibited from offering loans.

As we move towards 2024, a decade from these decisions, both of them need to be assessed to figure out if they worked at all. The UPI revolution around payments, all but killed the need for payment banks. Today, almost anyone can set up a payments business. But the question is if they will ever make revenues or profits of it.

The larger debate around deepening financial access and financial inclusion with SFBs is an aspect that the RBI needs to look into. Have the SFBs done well in meeting these objectives? Have they been able to survive with increased revenues and profits? After all, even a bank, despite being a socio-economic engine, needs to generate profits.

Culture fitment

As for fintechs, unless the RBI makes up its mind to accept them as potential digital banks, it should not blend the older banking licence categories with fintechs. The biggest challenge for any fintech merging into a traditional bank is culture fitment.

Recently, the RBI gave the go-ahead for the merger of a troubled fintech with a troubled SFB. If the marriage works out, the RBI will be relieved. If the marriage does not work out, it can solve two problems with one potential action — hand it over to another larger bank whose balance sheet can absorb any potential loss, and whose distribution and operations can handle continued consumer access of existing operations of the troubled unit. Either way, it’s win-win for the RBI. But to celebrate the merger as a win for the fintech sector would be imprudent.

Many would argue that both SFBs and many fintechs operate in the financial inclusion space. And that SFBs have access to retail deposits which usually are a cheaper source of funds. But market data show that’s not true. SFBs struggle with attracting and retaining liability portfolio, and this, too, not at lower cost owing to the outgo on overall technology management and balancing the regulatory compliances.

SFBs need differentiated strategy to serve consumers in the lower economic strata. Logically they cannot be all things to all people. There lies the challenges of being revenue-accretive, and raising their CASA (current account and savings account).

A marriage of convenience does not generally have a fairytale ending. If SFBs don’t make business sense, the RBI can put a guide path for them, instead of merging them with fintechs.

Culture eats both banking and digital. The challenge in the Indian banking system is the way digital is perceived. While banks want to be digital-first, they think of digital as a supplement to build on top of their existing processes. For a digital-native to succeed, one needs to think of banking processes from consumer perspective, and rebuild from scratch; all within the regulatory boundaries. This needs time and resources — financial and HR. Both of which seem unavailable.

Digital-first in banking has to put consumer at the centre of the organisation. Most Indian banks have failed here. Consumers seldom have influence in the banks. So merging a fintech, which has agility and digital in mind, with banks — which are used to hierarchy in everything they do — won’t foster financial inclusion.

The writer is a policy researcher and corporate advisor

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