Speaking virtually to attendees at the second edition of the Global Fin Tech Festival recently presented by most neo-banks and government agencies, T. Rabi Shankar, RBI Deputy Governor said, “The ideal approach is that Fin Tech companies are seen as facilitators and partners by banks or other financial institutions.
He also asserted that financial technology “can improve the efficiency of intermediation” but “cannot replace the fundamental nature of financial intermediation”.
The Indian banking sector is once again in the spotlight. This time by analysts and commentators, highlighting the inability of these institutions to finance economic activities and playing the game of Big Tech. NPAs or bad debts are not the only problems plaguing banks in India. The specter of disintermediation hangs over the Indian banking scene. A prominent banking analyst recently mentioned how companies are abandoning their age-old financiers, i.e. banks, and raising funds directly in the market, either through bonds or through stocks through IPOs / OFS, in a booming secondary market that has become a worry for the central bank. Another opinion columnist living abroad even wondered if the bank would know about the sad fate of newspapers.
When was the last time you visited your bank branch? When did you conclude a financial transaction without going to your bank branch? While the response to the first installer might be “I don’t remember”, the normal response to the second might be “almost every day”. This trend that began a few years ago has only intensified since the pandemic. The writing on the wall is clear. The banking industry in general is experiencing a level of disruption that has never happened in the past. Rising consumer expectations, the obsolescence of the concept of ‘waiting’ as a concept, the innovation brought by Fin Tech companies and the impetus provided by Big Tech providers all conspire to upset the viability of traditional financial institutions, including banks.
The juggernaut of disintermediation
Disintermediation – by removing banks as an intermediary – originated in India when non-financial corporations were allowed to bypass Indian banks and increase external commercial borrowing (ECB) in the early 1990s, when the India has embarked on the path of globalization and liberalization. Widely used to facilitate access to cheap foreign money by Indian companies, the ECBs, along with commercial paper and corporate bonds, have reversed the share of bank loans in additional credit.
RBI’s Mint Street Memo No.09 says: “The rise of bank disintermediation in business credit is enabling our financial system to become robust and more efficient at allocating risk. The unintended consequence of this process could force banks, worried about the shift from higher-rated borrowers to mutual funds, to either lower their credit standards or adopt prices that don’t really reflect the cost of their funds. Undertaking the structural reforms necessary to restore a healthy banking sector is of paramount importance.
Although mutual funds (MF) got their start in 1963 with the establishment of Unit Trust of India, they gained ground when the market was opened up to private players in 1993. Since then, the dramatic growth of Funds disbursed to MFs and the growth in assets under management (AUM) of insurance companies suggest that there is a noticeable change in the structure of financial intermediation in India. With over AUM at Rs. 36 trillion at the end of August 21, the MF industry has nearly eaten up the share of bank deposits. Total mutual fund assets reached 21 percent of total bank deposits in FY21, the highest ratio of MF assets under management to bank deposits at the end of any fiscal year.
P2P lending platforms in which individuals and businesses invest in small businesses allow the granting of credit without bank intermediation. Authorized by RBI in September 2017, P2P platforms, registered under the name NBFC Fin Tech Company, are an intermediary between lenders and borrowers. Backed by blockchain and smart contracts, 21 of these entities are currently scrambling for their space in the financial arena. Case data is hard to come by, but according to a leading player in the P2P space, “P2P loans have the power to unleash individual funds trapped in low-yielding investments and create a supply of credit. alternative in the economy ”.
Going forward, the biggest threat of bank disintermediation could come from a very unexpected quarter, the Central Bank (RBI)! With the imminent introduction of central bank digital currency (CBDC), the possibility of substantial retail deposits being transferred to e-money providers – banks, payment operators, e-wallets, NBFCs, Fin Tech companies, platforms Big Tech, etc. outside. The RBI Currency and Finance Report 2020-2021 points to this problem unequivocally when it says: being fragile. The public can convert their CASA deposits with banks to CBDCs, thereby increasing the cost of bank financial intermediation with implications for growth and financial stability. The Bank for International Settlements (BIS) in its latest communication – CBDC: Implications for Financial Stability, Report No. 4, September 2021 – warns that “a CBDC could also affect existing financial market structures and business models. which can present risks for financial stability because the financial system evolves in particular via the potential disintermediation of banks. However, the report reassures: “While there are studies suggesting both positive and negative overall effects of a CBDC on overall lending and economic activity, a common theme is that maintaining levels of Bank profitability could be difficult, and the magnitude of the implications will depend on the exact design of the CBDC.
The technological assault
Every aspect of our life has been sped up by technology. It is no longer acceptable for us to wait in line to perform banking tasks. In addition, the challengers appear to be undermining the established order. And banks are no exception. When a Google Pay user reserves a fixed deposit (FD) in less than two minutes, without having to open a bank account, and at maturity receives the value of his existing bank account which could be with n ‘ No matter what bank across the country, he doesn’t really feel indebted to the bank that paid him the most competitive interest rate, but to the platform that gave him a seamless experience. Clearly, the bank is hiding (eclipsed by technology?) Behind the smoke screen of technology, Fin Tech, in short. When we use Google Pay to pay bills, do we remain a customer of the bank that initiated this transaction or do we develop an engaging focus (relationship?) With Google Pay? Who will have richer data? The bank, Fin Tech or Big Tech?
Jack Ma, before being surrounded by the Chinese authorities, has a piece of advice for our banks: “Banks today continue to have a pawnshop mentality. Collateral and guarantees are pawn shops. It was very advanced once upon a time. But “collateralization with a pawnshop mentality is not going to support the world’s development finance needs over the next thirty years. We need to replace this pawnshop mentality with a credit-based system rooted in big data using today’s technological capabilities.
Initially, finance rode technology. The reverse is happening now. Banks need to decide where they want to be in the financial chain.
Over the past decade, the emergence of e-commerce and social platforms resulted in the collection, aggregation and use of mountains of data to grow sales and commerce. Now the same data is used for the provision of funding. The Buy-It-Now-Pay-On-Pay (BNPL) model is quickly catching up, allowing e-commerce platforms to increase their share of engagement in the lives of their consumers. Amazon Pay Later allows a consumer to get hassle-free instant credit through an all-digital process for purchases using EMI on Amazon.in, without having to provide their credit card details. Walmart, IKEA, Volkswagen, Tata’s Jaguar Land Rover, and Daimler’s Mercedes all incorporate payment technology that thrills their customers at the time of checkout.
Our trust in established banks is eroding as our engagement with large tech companies grows, through social and e-commerce platforms. Payment apps and loan apps have become a way of life. Millennials and Zillenials are more familiar with Flipkart, Amazon, Google or Apple and they are more likely to trust them than a bank their parents have banked with for years. If these big tech companies are reaching out to the financial system, where do we think our young people may reside? One of the reasons for customers’ aversion to banks is the barrier to entry in the form of more stringent KYC requirements. While potential bank customers can separate themselves from much more granular information about themselves by sharing their data with fintech companies and neobanks, this information sharing takes place behind the screen and without claiming. the time and patience of customers.
Today our identity is defined by Aadhaar, bank account and cell phone numbers. If citizens don’t remember the name of their bank and instead mention the names of some big tech companies, it will definitely reduce the reach of banks in our lives. The question is: have our banks been slow to connect to smartphones? Or have they been discouraged by our regulators? Again to quote Jack Ma: “Many regulators around the world have become zero risk, their own departments have become zero risk, but the whole economy has become risky, all of society has become risky. The competition of the future is an innovation competition, not a competition for regulatory skills.
It is not known who will win today’s battle. But one thing that is certain. If our banks can learn to mine data as ruthlessly as Facebook or Google, they can tip the battle in their favor.
Gang N Rath is a former central banker. Opinions expressed are personal