Compete or collaborate? The traditional banking and FinTech equation

BharatPe, a barely three-year-old FinTech, is now part owner of Punjab & Maharashtra Co-operative Bank. The latter collapsed after it made most of its loans to a bankrupt developer, and now, BharatPe (along with Centrum Capital) has control over its books, and thereby, access to a large pool of the bank’s merchant customer base.

It reads like a damsel in distress being rescued by her knight in shining armour. But is this a one-off, or a sign of an inevitably tragic end for the banking sector brought about by the rise of tech-driven financial firms?

A dynamic landscape

In the last five years, India has seen a 60% increase in FinTech investments, and the sector is slated to triple in value in the coming five years. This rapid growth can be attributed to a simple truth — FinTechs are doing what banks cannot, or have not been doing. They’re leveraging state-of-the-art technology and alternative data sources to serve traditionally unbanked segments and to ensure seamless customer journeys. Their primary focus remains on smooth functionality, accessibility, and convenience.

In addition, the fact that they aren’t regulated means their operations are lean and flexible — they have the freedom to innovate new products to meet specific gaps in the market and tear down ones that are no longer performing.These targeted offerings, coupled with superior customer service thanks to 24x7 access mean that banks now stand face to face with an agile competitor.

Versus or with?

Surveys state that only 17% of banks say their digital transformation was ‘deployed at scale’. It’s a troubling statistic when considering that:

The situation is worsened by the fact that even customer trust — which was once completely with banks — has been shaken post the 2008 financial crisis. Banks are seeing an annual attrition rate of 15%, only 35% of small and mid-sized businesses say they would seek financial advice from their bank.

Does this mean traditional banking is on its way out?

Not necessarily.

While the numbers may indicate otherwise, the fact remains that FinTechs simply cannot exist without banks. The latter is the source of capital — accumulated through deposits, loan interest, shareholder equity and debt. FinTechs rely on this capital to help customers access credit and make payments via their platforms.

Even if this were not the case, the fact remains that people would not entrust their hard-earned money to new-age companies with little to no regulatory oversight. Banks give them the regulatory backing they need in order to operate in the financial industry.

Banks also bring with them deep industry expertise and a solid customer base that they can leverage better when working with a FinTech. It will allow them to respond to customer expectations by embedded innovative solutions within their own platforms or co-create the same, while lowering their capital investment requirements and accompanying risk.

Customer experience too will see a boost through a bank and FinTech partnership — especially relevant when considering that 13% of financial services companies say ease of use is the highest priority when it comes to customer retention. Banks stand to benefit from FinTechs’ technological expertise to provide users with seamless digital experiences and customizable financial products.

The road ahead

The major problem banks are tackling today is customer attrition, and the challenge that faces FinTechs today is category creation and awareness — both can only achieve their goals together. In fact, a survey of FinTechs in Europe found that over 50% considered banks as ‘mission critical’ partners. With innovation and access as their primary goals, both banks and FinTechs must work together to create customizable financial products that can reach those who need it the most.

Download our E-book for a crash course on Embedded Finance and how your business can leverage it to improve user experience, drive repeat orders, and boost Average Order Value.