Bank-Fintech Marriages: Till Death Do Them Apart?

India is home to close to 7,500 fintech firms working in segments across lending, buy-now-pay-later, payments, savings, investments, and more. While these companies promise a lower entry barrier and a better user experience, they continue to depend on traditional banks to be effective.

Last week, HDFC Bank Ltd. said it will pick up 10% stake in GoDigit Life Insurance for Rs 49.9-69.9 crore, even as the fintech firm is yet to start its life insurance business.

Similarly, earlier this year, private lender ICICI Bank Ltd. partnered with ZestMoney to expand its cardless equated monthly instalment facility; Bank of Maharashtra tied up with Lendingkart to offer micro, small and medium enterprise loans; while neobank Freo is working with Equitas Small Finance Bank to launch a digital savings account.

Banks typically partner with fintechs with two main objectives in mind: broadening their customer acquisition funnel and learning how new, tech-enabled enterprises add to customer experience.

“The partnerships offer a very simple way of adding assets (for banks),” Vivek Iyer, partner at Grant Thornton Bharat, told BQ Prime. These partnerships, according to him, are a very effective way for banks to learn about customer experience and then “utilising that experience into their own digital lending applications".

Partnering with fintechs may help banks acquire more customers digitally, but it also comes with its own set of challenges. Lending-focused fintechs tend to over-promise a lot, according to a digital banking executive at a leading private bank.

While firms the bank has partnered with in the past have promised granular analytics, they can only offer a bird's eye view of their customer profile, this banker said.

During their discussions with banks, fintechs initially promise to take on some risk too, but eventually back out, the banker said. The banking partner is thus left on its own to do the real work around modelling risk, reducing the fintechs to mere digital distribution agents.

While bankers may feel this is an abdication of responsibility by fintechs, Iyer said this is actually a fair expectation on their part. “You can't give your balance sheet without offering your own risk management process or frameworks to the fintech partners.”

Short-Lived Wrappers

At the core of it, fintechs are essentially digital wrappers on banking services, according to Rahul Pratap Yadav, chief business officer at fintech firm iMoney Pay and a former banker. While fintech partnerships deliver better customer experience and generate some float and transactional income, it can't be a substitute for the bank's standalone business, he said.

Bank and fintech relationships are typically forged for a tenure of 12 to 36 months when co-lending is involved, according to the founder of a fintech lending firm. If the partnerships are purely for distribution, they tend to be for less than 12 months and can be extended if the bank feels it makes commercial sense for them, the founder said.

Since the wrapper grants more visibility to the fintech as opposed to the bank, it isn't necessarily accretive to banks building an independent relationships either. "Fintech has developed the ability to swing customers away from [banks], they have become a face," Yadav said.

This also perhaps contributes to why most banks look at link-ups with fintechs as “medium-term learning partnerships", as Iyer put it, noting that once banks build up the targeted book size, they can re-evaluate the partnership and swap partners in and out as needed.

“Most of their relationships with these partners are not institutional," Iyer said. "They are very dependent on the person who leads the function or the business heads."

While the relationships might not be ingrained for banks, the RBI's recent rules around digital lending will make it critical for fintechs to build sustainable relationships with them. Since banks and regulated entities will effectively act as enforcers of these guidelines, it will also grant them a wider berth in their relationship with fintechs.

"[Banks] will have more negotiation power now. They can pull them and trigger them from point of view compliance," Yadav said.

Differentiated Appeal

Even as larger banks are more keen to observe, learn and absorb from their finetch partners, mid-sized lenders depend on them for increasing their footprint.

For instance, Federal Bank Ltd. alone has managed to open over 4.5 lakh accounts per month by leveraging its partnerships with neobanks Fi and Jupiter, according to the bank's investor presentation for the quarter ended March. In its most recent disclosure, the bank also noted that it has managed to disburse gold and micro loans worth Rs 8,400 crore via fintech partners.

And Federal Bank isn't alone in such expansion. Others like SBM Bank (India) Ltd. and RBL Bank Ltd. have also forged multiple fintech partnerships to expand their reach.

"Midsized-banks always wanted fintech because that's the way they crawl towards the top of the pyramid," Yadav said, noting that such partnerships help smaller banks both expand their reach and offer better products.

"Two verticals—retail and small businesses—will remain important areas for bank-fintech relationships," he said.

The fintech founder quoted earlier concurred, saying that while retail has better margins, small businesses offer a wider distribution opportunity given how competitive retail markets, especially in urban areas, tend to be.

While the friendship between banks and fintechs might be far from sacrosanct—and somewhat complicated—it isn't a zero sum game either. In a broad way, “India is still largely an underserved market in terms of credit penetration", said Parijat Garg, an independent digital lending consultant.

Unless the market itself reached saturation, there's likely to be enough room for both banks and fintechs to grow, with fintechs going after newer terrains and banks typically following suit and “grabbing opportunities wherever they think the shoots are much greener", Garg said.