Global Narrative Of Fintech Threat To Banks May Be Overstated: Kotak Report

Indian banks have underperformed during the pandemic on fears that they are ill-prepared to take on fintech firms and big tech giants. According to Kotak Institutional Equities, there may be a problem with this “powerful global narrative”.

The market has extrapolated the success of fintechs in payment to lending as well, Kotak said in a Dec. 6 note. But it finds two issues with that: the standalone payment business is not very remunerative; and the lending space is crowded, with fintechs having no real advantage.

Indian banks have ceded ground in the payments business to big tech firms. Billionaire banker Uday Kotak, speaking at an event last week, had called the lenders “short-sighted”, warning that they risk losing more to Google and Walmart-backed PhonePe. To be sure, his personal opinion as a banker is separate from the independent view of Kotak Institutional Equities, part of the group that bears his name.

According to the note by Kotak Institutional Equities, global tech firms have largely focused on payment with a limited foray into lending, save for ‘buy now, pay later'. Moreover, the brokerage said, the Indian payment industry does not appear to be “very profitable” given:

• A large number of options.

• Reluctance among consumers to pay for transactions.

• Cash being the zero-cost default option.

• Very low switching costs for consumers.

• High costs for merchants.

Fintechs face the lending challenge as there are already a large number of lenders for prime and subprime borrowers with similar pricing and products, and banks also benefit from the cost-of-fund advantage.

The brokerage also flagged the risk in fintech firms' focus on subprime customers with limited datasets on borrowers. Citing the example of microlenders, the note said, a Covid-19-type situation would result in a spike in credit costs, and set them back by two to three years.

While the banks didn't defend the payment business given its small revenue and profit pool, the brokerage called it a “mistake”. They will, however, protect the lending business “more aggressively”.

According to the Kotak note, key triggers for banks include:

• A favourable macroeconomic environment: Higher interest rates are positive for yields and spreads in general, and likely stable-to-lower provisions as economic conditions improve.

• Likely pickup in credit offtake on recovery in the economy in general and automobile and housing demand in particular

• Sharp increase in profits and return ratios for banks as provisions lag growth in net interest and pre-provision operating profit.

• Most banks have seen a moderation in slippages and have adequate provisions.