Caution: This is a long post
Essentially what is happening perhaps from 2010 onwards is a disruption of traditional banking activities. KPMG had come out with an outlook on FinTech in India last year. It identified 7 themes for India namely:
1. Next Gen Payments
2. P2P Lending
3. Robo Advisory
4. Bank in a box
5. Block Chain
6. Security & Biometrics
7. Financial Inclusion
I have attached the report for reference.
In my opinion I visualize this in a sort of a traditional Maslow’s hierarchy of banking and financial service needs. All the themes fit into the hierarchy triangle.
If you look around you will see that payments is where the traction is and that’s because it is the base of this triangle. Do refer to the Google BCG report on Payments in India in 2020. I have attached that too. The report says that Indians will make retail payments over $500 billion in the next 4 years and non-cash retail payments will overtake cash in 2023. I was a part of a global McKinsey study in 2012 which extended to 2014 where we studied the retail payments. The biggest land grab opportunity perhaps is in India! That’s what we have seen with everyone coming to party. This growth is actually being led by non-banks such as Paytm, FreeCharge, Airtel Money etc. Data says that these wallets (called non-bank pre-paid instrument issuers) do over 2 times the transactions than mobile banking transactions of banks.
A payments value chain essentially consists of a variant of a 4 party model (this is what card associations such as Visa and MasterCard call it). In a typical 4 party model we have an issuing bank, an acquiring bank, a customer and a merchant. But the entities in a modern day value chain are aplenty!
Banks in this space are mostly used for payment processing or providing escrow services (meaning they hold funds of the pre-paid instrument issuer say Paytm with them, they earn float income on this amount and also earn certain transaction fees). Banks provide BIN sponsorships (Bank Identification Number, the first 6 digit on your cards). RBI allows only banks to be issuers of these 16 digit cards (these 16 digits are called PAN Primary Account Number). Thus a non-bank issuing cards needs a bank. This is one business line. Check out ItzCash you will realize what they do. Ratnakar is a leader in this space followed by YES bank. Every transaction is an earning here. ICICI and HDFC don’t do much of these programs. They rely heavily on earning interchange on their cards (interchange is the income which an issuing bank makes on every card transaction). Though smaller banks such as YES, Kotak, RBL, Indusind have comparatively smaller card programs and spends on cards they are providing digital services which are far better than the big three private banks. ICICI though is doing quite well in itself.
On the merchant acquiring side many people especially banks are not interested as it is not attractive from a pure financial perspective. The income is much lower compared to issuing. RBI is working on correcting this. Though entities like to have 'on us' transactions meaning both acquiring and issuing is done by the same entity, this has better financials. For instance American express, it is the issuer, acquirer as well as the network. Card networks are an expanding moat business as I see it. Wish I could invest in them! Trivia: Warren Buffet has investments in all three - Amex, MasterCard and Visa.
New age form factors such as QR codes (individual company codes as well as Bharat QR codes) are slowly gaining adoption, UPI has a poor success rate but it is picking up transactions on Peer to Peer transactions. Our payments industry has experimented on all sorts of form factors – visual, audible sound, ultrasonic, Bluetooth, simple mobile number, merchant initiated pushes etc etc. Honestly on which we can bet is a guess I do not want to make.
Leaving aside payments which you can read a lot in the Google report.
Financial inclusion is a separate animal altogether. If I were allowed I could upload my published paper (academic) on domestic remittances to show you the details. The need is very different in this segment. It’s a very big industry in itself. The form factor is primarily assisted mode. RBL and YES bank are clear leaders in this service. The big guys are not interested.
No bank I think is into P2P lending yet. They are focusing on personal loans rather. The tragedy is that they offer credit lines to ones who don’t need it. Risk scoring is the need of the hour. That is where the P2P lending and security and biometrics kick in. Again here the banks which stand out are YBL, RBL, ICICI, Indusind and Kotak for me. I believe this space will see great value addition from third party. Banks will not develop anything I am guessing.
Coming to insurance and investments part of fintech, banks are doing zilch in my honest opinion. One experiment here and there is what is happening. It is the non-banks who are doing something in this space.
Lastly the famous and mythical blockchain. One of the banks that is ICICI did a blockchain transaction for a cross border remittance last year I suppose. Block chain for us is a record keeping mechanism and not a payments mechanism as in bitcoins/cryptocurrencies. I was a part of the team in ICICI in 2012 which eventually did this blockchain transaction. I had done near real time remittances from Saudi Arabia to India using the plain vanilla SWIFT messages and back guarantee methods (you can check on world bank site now). Yes banks are running explorations in this space but I honestly don’t feel we are at any level compared to the developed economies in doing anything effective with blockchain so soon. There are a lot of proof of concepts by non-banks but that’s all and they are essentially bitcoin exchanges. RBI has set up a committee to study blockchain but I am not sure what’s the progress there.
Briefly summarizing bank wise what I have seen in my last 7+ years in this industry:
- YBL: Great bank imho for this space. Ready to partner on any new field. Very supportive in terms of experimenting. Was lucky to work closely with their first chief innovation officer.
- RBL: A mini YBL. All qualities of YBL but I do not know whether they are hungrier for digital space or YBL! A good problem to have.
- ICICI: Fighting it all alone. Great infrastructure. Has the muscle. Excellent issuance program and retail customer base.
- Kotak and Indusind: A step behind the above 3 but quite competitive with their own programs.
- HDFC: Don’t know much about them but they have written off the wallet story as per media reports. I think they are the best card issuers in the country.
- SBI: I don’t know. If a bank expects you to walk into their branch to activate your app then better not say much.
- Axis: Their earlier product Lime was a disaster. They have acquired FreeCharge. FreeCharge is a gem of a company. I am biased because that’s where I used to work till March this year. I am sure if Axis takes care of FreeCharge they are up in the game of payments.
- Foreign banks: Too niche to have an impact
- PSU banks: It’s a ‘me too’ story for them
Apologies for the long post. But I feel there are so many more things in this space that it’s better to discuss
Also recommend if you want more details at a global level. Get a copy of the MIT's FinTech Report here. And if it really interests you then you might like to enroll in their program.
Sorry I am not being able to upload the KPMG report. The link is this.
BCG-Google Digital Payments 2020-July 2016_tcm21-39245.pdf (1.8 MB)