Impact of fintech on India's retail banking ecosystem

Any Banking ecosystem is expected to provide savings, investments, credit, and payment facilities to its customers across all the segments. While there are text-book definitions of financial inclusion, a simple statement would be that it is an act of encompassing all the customers across the country with respect to the banking services.

Brick and Mortar delivery models for financial inclusion, did not make business sense for many Banks and hence financial inclusion was a task most often restricted to the public sector banks in India. The post liberalization era saw a lot of new Banks come into the space and brought about a lot of focus on technology as well. While this significantly bettered coverage, financial inclusion as an agenda was still wanting.

The regulator did realize that technology would be a good changer if financial inclusion were to become a reality. Initiatives such as the Institute for Development and Research in Banking Technology (IDRBT), National Payment Corporation of India (NPCI) and the India Stack were the key pillars that set the foundation for development of the fintech ecosystem in the country, with the intent of advancing the financial inclusion agenda. The innovations from these institutions such as NFS, UPI and Aadhar have provided the much-needed digital infrastructure that was a pre-condition for the success of the fintech ecosystem in the country.

With the above background, it might be useful to understand the impact the fintech has brought on to the retail banking system in the country. While there are many positives, some of the positives that we would like to highlight are as below:

Collaboration: The Traditional Banks for quite some time were concerned about being upended by the fintech ecosystem and this resulted into an introspection about how they could be nimble despite their size. This thought process helped them to become a part of the disruptive innovation instead of being a victim of the same. The collaborations with the fintech ecosystem around digital lending, UPI and off late with Account Aggregators under the open banking architecture, are some of the significant changes brought about in the Retail Banking ecosystem.

Focus on customer experience: The customer experience on digital channels has substantially gone up on account of investments in customer experience by the traditional banks. Customer analytics coupled with the traditional banking
advantage of customer contact has been combined to come up with very meaningful innovations. Simplifying internet banking by integrating credit, savings, investments, and payments is one small example of this change.

Rise in the captive accelerator programs and fintech incubation programs: Increasingly the Banks have seen a rise in patience towards innovation and a lowering stigma around failures around the same. This is very clear from the number of captive accelerator programs and the fintech incubation programs that each of the Banks run. Creating a safe environment for trying and failing is one of the biggest steps towards fostering innovation and this is a big change that is being seen in the traditional banking system.

Financial Literacy: The Traditional Banks realized that the biggest challenge facing financial inclusion was not just access to technology but adoption of the same. As the Banks started collaborating with fintech players for different offerings, they realized the concerns of their customers about adoption because of fears around security. The Banks given their reach were able to allay a lot of concerns through their financial literacy initiatives with various customers.

While there are some positives, there are some negatives as well. Let us briefly look at each of them:

Cyber Security Risks: Integrating with fintech ecosystems has resulted in external APIs interacting with the Bank's IT systems. This can result in vulnerabilities around security of the information that transverses these channels. Vendor Risk Management especially with a focus on cyber security is a big concern area for each of the Banks.

Regulatory Compliance: The level of regulatory compliance that needs to be exercised on the fintech partners by the traditional banks needs more work. The regulator has delegated to the traditional Banks to ensure compliance from the fintech ecosystem. But the compliance infrastructure of the Banks, especially around manpower and technology is not upgraded to address the challenges.

Weak IT architecture: The amount of system downtime that many Banks experience on account of many system integrations with different vendor IT systems, has substantially increased. While the IT organization within the Bank is focused on addressing the same proactively, it nevertheless does pose a challenge.

Final Words

Every innovation goes through a metamorphosis, where the negatives seem to outweigh the positives, but eventually in the long run the positives outweigh the negatives. This is the thought process that the regulator has rightly adopted to facilitate the growth of a robust financial system. Often, the regulator is at the receiving end of criticism, but to give where credit is due, the digital transformation of the Banking system owes its success purely to the regulator.