Even as Fintech start-ups are seen as a threat by traditional banks in mature markets, cooperation with them is the preferred strategy for Indian banks.
Last week, Axis Bank, India’s third largest private sector bank, announced the launch of what it calls Thought Factory, a Fintech innovation lab. Based in Bengaluru, the lab combines an in-house team with an accelerator program for Fintech start-ups.
Axis Bank is just the latest among a host of Indian banks who have taken this path—of cozying up to the Fintech start-ups. With Axis Bank’s announcement, almost all major new private sector banks, namely ICICI Bank, HDFC Bank, Yes Bank and Kotak Mahindra Bank, have some sort of strategy in place to leverage the Fintech start-up community. Even the state-run State Bank of India—India’s largest bank—has also treaded the same path.
Earlier this year, between February to April, ICICI Bank, India’s second largest bank and the largest in the private sector, ran a contest among developers to build apps by making available a diverse set of APIs to them. Dubbed ICICI Appathon, it saw enthusiastic participation from developer community. ICICI is now reportedly looking at adopting some of the winning applications. User experience was the most common theme among winning applications.
Around the same time, in early March, HDFC Bank, the second largest private bank in India, too launched its Digital Innovation Summit wherein it asked Fintech startups to make presentations before its leadership. While more than 100 start-ups applied for the summit, the bank shortlisted 30 to make the presentation—in ten areas, right from branch automation to payments, social banking to cyber security, etc. It selected five start-ups whose applications the bank is deploying.
Even newer and smaller banks like Kotak Mahindra Bank and Yes Bank have taken the same route. In fact, much before HDFC Bank and ICICI Bank, Kotak Mahindra, in December last year, tied up with IT industry body NASSCOM’s 10,000 Start-ups program to conduct Kotak Fintech Mobility Hackathon to select a few apps. Around the same time, Yes Bank tied up with tech products think tank, iSPIRT, to launch an online app store. State Bank of India has also announced INR200 crore fund to invest in Fintech start-ups. Chairperson Arundhati Bhattacharya has herself been in Bangalore to meet startups.
Interestingly, Indian central bank, RBI, has also been quite proactive. Institute of Deveopment & Research in Banking Technology, its inhouse think tank, also organized a competition among Fintech start-ups. Earlier this year, National Payment Corporation of India, created under the supervision of RBI, and owned by multiple banks, too chose the hackathon route to build a unified payment interface.
In short, the Indian banking sector has been quite proactive in embracing the Fintech wave by deciding to partner with the start-ups. They have seen the Fintech firms as an opportunity rather than a threat.
Contrast this with the prevailing attitude among traditional banks in mature markets in the US and Europe. By and large, Fintech start-ups have been seen as a threat and the narrative is around how to thwart the challenge. Go through the headlines in business media in those markets and this seems to be a top-of-the-mind challenge for many banks. Fortune magazine recently described it as the “No. 1 threat facing large banks today.”
Yet, few have acted in the way Indian banks have done.
Though the Fintech ‘challenge’, as they call it, has been looming large for a long time, it is only around last year that a few banks took some steps to explore the partnership option. One was Citicorp, whose new consumer business chief, Stephen Bird, created a similar unit, Citi FinTech. But his focus is to create a start-up within Citi. Partnering with existing start-ups seem like a half-hearted after-thought—and that too in the traditional route of investing in promising Fintech start-ups.
In India, hackathons, competitions and partnering with incubation platforms seem to be the preferred strategy and when you see so many top players taking a common approach, you have reasons to believe that it is here to stay. The difference in approaches between banks in mature markets and banks in India is clear. In India, the strategy is not derived out of fear but from a long-term growth perspective.
It is not so difficult to see why. In the mature markets of the West, the Fintech startups have been going after the same customers that traditional banks have been serving, that is, in a way, trying to snatch their bread and butter.
In India, on the other hand, it is clearly three fairly new segments that the new Fintech community has been after—the low-income, unserved segment; the youth and the tech-savvy professionals. Most Indian banks do not have large customer bases in the first two.
Yet, progressive banks realize that these three segments are the fastest growing. With India’s demography—28% population is between 10-24—youth is the single largest opportunity. Any growth in the medium to long run is completely dependent on tapping this segment effectively. Also, the third segment is a very valuable segment for these banks.
So, the predominant attitude among large Indian banks about Fintech wave is to ride on it. Banks realize that they can never have that kind of focus and attention on point solutions if they go the organic route. This is the reason why they have chosen to partner the start-up community. The fact that these start-ups do not really compete much on their core business of today makes that relationship less conflicting. It is a win-win for both.
That most of the top banks in India—HDFC Bank, ICICI Bank, Yes Bank and Kotak Mahindra Bank—are themselves not too old and fairly nimble could be another reason why it is simpler for them to work with start-ups.
And finally, India’s large base of young coders and techies do help too. It is both faster and cheaper. Finally, a progressive and proactive regulator has contributed in its own way.
Now, the partnership-hackathon model is so common and dominant in India that it will not be an exaggeration to call it the Indian model.