How Fintech-Bank collaboration brings together the best of two worlds

With the highest fintech adoption rate in the world, India has undoubtedly emerged as the hub of digital revolution in the global financial landscape. The Indian fintech market, already the third largest in the world, is projected to reach the US1.3 trillion dollars by 2025, growing at a CAGR of 31%. This phenomenal growth has been driven by rapidly growing digital adoption on the back of increasing smartphone penetration and low-cost data, favorable structural reforms, world-leading digital infrastructure coupled with an enabling regulatory environment. While the adoption of Unified Payments Interface (UPI) started India’s fintech revolution, demonetization served as a catalyst in the digital growth story. The momentum was further fueled by the COVID-19 pandemic which not only turbocharged the digital payments space, but also pushed the strength of new-age fintech models in the face of adversity.

The technology-led revolution has enabled India to drive the next wave of disruption in financial services. However, a concerted effort by all stakeholders in the ecosystem, including established banks, fintechs, NBFCs, governments and regulators, will play a crucial role in driving inclusive growth in the economy. Led by advanced technology, affordable distribution models and innovative industry-first products, fintech has made strong inroads into the underserved and unbanked segments of the population. As fintechs drive financial inclusion, the path to sustainable growth and profitability is increasingly critical to their success. On the other hand, the banking sector in India is currently undergoing a flurry of changes due to the fintech revolution and changing cultural trends across the country. While banks have an established customer base and significant balance sheets, coupled with high levels of trust due to decades-old customer relationships, they are gradually reinventing themselves to meet customers’ changing expectations in the new digital environment.

There is a clear need for collaboration between banks and fintechs to create a “win-win” model where the unique and complementary strengths of both players come together to create ecosystems that deliver a seamless banking experience to customers across all walks of life . For banks, partnering with fintechs will mean they don’t have to do the legwork of building their technology stacks from scratch, and will gain access to new superannuation models as well as APIs to facilitate integration with new age financial technologies. By leveraging mature engineering algorithms, fintech can help banks with customer behavioral insights at a granular level to identify customer needs and appetite for credit in real time. Moreover, the digital lending models and risk engines built by fintechs can be leveraged to cut down the loan application to disbursement journey to a fraction of the time it traditionally takes. Fintechs, on the other hand, can benefit from access to capital, the stamp of trust and a solid customer base that banks have built up over decades. From fintech’s perspective, the banks bring in a lot of internal knowledge around regulatory management that steers them in the right direction and helps them embrace compliance by design.

A growing number of banks in India are partnering with fintech companies in various shapes and forms across verticals such as PoS solutions, co-branded cards, lending and insurance offerings. This wave of alliances has cemented the power of collaboration as a powerful tool to drive penetration into new/existing lines of business and unexplored/less explored customer segments through innovative products and digitally driven go-to-market. The partnership model has enabled the deployment of tailored solutions to serve the tier-3 and beyond markets, promoting financial inclusion across the country. Moreover, newer banks in India are banking on an asset-light model as they explore fintech partnerships to expand their distribution across the country without having to invest in a large branch network. In addition, technology services and algorithm-driven underwriting are the preferred areas of cooperation. The use of Application Programming Interfaces (API) has further enabled the integration and co-creation of innovative solutions between banks and fintech companies.

Another example of such collaboration is embedded banking – which enables the seamless integration of banking products into fintech user apps. It enables merchants/consumers to access bank accounts and make transactions through the fintech user app. Since fintechs focus a lot on user experience, they ensure that the entire banking experience through the app is very simple and intuitive, thereby increasing accessibility and increasing engagement.

Furthermore, I see that the collaboration extends beyond the standard set of banking products and solutions. Fintechs usually have a strong product and technology team. We are always pushing for both incremental improvements and new products. While I understand that banks and larger financial institutions have their specific challenges when it comes to developing new products and adopting new technology, which leads to long development and launch cycles. Here, fintechs can also collaborate with banks where they deliver their technology stack and integrate it with the banks’ core systems, thereby speeding up development cycles.

The key point is that fintech is not just a customer acquisition and referral channel, as in the case of the ancient Banking Correspondents model. Fintechs can fundamentally help with better product distribution and access, improved efficiency and engagement – ​​powered by better technology and superior user experience.

To unlock the full potential of fintech-bank collaboration, it is crucial to crack an effective partnership model that strikes the right balance between sustainability, innovation and regulation. This will set the blueprint by defining clear railings to facilitate data sharing, risk management and governance, as well as enabling the establishment of simplified go-to-market models. Most importantly, building a strong partnership DNA will require continued support from regulators. India’s regulatory framework aided by the powerful India Stack infrastructure has been highly effective in addressing risks and enabling healthy collaboration between various players in the ecosystem and its increased support will be a clear tailwind in supporting stronger partnerships.

To conclude, fintechs with banks will be the way forward to redefine India’s financial services sector. The collaboration between both players is only going to get stronger, bringing to the table the best of traditional banking combined with the innovation and agility of fintech. Over the next few years, we will see a number of new partnerships between fintechs and banks as the dominant model for the development and delivery of financial products and services in India. I strongly believe that bringing together the combined forces of all the players in the financial ecosystem will be the nature of the game to drive India’s quest for a $5,000 economy.

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