The dividing line is clear at the very beginning. Fintech companies have a strong technological heritage and to them finance is just another use case to be explored and exploited. It is also a relatively untapped territory, which requires disruption and agile execution. Historically, this has been the forte of new private upstarts rather than the established players from the private or public- sector world. It wasn’t VISA that created the revolutionary PayPal despite their existing reach.
Disruption in finance vis-a-vis other sectors
Finance is, globally, a highly regulated industry involving licences, registration, membership, and adherence to strict norms from various banking, insurance, and securities regulators. Entry into these markets is restricted and requires adherence to existing norms which, in turn, protect incumbents and limit innovation. However, the growth in digital technology and telecommunication has forced the financial sector to wake up to the disruption that new technologies can wreak upon their old, comfortable models and processes.
Large companies have disrupted entire industries — Amazon (retail, data centres), Netflix (movies, television), Google (media, telecom), Apple (music), Tesla (automobiles), Hotel.com (hotel reservations), to name a few. However, there are very few examples of startups in the Banking, Financial Services, and Insurance (BFSI) sectors which could craft out a dominant position (for example PayPal).
Finance — a highly regulated sector
This slack pace is due to the regulation-driven nature of the business. Startups have popped up all over the BFSI landscape. However, most of them tend to be subsumed by larger incumbents. If not, they migrate to being a licensed/regulated entity themselves, thus becoming a member of the industry they wish to disrupt. Technologically nimble incumbent players have proven more receptive to the promises of this disruption and have opened up a yawning competitive gap vis-a-vis their less agile counterparts.
Back home too, this global trend for techfin to prevail over fintech is likely to be true, especially given the conservative regulatory environment in the country. Anecdotal evidence from the BFSI sector over the last few years strengthens this view. A few large players have emerged led by traditional bankers who embraced the new digital technology paradigm, eg. Kotak Bank, Yes Bank, CapitalFirst, Ratnakar Bank, Edelweiss, IIFL, etc. It remains to be seen how some of the newer finech companies such as BankBazaar, Capital Float, Lendingkart, Faircent perform in the years ahead. A big fintech player, Paytm has already acquired a payments bank licence and will need to behave more like a regulated techfin player.
Other techfin bankers seem to be grappling with the easiest way to bring technology into their current setup. Public sector behemoths such as SBI have lagged in the technology-adoption curve compared to their private counterparts — case in point, the automation of processes through paperless operations. There is a certain resistance to unlearn and relearn, almost as if fintech is forcing the ‘tech’ in techfin.
While age is not necessarily an indication of how adaptive a CEO’s outlook can be, it isn’t the biggest surprise that the average age of the top Indian fintech CEOs is around 40 years (Paytm, BankBazaar, Capital Float), whereas that of comparable techfin companies’ chairmen is north of 50s (Edelweiss, Kotak Bank, Capital First).
Also unsurprisingly, fintech CEOs have a technical education. Some of them have experience with consulting companies and others have that in combination with technical work experience. Only 50 percent of founders have more than two years of experience in financial services before their current venture in the fintech space. Approximately one-third of the founders have 2–10 years of experience and 17 percent have over 10 years of experience in the domain.
On the other hand, almost all techfin managing directors are alumni of some of the top management educational institutes in the world and have a long experience in the banking space. Interestingly, there is a shift in the way techfin is approaching the challenges in technological adaptation. Even the Indian government, in a first, has appointed private sector professionals to head Bank of Baroda (Ravi Venkatesan, ex-Chairman, Microsoft India) and Canara Bank (TN Manoharan, Director, Tech Mahindra).
Most Indian fintech startups are typically sponsored by the who’s who of the Silicon Valley venture capital ecosystem. Techfin investments, on the other hand, are largely made by sovereign funds like GIC Singapore or private equity funds like KKR and Blackstone. Typically, funding to techfin companies are an order of magnitude more than the funding for fintech startups (with the exception of Paytm that is already making a transition to a ‘licensed’ payments bank).
A study of their current and potential target audience reveals that fintech startups are focused on the younger consumers, a group that can be stereotyped as being comfortable with transacting online. In general, fintech companies strive to create new markets. Techfin companies typically target SMEs, the older generation, and a wealthier class, for whom transacting online is rather alien. This could feed into the cycle — techfin customers don’t want change and therefore, there is a more gradual approach to adopt new technology. Techfin companies aim to retain their market share or take some from other incumbent players.
Techfin, by its very nature, has huge credit risks and is operations heavy. In addition to credit risk (if it is in the lending space), fintech companies have to guard themselves against security and privacy risks from hackers. While techfin players tend to pursue traditional metrics like income cover, security cover, and CIBIL scores while taking credit risks, fintech players tend to rely on newer and more interesting metrics derived from the digital world or social media and mobile usage patterns of their clients while making credit decisions.
The dynamic nature of regulations for the financial industry is both a boon and a curse. While it could mean an evolving, conducive environment, it also means having to be on your toes. For now, techfin bankers have to operate within heavily regulated boundaries and fintech enjoys operating from the periphery, managing to keep away from regulations to a large extent. Though some of the disruptive technology implementations like blockchain and peer-to-peer lending don’t have strict regulations guarding them, fintech firms need to develop the brand and trust of their techfin counterparts to grow.
Similarly, the penetration of startups in all areas of finance and the growth of the role of technology in traditional financial organisations serve as growing competition for each other. In addition, both fintech and techfin organisations have competition from newer and more efficient government schemes that have the potential to take away big chunks of market share. This is particularly true of the payments space that is seeing extensive technological innovations via UPI, India Stack, etc.
On the flip side, fintech can take advantage of growing internet penetration. The startups can also benefit from both the increasing wealth of their target market and an increase in the size of the market itself.
Potential for synergy
We will see a lot of assimilation of fintech by techfin. The matchmaking of finance and technology will go through a honeymoon period. Beyond that lies the real test — which one will end up paying alimony and who will end up having a happily ever after? Investors in the BFSI space will need to be aware of the difference between fintechs and techfins. The differences ought to help them predict the evolution of their investee companies’ market and thus guide their investment bets.
This story has been contributed by Bharat Innovations Fund which is an initiative by IIMA-CIIE to encourage and support bright entrepreneurs with the potential to create disruptive innovations that can solve some of India’s toughest problems.