Is traditional and digital collaboration the future?

Rahul Sanklecha, Mar 4 2018, 22:25 IST
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Banks in India have formed the backbone of the economy for centuries now, and have emerged as one of the most large-spread institutions in the country, reaching millions of customers in their years of existence.

However, with the onset of digital, reach and influence of financial institutions is only bound to grow.

Digital India may still be at a nascent stage, but it would be difficult to deny that digitisation in finance is playing a bigger role in our lives every day. From the use of smartphones for communication to ecommerce to cashless transactions, digital is taking over many aspects of our lives. One such segment is credit lending, where digital lenders are scaling at a tremendous rate, where their demography and geography-agnostic approach allows them to reach more people than ever before.

In such a scenario, one may imagine that a traditional lender would be threatened by the danger of appearing obsolete. The reality is far from it. While traditional lenders are in a stage of playing catch-up, so as to not miss out on new revenue, these developments only open up fresh avenues for the traditional finance sector.

Over the years, very rigid regulations among traditional institutions have caused some level of exclusion among the under-banked and un-banked, which created a void in the market, that today, digital institutions have attempted to fill.

Digital platforms offering financial solutions have, in that sense, emerged as an extremely lucrative sector for customers and investors, offering digital loans, payment banks, and automated processes, all of which are leading India's shift into its digital, cashless era.

While FinTech may have initially been ignored as a passing fad, today, even banks are stopping to re-think their touch-points for customers.

In recent years, traditional financial institutions have invested heavily in digitisation to create their own digital platforms, while FinTech players have already managed to create a large base of loyal customers, among young adults and salaried professionals. What both these systems are working towards is easy, convenient processing, personalised customer experience, and inclusivity.

FinTech platforms are trying to innovate all aspects of financial services €" including financial product, how they reach out to customers for origination and ways to deliver these products. This shift, however, does not necessarily mean that traditional financial institutes are going against their business models to fit the current need. They have merely recognised the high stakes involved in reaching customers that may have been neglected in the past, through in-house digital development or harnessed through partnerships, which could lead to new and potentially lucrative distribution channels.

With the advantages that both systems have to offer, partnerships and collaborations are becoming increasingly common and yielding better results. While some FinTech companies see themselves as disruptors in the finance sector, others have identified the importance of working alongside traditional finance systems for their expertise, established name in the industry, etc.

Additionally, banks and traditional financial institutions possess greater resources and personal relationships with their customers for which they have gained a great deal of trust. Couple this with the tried and tested infrastructure with specific financial knowledge of regulations, risk management and compliance.

For instance, the kind of relationships with customers that banks have built over the years to an extent where every exchange is extremely personalised helps them gain the loyalty and trust of their customers, while FinTech companies continue to struggle with issues like faith.

Here, FinTech companies could help themselves by being backed by an institutionalised brand. On the other hand, banks could use the analytics and technology offered by FinTech companies to expand their reach and product offerings.

We are increasingly seeing more and more rewarding collaborations between banks and FinTech companies; be it in terms of banks offering debt funds, cross-selling on alternate platforms, using alternative data analytics offered by FinTech firms for risk hedging and so much more. Therefore, while there is no danger of either FinTech or traditional institutions going out of business in the near future, the optimal banking or financial institution of the future will be a combination of the two €" the best of both worlds.

Examples of these forward-looking collaborations are all around us. In the UK, traditional and all-digital banks have collaborated to create innovative products together. Another example in Singapore, where the regulator leads a group of banks and technology companies to experiment with a distributed ledger technology demonstrates how interbank payments could lead to creation of more applications.

Other technology companies and academic researchers have experimented with block chain technology and digital currency again for enabling interbank payments.

Banks have also tied up with FinTech institutions to create or collaborate for personal finance management systems. In India, most big Indian banks including the likes of HDFC, YES Bank, ICICI and Kotak Mahindra are working in collaboration with several new-age businesses in the space of payments, credit creation and other allied services. Banks are also seeing the FinTech sector as a worthwhile investment opportunity.

Several banks and traditional NBFCs have now invested, both debt and equity formats, in various new-age companies, including payment platforms, mobile wallets, digital lenders and P2P platforms. The immense potential the sector offers has fueled these mutually-beneficial collaborations creating a much more inclusive financial landscape in the country.

Banks are experienced in the regulatory landscape, while FinTech systems are nimbler and more open to flexible innovations. Banks need the technology that FinTech companies offer, while FinTech firms require banks for their expertise in the field and their wide customer base.

All these collaborations have resulted in win-win situations, where one has something the other wants and vice versa. In a nutshell, banks and FinTech firms have different comparative advantages, and a strategic collaborative partnership between the two would enable them to contribute to the innovation process and focus on their respective core competencies. However, there are still several obstacles that both systems must overcome before they can create the ideal complementary system that we speak of. These include legal issues, regulatory hurdles, as the FinTech space becomes more regulated, privacy and security, etc. Despite these hurdles, collaborations are increasingly being carried out successfully and efficiently for greater customer satisfaction, proving that the marriage between traditional and digital finance will indeed be a fruitful one.

(The writer is Vice President for Credit & Operations at Lendingkart Technologies)

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