Bridging The Gap: How Fintech-Bank Partnerships Are Transforming India’s Financial Landscape

Financial inclusion in India has seen positive developments, owing to the collaborative efforts from key stakeholders such as traditional banks, fintech companies, the government, and NBFCs. 

Fintech has emerged as a central player in this progress and witnessed a 30% increase in capital momentum during 2023. Adopting digital and tech-first approaches has led to a discernible change in consumer preferences for financial services. 

Traditional banks and financial institutions are adapting to this changing landscape by increasingly partnering with fintechs for innovation and long-term growth. 

The collaborative approach between fintech and banks has evolved from competition to cooperation, with over 65% of fintech CEOs prioritising partnerships. 

This trend reflects the industry’s recognition of the need for win-win models to drive inclusive growth and leverage the strengths of both sectors.

Glimpse Of Traditional Banking Era

The traditional case differed significantly. Earlier, banks focused on developing conventional products tailored to their target audience, particularly those with active engagement or the potential for positive profit impact. 

Their reach was primarily to areas where physical bank presence existed. Products were largely standardised, and digital-first offerings were nonexistent or accessible to only a few. 

Due to elevated distribution costs, banking services often incur high overhead expenses, rendering them less accessible to lower-income individuals. Also, the prevalence of customised products was not widespread, and many customers needed to align with the bank’s available offerings.

Collaborative Venture: A Win-Win Approach

The partnership between banks and fintech is opening up new opportunities for financial inclusion. By collaborating with banks, Fintech integrates cost-effective solutions into existing infrastructure, making financial services more affordable and attractive.

On the other hand, banks with established regulatory frameworks provide a solid foundation for Fintech to navigate complex regulations. 

A multitude of evolving trends emphasise the enduring nature of bank-fintech partnerships. One prominent trend is open banking, which supports secure data sharing and enables personalised solutions through collaborative efforts among financial institutions, tech companies, and users. 

Leveraging APIs, open banking utilises consumer data to provide a range of financial services, with UPI playing a crucial role in advancing payment digitization.

With this, fintech’s substantial impact is evident in the anticipated annual growth of over 10% in the total transaction value of digital payments, poised to surpass $8 trillion by 2024. 

Another trend, embedded finance, is gaining traction, extending access to financial services for individuals historically underserved by traditional banking. Projections indicate that this sector will reach a substantial $23.45 Bn by 2029.

Bridging MSME Credit Gap

The collaboration between fintech and banks is instrumental in addressing the micro, small, and medium Enterprises (MSMEs) credit gap. Approximately 50.7 Mn MSMEs need more access to credit through traditional channels. 

Conventional banking processes, often protracted and cumbersome, discourage MSMEs from pursuing formal credit. Fintech firms, however, bring efficiency through automated systems and digital platforms, offering user-friendly interfaces and streamlined digital documentation. 

Leveraging alternative credit scoring models, fintechs assess the creditworthiness of MSMEs based on digital footprints and transaction history. Also, they offer tailored solutions for easy credit access and promote financial inclusion. 

For example, the collaboration between ICICI Bank and Niyo in January 2021 aimed to enhance financial inclusion for MSME workers. Through the issuance of tailored prepaid cards, the partnership sought to streamline payments for small enterprises, providing MSME workers with convenient access to digital banking services. 

This initiative reflects the commitment of both entities to promote financial inclusion and digital banking adoption within India’s workforce.

Government Initiative Advancing Financial Inclusion

As the banks-fintech partnership becomes increasingly prevalent, numerous government initiatives contribute to the enrichment of this ecosystem. India’s Pradhan Mantri Jan Dhan Yojana (PMJDY) stands out as a government initiative promoting financial inclusion by offering easy access to banking services, insurance, and pension schemes for underserved sections of society. 

The Jan Dhan Darshak App, introduced by the Indian government as part of PMJDY, is a valuable tool for those interested in the program. This app is crucial in identifying villages without adequate banking touchpoints, enabling the government to extend financial literacy and development opportunities to remote communities. 

Users can conveniently utilise the Jan Dhan Darshak App to locate the nearest bank branches, post offices, ATMs, or Bank Mitras.

Bottom Line

As India becomes the third-largest fintech market, projected at $150 billion by 2025, the collaboration between banks and fintech firms becomes a powerful driver for financial inclusion. 

This synergy merges the strength of traditional banking infrastructure with the expertise and innovation of fintech, leading the way for a more inclusive financial ecosystem. 

It extends its reach to individuals and communities traditionally excluded from mainstream financial services. With ongoing partnerships, there is a promising shift towards a financial landscape that is more accessible, affordable, and equitable for all.