Fintech Startups Are Eating Leftovers Of Banks

As a VC, we see a lot of startups looking at the unbanked population as a business opportunity to create new markets. It might be true in some segment but mostly it’s a false narrative. Existing banks are smart enough to tap the most profitable opportunities. What is leftover today by banks is not viable, profitable and secured business.

Let’s take example of opening of bank accounts through mobile banking, fintech startups have done a fabulous job of reducing friction and saving money on the whole process. But they missed out working on the profile of customers who are opening accounts — whether they are profitable, is there money to be made in this transaction? Probably not, so looking into savings in isolation gives a delusional success. Family offices or HNIs have private bankers who offer personalised services to their clientele as they are valuable and love face to face engagement with bankers. Fintech founders give credit with their innovative credit models for underwriting risks while they end up giving margin security to banks to avail that line of finance. Founders believe that they have a partnership with the banks while for banks this is like getting secured income without taking risk. Fintech startups eventually will become vendors to the banks and not equal partners in growth.

Media hype has made fintech startups very glamorous while discounting the real fundamentals of commerce on which BFSI industry works. The fintech startups offers, niche point solution to problem and they are very effective in that space with innovation, customer experience and delivery of services but have failed to look at profitability, barriers to entry and industry partnership with interoperability. Young out of college, the not-so experienced ones are out to challenge the incumbent banks with technology as their edge, but they have chosen the demographics where profitability is distant. Banks will not disappear overnight like Nokia, Blackberry or Kodak. Fintech startups are pushing banks to evolve, morph into a digital enterprise but they will not be able to replace the banks. Banks have a proven business economics and time-tested business models. To disrupt banks is a fantasy.

Let’s take the example of the most popular payments app, Paytm. They have 45 Cr customers; 13 Cr monthly active customers and their revenue growth was tepid at 2.8% to INR 3,319 Cr compared with INR 3,229 Cr in FY18 and they posted a net loss of INR 3,959.6 Cr in FY19 against INR 1,490 Cr the previous year with valuation of INR 70,000 Cr. Now let’s compare it with Bandhan Bank statistics. Bandhan Bank reported a 45.02% growth in net profit at INR 1,952 Cr for the financial year ended March 31, 2019, as compared to INR 1,346 Cr and their total revenues for stood at INR 7,707 Cr as compared to INR 5,508 Cr with 1.73 Cr customers with market capitalisation (valuation) of INR 71,324 Cr.

Today in India, most banks have started their own incubator, accelerator to ensure that they are near to innovation. Banks are cognisant of the threat and are in alert mode. Many of the private banks have become limited partners to venture funds, venture debt funds and even directly investing in startups. Given the banks’ balance sheet size, their ability to acquire startups is a big probability as most of them are venture funded and for them this would be a logical exit. This brings us to the question — will fintech startups survive, are they built to last or get acquired? With current downturn in venture capital due to WeWork IPO fiasco, VCs have started talking about profits before IPO. This will change a lot of fintech startups who are capital guzzlers as VCs will push them to look at bottom line closely. The flow of capital to fintech startups will slow down considerably in coming months. Fintech companies who have an edge on data, who know how to ride on existing bank infrastructure and get equal partnership will survive.

The business of bank is business of trust. The new age fintech startups may have disruptive technology but very little credibility. Bitcoin has all the functions of a bank being a value store but has very little trust. It is built on a disruptive blockchain technology, which transfers value over internet but has seen limited success.

Will we see a repeat of 1999-2000 bust? I believe no. But there will be collateral damage. There will be few who would emerge as winners and finally get integrated into the current India banking ecosystem.