FinTech firms are spearheading the transformation of the financial sector by introducing innovative business models by creating cutting-edge platforms and ecosystems. As regulatory requirements continue to evolve, the banking industry is constantly adapting to these changes. The scope of products and services offered by banks is expanding, but they still face stricter regulations and limitations on innovation.
On the other hand, FinTech companies operating in various sectors are agile players in the technology industry. Kinara Capital, along with other Non-Banking Financial Companies (NBFCs), is regulated by RBI and operates within the regulatory framework, adhering to the mandates, guidelines and frameworks established by the relevant authorities. With their flexibility and ability to innovate, they are able to offer unique Micro, Small and Medium Enterprises (MSMEs) lending services. It helps small businesses acquire essential support that traditional banks may not be able to match.
As a result of the Covid-19 pandemic, the financial sector has undergone a massive digitisation shift. The pandemic has also played a significant role in the growth of MSMEs using digital payments and the testing of new-age fintech models in the face of adversity.
MSME entrepreneurs have increasingly become more comfortable managing their financial matters online. Therefore, customer expectations have changed, and the demand for digital MSME lending services has increased.
According to Piyush Goyal, the Union Minister of Commerce & Industry, India is on the brink of becoming one of the largest digital markets in the world. He revealed that the country has an impressive FinTech adoption rate of 87%, which is significantly higher than the global average of 64%. India has gained third place in digital payment after the US and China, signifying that India has a huge untapped market. The country has also been predicted to reach US$1.3 trillion by 2025, with a Compound Annual Growth Rate (CAGR) of 31%. This highlights the tremendous potential for growth and development in the Indian digital market, especially in the financial sector.
This impressive growth is a result of several factors, including the rising use of smartphones, low-cost data, favourable structural reforms, and world-class digital infrastructure supported by an enabling regulatory environment. The introduction of the Unified Payments Interface (UPI) marked the beginning of India’s fintech revolution, which was further accelerated by demonetisation and the pandemic. These events compelled people to shift towards digital transactions. However, these events accelerated the adoption of digital transactions, pushing individuals and businesses to embrace digital payment systems for their financial needs.
The technological revolution unfolding in India’s financial services industry has the potential to drive significant disruption. However, this transformation requires a collective effort from all stakeholders, including traditional banks, fintech companies, NBFCs, government, and regulators, to ensure inclusive growth in the economy. Fintech companies have leveraged advanced technology, innovative products, and low-cost distribution models for MSME lending and to reach underserved and unbanked populations.
Nonetheless, the path to sustainable growth and profitability is crucial for their success. Meanwhile, traditional banks are adapting to the fintech revolution and changing cultural trends by reinventing themselves to meet the evolving expectations of customers in the digital age. Despite established customer bases and sizable balance sheets, banks must continue to evolve and keep pace with the changing financial landscape.
Technological advancements have been at the forefront of policy discussions for several years. The impact of Information and Communications Technology (ICT) has been significant in various sectors of the economy, positively affecting the ease of living and conducting business. Additionally, the digital divide between rural and urban India has decreased dramatically as a result of technological innovations. Common Service Centers are playing a crucial role in bringing e-commerce and government services to the grassroots level, thereby bridging the gap between development and access to resources.
The use of digital platforms has made accessing public services effortless and time-saving. This has also impacted the financial services sector, with an increasing share of internet penetrations, the introduction of the UPI, and at-home financial services leading to increased access to banking systems and enhanced service availing. These digital solutions have been empowering and have resulted in the scale of financial inclusion for MSMEs in India through bank and fintech collaboration.
UPI has been a game-changer in the country’s financial landscape, with its widespread adoption among individuals and businesses alike. The World Bank and other international organizations have lauded the UPI’s effectiveness in enabling seamless digital transactions and payments. According to recent statements made by Reserve Bank of India Governor Shaktikanta Das, the UPI has the impressive capability to process up to one billion transactions every day. The daily transaction volume through UPI currently stands at a staggering 16.58 billion.
In India, the banking and fintech industries are witnessing an unprecedented level of collaboration across various verticals such as PoS solutions, co-branded cards, MSME lending, and insurance offerings. These partnerships have demonstrated that collaboration can be a potent tool to penetrate new and existing business lines and reach unexplored or underexplored customer segments with innovative products launched through digitally-driven go-to-market strategies. Numerous innovative fintech models have emerged to create a seamless banking experience for people, including MSMEs, across the country. Some of the most noteworthy models include:
The partnership model has revolutionised the financial industry, enabling the deployment of customised solutions that cater to tier-3 markets and beyond, thus enhancing financial inclusion across India. In addition to this, the advent of fintech collaborations has allowed newer banks to adopt an asset-light model, leading to an expansion of their distribution network without the need for extensive investments in branch networks. The preferred areas of collaboration include technology services and algorithm-driven underwriting, with the integration of Application Programming Interfaces (APIs) providing a seamless platform for co-creation and innovation. The possibilities for collaboration between banks and fintech companies are endless, and the use of cutting-edge technology will undoubtedly lead to a more inclusive and accessible financial system.
It is essential for banks and fintech companies to collaborate to create a mutually beneficial model. This alliance can help them provide a smooth MSME lending experience for small businesses across the country. By working with fintech companies, banks can access new-age underwriting models, APIs to integrate with the latest financial technologies, and mature engineering algorithms that provide behavioural insights into MSMEs’ needs and credit appetite in real-time.
Fintech firms can leverage the digital lending models and risk engines built by them to cut down the loan application to disbursal journey to a fraction of the time taken traditionally. Fintechs can benefit from the banks’ access to capital, established customer base, and regulatory management know-how that helps them embrace compliance by design.
An excellent example of successful collaboration between banks and fintech is the concept of embedded banking. This innovative integration allows for seamless access to banking products and services through fintech user apps. Fintechs, with their strong focus on user experience, ensure that banking transactions through their app are simple, intuitive, and easily accessible, fostering engagement.
Moreover, collaborations between banks and fintechs extend beyond conventional banking offerings, with fintech bringing their robust product and technology expertise to the table. By leveraging fintechs’ tech stack and integrating it with the banks’ core systems, the entities can expedite their development cycles, overcoming their specific challenges and making innovative lending products for MSMEs.
Fintechs have the potential to do more than just serve as a means for customer acquisition and referral. By leveraging technology and user experience, fintech can improve product distribution and access, increase efficiency and engagement, and fundamentally transform the way banks and fintech collaborate. However, to fully realise these benefits, it is essential to establish a partnership model that balances innovation, regulation, and sustainability.
To ensure successful collaboration among ecosystem players and establish stronger partnerships, it is essential to have clear guidelines for data sharing, risk management, and governance. Additionally, simplified go-to-market models can help streamline the process of bringing new products and services to market. Regulatory policies and infrastructure, like India Stack, can also play a critical role in facilitating healthy collaborations.
The collaboration between banks and fintechs is rapidly transforming the landscape of digital lending and MSME lending. As banks look to enhance their service offerings, fintechs provide the technological innovation necessary to streamline processes and reach underserved markets.
One of the key factors driving this collaboration is the ability of fintechs to leverage advanced technologies, such as AI and machine learning, to assess credit risk more efficiently, enabling faster and more accurate lending decisions.
Banks, on the other hand, bring their established trust, regulatory compliance expertise, and large customer bases, which provide a solid foundation for fintech innovations. This partnership creates a win-win situation by improving access to MSME lending, reducing operational costs, and expanding the reach of financial services.
The synergy between banks and fintechs ultimately helps unlock new opportunities for MSMEs and drives financial inclusion in the digital lending ecosystem.
By partnering with fintechs, banks can adopt cutting-edge technologies that streamline the digital lending process, reducing approval times and improving customer experience.
Fintechs leverage AI, machine learning, and big data analytics to evaluate creditworthiness more accurately, helping banks offer loans to a wider range of customers, including MSMEs that might otherwise be overlooked.
Bank and fintech collaboration can significantly expand access to MSME lending, especially in underserved areas where traditional banking infrastructure is limited. This partnership enables fintechs to connect with more businesses, driving financial inclusion.
Fintechs can help banks lower operational costs by automating processes such as loan origination, documentation, and risk management. This allows banks to focus on their core strengths while benefiting from fintech efficiencies.
Banks bring regulatory expertise, ensuring that digital lending platforms remain compliant with legal requirements. This creates a secure, reliable environment for both customers and financial institutions.
The collaboration fosters innovation, allowing banks and fintechs to co-create new financial products that cater to evolving customer needs in digital lending and MSME sectors.
Fintechs have the potential to revolutionise the way financial institutions collaborate by enhancing product distribution and access, as well as increasing efficiency and engagement through technology and user experience. However, to truly realise these benefits, a partnership model that balances innovation, regulation, and sustainability is crucial. Clear guidelines for data sharing, risk management, and governance, as well as simplified go-to-market models, are imperative.
Risk management is the systematic process of identifying, assessing, and prioritising potential risks that could hinder the achievement of organisational goals. It involves developing strategies to mitigate or exploit risks, monitoring their effectiveness, and adjusting approaches accordingly. Effective risk management enhances decision-making, safeguards assets, and ensures business resilience in an ever-changing environment.
Indian banks are slowly adopting technology to make banking services digital and user-friendly. Banks, fintech and NBFCs are all aiming for financial inclusion through innovative MSME lending products, credit/debit cards and UPI payments. Not just that, banks are also indulging in co-lending partnerships to cater to a broad customer base and widen their reach. NBFCs like Kinara Capital are creating financial inclusion by bridging the MSME lending gap in India and have disbursed over INR 4000 crores across 87,000+ business loans to over 50,000 customers in 125+ urban, peri-urban and rural locations in India.
Bank and fintech collaboration is a strategic alliance wherein banks and fintech companies join forces to capitalise on their respective strengths and expertise. By combining traditional banking infrastructure and regulatory know-how with fintech’s agility and technological innovation, they can develop groundbreaking financial solutions that enhance customer experience, increase operational efficiency, and drive digital transformation in the financial industry. This partnership fuels innovation, promotes financial inclusion, and opens new avenues for growth and market expansion.
Banks forge partnerships with fintech companies to optimise product distribution channels, broaden access to financial services, streamline operations for improved efficiency, boost customer engagement, and leverage fintech advancements to enhance technology infrastructure and elevate user experience.
Collaboration between banks and fintech has led to the development of numerous innovative financial solutions, such as feature-rich mobile banking apps that offer seamless banking experiences, secure digital wallets for convenient transactions, and peer-to-peer MSME lending platforms that provide accessible financing options for small businesses. These collaborations drive financial inclusion and propel the digital transformation of the industry.
Fintech companies derive substantial benefits from collaborating with banks, including the opportunity to tap into a wider customer base, leverage the banks’ deep regulatory expertise, and establish credibility through association with a trusted brand name. This collaboration fosters growth, builds credibility, and accelerates market adoption for fintech innovations.
Bank and fintech collaboration directly benefits customers by delivering a wider range of innovative and convenient financial products and services that are specifically tailored to their unique needs. This collaboration enhances customer experience, fosters financial inclusion, and empowers individuals with personalised solutions to meet their evolving financial requirements.
To manage risk in their collaborations, banks and fintech companies establish well-defined protocols and guidelines for data sharing, risk management practices, and governance frameworks. This ensures proper handling of sensitive information, effective risk mitigation strategies, and transparent governance structures, fostering trust and minimising potential risks in their collaborative endeavours.
Regulatory policies and infrastructure serve as crucial foundations for collaboration between banks and fintech, offering a framework that supports innovation, sets regulatory standards, and ensures the long-term sustainability of their joint efforts. These elements foster a conducive environment for responsible growth, consumer protection, and the development of innovative financial solutions.
Collaborations between banks and fintech companies encounter challenges stemming from divergent cultures, technology stacks, and regulatory demands. Navigating these hurdles requires effective communication, alignment of processes, adaptation to varying technological landscapes, and harmonisation of compliance measures to foster successful partnerships and drive innovation.
To overcome the challenges, banks and fintech companies should establish open and transparent communication channels, foster trust through regular engagement, and align their efforts towards shared objectives. By cultivating strong relationships and collaborating closely, they can bridge cultural and technological gaps, navigate regulatory complexities, and drive successful partnerships.
The future of bank and fintech collaboration is promising, as the financial industry embraces innovation. Anticipate a surge in partnerships that will further revolutionise the sector, introduce novel technologies, enhance customer experiences, and reshape the way financial services are delivered, creating an exciting era of continuous transformation and innovation.
