Will the bank face the unfortunate fate of the newspapers? With the tech industry sneaking up on licensed deposit taking institutions in India, it’s time to get serious about the question.
Alphabet Inc.’s Google already offers one of the two most popular payment wallets in the country. But now Google Pay wants to boost the time deposit products of small Indian banks that don’t have much of their own retail liability franchise. According to a press release, Equitas Small Finance Bank will offer Google Pay customers up to 6.85% interest on one-year funds as part of a “brand business experience” on the platform. The Mint newspaper, which has reviewed the interface of the app built by Setu, a Bangalore-based fintech, says other lenders can sign up as well.
The movement has a global meaning. It shows the tenuous nature of control financial institutions have over a core operation such as receiving deposits, and their vulnerability to attack from the giants of online search, social media and e-commerce. Alphabet, Facebook Inc., and Amazon.com Inc. can pose a much greater challenge to traditional lenders than fintech startups that don’t have the scale of platform businesses. As in India, challenging banks with deposit problems could throw the keys at tech intermediaries with hundreds of millions of active users. When the giants storm the fortress, even the biggest banks will lose control of the bank.
ALSO READ: Good show from private banks, best from PSB
China’s local tech titans have already shown how easy it is to evict traditional lenders from loans. In a growing network of users, real-time non-financial data can be a more powerful predictive tool than the credit ratings trusted by banks. Adding a financial activity layer to an online platform provides more information. Before Beijing stepped in to clip its wings, Jack Ma’s Ant Group Co. pursued this advantage to the hilt.
Silicon Valley never had a chance in China. However, it is in a stronger position in the second most populous nation in the world, where everything to do with money is increasingly about connecting to an open network. The historic bank moat has been breached by technological innovation.
For example, the government’s digital ID system for 1.3 billion people has made paper traces and physical presence redundant, and has made the cumbersome processes of meeting your customer from banks (verifying an address or being introduced by another account holder) in a cheap utility with standard protocols. A wallet can establish the identity of the customer as easily as a bank and manage the process of obtaining their consent.
Indian deposit-taking institutions also have no special advantage in the movement of retail money. Yes, they still have the accounts to send or receive funds. But rather than transacting on their apps or bank cards, customers prefer to use Google Pay or Walmart Inc.’s PhonePe to pay each other and merchants. The two wallets were used to transfer 5 trillion rupees ($ 70 billion) last month, giving the duo an 85% share of a market that has more than 50 apps, including those from banks.
That’s the power of the platforms’ DNA or data network activity cycle, as described by researchers at the Bank for International Settlements. When Facebook’s WhatsApp Pay is fully ready, the messenger service’s 500 million Indian users are sure to give it a head start in financial business.
ALSO READ: Central Banks Shouldn’t Demand ‘Green’ Investments: Raghuram Rajan
The environment is ripe for Silicon Valley to invade banking. Equitas does not have a pre-existing relationship with the Google Pay customer to whom it markets fixed-term products. Even after obtaining the money, the lender may not be able to establish a long-term partnership with the saver. Once the deposit is due, the money will simply be transferred to the bank account it came from. Since it won’t take a platform two minutes to reserve deposits from scratch, if another lender offers a better deal, the idle funds could go there next. Customer loyalty, which is often sheer inertia, will no longer guarantee rigidity. Savers want profit.
If the playbook is successful, companies like PhonePe and WhatsApp Pay may want to copy it too. For a fee, platforms can easily expand their insights into consumer behavior and payment flows to influence deposit mobilization. The higher the commission, the lower the banks’ profit. Indian state lenders, in particular, will need to become more efficient. Or they will have to pressure regulators to control the tech giants. Amazon, Google and Facebook were racing to build a new payment network in India, but the central bank suspended the license due to concerns about data security, according to a separate report in Mint last week.
Globally, banks and regulators have been preparing for the Diem challenge, a Facebook-backed project that promises to replicate major global currencies to expand financial inclusion. But lenders can be on a slippery slope even without new payment instruments. As Big Tech asserts control over the flow of savings in search of performance, a commanding presence on the street will no longer serve as a ticket to cheap financing.
Regulated institutions can be left with a license to receive deposits, and a thick rulebook that accompanies that privilege, but platforms will decide whether a bank’s promotional offering will be prominently displayed or buried in a dark corner. The same slow and painful decline that destroyed print media after readers and advertisers moved to the Internet and publishers lost their grip on them may also be waiting behind the scenes for banking.