Till death do them part?

India is home to close to 7,500 fintech firms working in segments across lending, buy-now-pay-later, payments, savings, investments and more. Although these companies promise a lower barrier to entry and a better user experience, they still rely on traditional banks to be efficient.

Last week, HDFC Bank Ltd. that it will pick up 10% stake in GoDigit Life Insurance for Rs 49.9-69.9 crore, even though the fintech firm is yet to start its life insurance business.

Similarly, earlier this year, private lender ICICI Bank Ltd. a partnership with ZestMoney to expand its cardless monthly installment facility; Bank of Maharashtra joined Lendingkart to offer loans to micro, small and medium enterprises; while neobank Freo is collaborating with Equitas Small Finance Bank to launch a digital savings account.

Banks typically partner with fintechs with two main goals in mind: expanding the customer acquisition funnel and learning how new, technology-enabled businesses contribute to the customer experience.

“The partnerships offer a very easy way to add assets (for banks),” Vivek Iyer, partner at Grant Thornton Bharat, told BQ Prime. These partnerships, according to him, are a very effective way for banks to learn about customer experience and then “use that experience in their own digital lending applications”.

Partnering with fintechs can help banks acquire more customers digitally, but it also comes with its own challenges. Lending-focused fintechs tend to overpromise a lot, according to a digital banking manager at a leading private bank.

While firms the bank has partnered with in the past have promised detailed analytics, they can only offer a bird’s-eye view of their customer profile, this banker said.

During the discussions with the banks, the fintech initially promises to take some risk as well, but eventually pulls out, the banker said. The bank partner is thus left to do the real work around modeling risk, reducing the fintechs to mere digital distribution agents.

While bankers may feel this is an abdication of responsibility by fintechs, Iyer said this is actually a fair expectation on their part. “You cannot provide your balance sheet without offering your own risk management process or framework to the fintech partners.”

Short-lived wrappers

At its core, fintechs are essentially digital wrappers on banking services, according to Rahul Pratap Yadav, chief business officer at fintech firm iMoney Pay and a former banker. While fintech partnerships provide a better customer experience and generate some liquid and transactional revenue, they cannot be a substitute for the bank’s stand-alone business, he said.

Banking and fintech relationships are typically forged for a period of 12 to 36 months when co-lending is involved, according to the founder of a fintech lending firm. If the partnerships are solely for distribution, they tend to last less than 12 months and can be extended if the bank feels it makes commercial sense for them, the founder said.

Since the packaging gives more visibility to the fintech in contrast to the bank, it is not necessarily attractive for banks that are building an independent relationship either. “Fintech has developed the ability to sway customers away from [banks]they have become a face,” Yadav said.

This perhaps also contributes to why most banks view tie-ups with fintechs as “medium-term learning partnerships,” as Iyer put it, noting that as banks build their targeted book size, they can reassess the partnership and swap partners in and out as needed .

“Most of their relationships with these partners are not institutional,” Iyer said. “They are very dependent on the person leading the function or the business managers.”

While the relationships may not be ingrained for banks, the RBI’s recent rules around digital lending will make it imperative for fintechs to build sustainable relationships with them. As banks and regulated entities will effectively act as enforcers of these guidelines, it will also give them a wider space in their relationship with fintechs.

“[Banks] will have more bargaining power now. They can draw them and trigger them from a point of view,” Yadav said.

Differentiated appeal

Although larger banks are more keen to observe, learn and absorb from their finetch partners, mid-sized lenders rely on them to grow their footprint.

For example, Federal Bank Ltd. alone managed to open over 4.5 lakh accounts per month by leveraging its partnerships with neobanks Fi and Jupiter, according to the bank’s investor presentation for the quarter ended March. In its latest disclosure, the bank also noted that it has managed to disburse gold and microloans worth Rs 8,400 crore via fintech partners.

And Federal Bank is not alone in such an expansion. Others like SBM Bank (India) Ltd. and RBL Bank Ltd. has also entered into several fintech partnerships to expand its reach.

“Mid-sized banks have always wanted fintech because that’s the way they crawl towards the top of the pyramid,” Yadav said, noting that such partnerships help smaller banks both expand their reach and offer better products.

“Two verticals – retail and small business – will continue to be important areas for bank-fintech relationships,” he said.

The fintech entrepreneur quoted earlier agreed, saying that while retail has better margins, small businesses offer a wider distribution opportunity given how competitive retail markets, especially in urban areas, tend to be.

While the friendship between banks and fintechs may be far from sacred – and somewhat complicated – it’s not a zero-sum game either. Broadly speaking, “India remains largely an underserved market in terms of credit penetration”, said Parijat Garg, an independent digital lending consultant.

Unless the market itself reached saturation, there is likely to be plenty of room for both banks and fintechs to grow, with fintechs chasing newer ground and banks typically following suit and “grabbing opportunities wherever they think the shoots are much greener” , Garg said.