Will the bank meet the sad fate of the newspapers? With the rise of the tech industry on licensed depository institutions in India, it is time to take the matter seriously.
Google already provides one of the two most popular payment wallets in the country. But now Google Pay wants to offer term deposit products from small Indian banks that don’t have a lot of retail liability deductibles. 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 “branded shopping experience” on the platform. Mint newspaper, which reviewed the app interface built by Setu, a Bangalore-based fintech, says other lenders can sign up as well.
The movement has global significance. It shows the tenuous nature of financial institutions’ hold on a basic operation like deposit taking, and their vulnerability to onslaught from the giants of online research, social media and e-commerce. Google, Facebook, and Amazon.com can pose a much bigger challenge to physical lenders than fintech startups that aren’t the size of platform companies. Much like in India, deposit-strapped challenger banks could throw the keys to 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.
Chinese tech giants have already shown how easy it is to dislodge traditional lenders from loans. In a growing network of users, real-time non-financial data may be a more powerful predictor than the credit scores on which banks rely. Adding a financial activity layer to an online platform brings even more information. Before Beijing stepped in to cut its wings, Jack Ma’s Ant Group pursued this advantage to the end.
Broken by technology
Silicon Valley has never been lucky in China. However, it is in a stronger position in the world’s second most populous country, where all about money is increasingly about connecting to an open network. The historic bank gap has been broken by technological innovation.
For example, the government’s digital identification system for 1.3 billion people has made paper trails and physical presence unnecessary, and transformed banks’ tedious KYC processes (verifying an address or entering by another account holder) into an inexpensive utility with standard protocols. A wallet can establish a customer’s identity as easily as a bank and handle the process of seeking consent.
Indian deposit-taking institutions also have no particular advantage in transferring money at retail. Yes, they still hold the accounts to send or receive funds. But rather than making transactions on their apps or bank cards, customers prefer to use Walmart’s Google Pay or PhonePe to pay each other and merchants. The two wallets were used to transfer 5,000 billion rupees ($ 70 billion) last month, giving the duo an 85% share of a market that has more than 50 apps, including banks.
That’s the power of the data network, or DNA, business loop of platforms, as researchers at the Bank for International Settlements describe. When Facebook’s WhatsApp Pay is fully ready, India’s half-billion messaging service users are sure to give it a head start in financial businesses.
The environment is ripe for Silicon Valley to encroach on the banking sector. Equitas does not have a pre-existing relationship with the Google Pay customer to whom it markets term products. Even after getting the money, the lender might not establish a long-term association with the saver. Once the deposit is due, the money will simply be reinjected into the bank account it came from. Since it won’t even take a platform two minutes to book deposits from scratch, if another lender comes up with a better deal, the unused funds could go there next. Customer loyalty, which is often pure inertia, will no longer ensure sustainability. Savers will benefit.
If the playbook is successful, PhonePe and WhatsApp Pay may also want to copy it. For a fee, platforms can easily extend their knowledge of consumer behavior and payment flows to influence deposit mobilization. The higher the commission, the lower the profit of the banks. India’s public lenders, in particular, will need to become more efficient. Or they will have to lobby regulators to curb the tech giants. Amazon, Google and Facebook were all competing to build a whole new payments network in India, but the central bank suspended the license due to data security concerns, according to a separate report released last week to Mint.
Globally, banks and regulators are bracing for the challenge of Diem, a Facebook-backed project that promises to replicate the world’s major currencies to expand financial inclusion. But lenders can be on a slippery slope even without new payment instruments. As Big Tech claims control of the flow of yield-seeking savings, a massive presence on the streets will no longer serve as a ticket for cheap financing.
Regulated institutions can retain a license to accept deposits – and a thick rulebook accompanying that privilege – but platforms will decide whether a bank’s promotional offer should be displayed prominently or buried in a dark corner. The same slow and painful decline that emptied print media after readers and advertisers moved online and publishers lost their grip on them can also wait behind the scenes for banking. – By Andy Mukherjee, (c) 2021 Bloomberg LP