Rising Big Tech Presence in India’s Loan Market — Will This Be the End of Banks?

Banks around the world are perhaps undergoing an ordeal similar to monarchies post the onset of the 20th century. They run the risk of becoming dated and somewhat less relevant unless they upgrade their businesses.

However, with the tech industry beginning to encroach upon core banking facilities in India and elsewhere, the “upgrades” of banks now seem more compulsory than compelling.

What began as a handful of fintech startups offering intermediary digital assistance to banks and their customers has now cut across commercial sectors and accommodated big players like Google, Facebook, Xiaomi, Flipkart, Amazon etc. In the digital lending business, something that hasn’t been their chief domain of operation.

This makes a lot of sense for the big tech players quite simply because it is underwriting that makes high margin money and not facilitation of payment transactions.

Recently, Google Pay (or GPay) announced a partnership with Equitas Small Finance Bank to offer customers up to 6.85% interest on one-year funds as part of a “branded commercial experience” on the platform.

What does this mean? Why are other lenders signing up for similar ventures with tech companies? And what does this mean for the traditional brick-and-mortar banks?

The Digital Overload

Let’s start with Google’s escapades into the digital lending turf. It started with “Project Cache” which marked the tech giant’s first push into finance. The company started offering checking accounts (type of deposit accounts) to customers of Citigroup in the US.

From thereon, Google began drawing on data to offer customers better financial insights and budgeting tools. It extended partnerships to more banks — at least 11, as of November 2020. The arrangement was simple. Google provides the consumer-facing front-end digital banking services while the accounts are held by the partner banking institutions.

In India, however, the arrangement is slightly different. Here, GPay, the company’s digital payments arm, is the chief driver of its digital banking push and has entered into collaborations with “loan providers” which include a diversified mix of partner institutions.

Some of them are digital lending startups like ZestMoney and FlexiLoans which help in facilitating digital credit access to small businesses (in particular) directly through the GPay app. Some are investment platforms like Groww and 5Paisa which have integrated with the GPay platform to offer brokerage services. The rest are Indian banks (e.g. SBI, IndusInd, Federal Bank) for whom GPay provides “tokenised offerings” — make debit/credit card payments without sharing card details.

Big Tech Bank Rush

The heightened focus on the digital payments market in India in lieu of generating contactless experiences since the pandemic’s start has only gathered more interest from tech firms to capitalise in the sector.

There has also been an increase in demand for small ticket loans, particularly from middle-income households for transient expenses and young, first-time borrowers with limited or no credit histories. This is where digital lending apps have stepped in to fill the roles of traditional lenders.

After foraying into the digital payments space through WhatsApp Pay, Facebook has rolled out a small business loan programme (in partnership with Indifi) with collateral-free loan offerings in the range of ₹5–50L ($6,828–68,286).

Xiaomi intends to partner with some of India’s biggest startups as well as traditional lenders to offer a range of services — loans, credit cards, insurance products etc.

Flipkart expanded its Growth Capital scheme to extend loans to seller partners (₹5L-5cr or $6,826–682,864) which get disbursed with 24 hours of application owing to the help of what the company describes as “tech synergies across the ecosystem”.

Amazon Pay is also ahead in the microlending business since the launch of its Pay Later scheme which operates on the Buy Now Pay Later model and has secured 2 million customer sign ups as of July 2021.

Several of these names initially ventured into the space as mere loan originators but are now increasingly and rapidly embracing the art of underwriting. With piles of data and access to payment and spending patterns, there is a solid case to be made on the synergies that tech companies can capitalise upon.

The Companies Act

The point is that the digital payment space having mutated into a UPI credit channel has opened up immense financial opportunities in India (India’s digital lending market represents $1trn opportunity in the next five years). That essentially makes the market a no-man’s land with scores of players attempting to capitalise on it.

But it comes with risks. With the country’s bad loan ratio in double digits, it is one of the worst performers among major economies and that is perhaps an only cause of worry. But one would imagine, it is the tech companies who are perhaps ideally positioned to use data analytics to best assess and capture the risk-reward tradeoff!

Under these conditions, big tech corporations have an obvious advantage due to the massive scale of their operations, cash-rich reserves and brand identities. Not to forget the cross-industry presence which some of them enjoy (payments, e-commerce, lending, electronics, software etc.) which solidifies their influence over the sector and gives a premium value to their products.

For instance, in January this year, GPay took down 30 loan apps from Play Store following RBI’s instructions to monitor fraudulent applications hosted on its platform. In March, GPay introduced a new functionality that allows its customers to delete their transaction data from the app.

Agreed, initiatives like the above could be understood as good governance practices in the interest of preventing loan fraud or helping secure the customer’s right to privacy. However, it doesn’t diminish the fact that such outsized abilities of one player enable it to jeopardise industry-wide optics (and revenues) in its favour, or in plain terms, allow it to commit antitrust violations and behave in an uncompetitive manner, behaviours which have been alleged upon Google and other big tech companies in the past repeatedly.

Lenders Beware?!

The other effect of big tech invasion into the digital lending space is with the potentially decimated presence of brick-and-mortar banks. At a time when banks are severely deposit-strapped and coping with challenges ranging from liquidity to bad assets, the creeping acquisition of the digital lending ground by big tech giants only stands to extinguish the control that traditional banks exert in this sphere.

The world has already witnessed this in China where the domestic tech companies (like Ant Financial and Tencent) easily unseated traditional lenders from lending businesses with the help of a burgeoning network of users and scores of non-financial customer data procured from allied applications in the payments and e-commerce sphere.

However, with the Chinese government muzzling the operation of its own tech players, Silicon Valley is all the more eager to rush to the world’s second most populous market with a growing hive of digital startups to bank on.

In any case, from the looks of it, the decline of deposit banking institutions with the rise of alternate financing institutions seems imminent. One can only hope that it is a gradual and not a painful decline as is normally seen when old guards cave to new entrants, like the print media giving way to (or more appropriately, gutted by) the online publishing and advertising industry.

(Originally published September 6th 2021 in transfin.in)