Fintech startups disrupt mammoth banks

Firms are emerging in areas such as building financial products, distribution, payment and analytics.

Top bankers recently met at a luxury hotel in Bengaluru to discuss how to innovate startups, from sourcing ideas to influencing direction of new product development. The theme of the event revolved around how to combine the spirit of traditional business powerhouses with startups. In fact one of the guests confessed that he didn't know much about the new age firms and he had to actually Google the word 'startup'.

The chief information officers of top startups and a ‘Unicorn’, a young tech firm which has yet to come to the stock market but is valued at more than $1 billion (Rs 6,640 crore), were also invited to the event to give some pep talk.

Banks are right to be afraid of the fintech (short for financial technology) boom. A slew of startups in the fintech space are disrupting the financial services and banking industry. These firms are developing innovations that include peer-to-peer lending platforms that match borrowers and savers. They are helping banks to detect fraud and money laundering using artificial intelligence and machine learning.

Platforms like Paytm and BankBazaar.com are developing apps that quickly transfer money and provide a wide range of financial products to the consumers.

Experts say small fintech firms are emerging in areas such as building financial products, distribution, payment and analytics, activities which were once almost exclusively the domain of banks.

“Banks and financial institutions are now constantly under attack from a new breed of financial sector startups,” said YM Deosthalee, Chairman and Managing Director of L&T Finance Holdings at an industry event in Mumbai. “These fintechs are increasingly gaining legitimacy even with regulators. In time it is expected that they will also gain trust from customers.”

Artificial intelligence

CustomerXPS, a startup founded by a team that was earlier part of the products division at Infosys, has built a software product based on artificial intelligence and psychology. It helps banks detect and avert fraud before the online banking transaction is completed and takes necessary action to prevent any damage.

“Bank systems are like starfish, living, but working in silos,” said Rivi Varghese, chief executive of Customer XPS. “Our approach enables the bank to deploy a central nervous system, a human like brain.” He declined to reveal the names of his clients, but said a bank is using the technology to thwart frauds worth over $30 million (Rs.199 crore) per year.

“I don' think banks should be scared of fintech startups, they should embrace them with open arms,” said Atul Singhal, CEO of Probe Equity Research, a startup which has developed a platform that provides access to financial information on over one million companies in India. The platform Probe42 collates information on companies, public as well as private, from a number of sources including the Registrar of Companies, lists of defaulters and public filings. It also examines the data for the customers. This helps banks reduce bad debt and improve efficiency.

An alumnus of IIT Madras, Mr Singhal named the product as Probe42, after reading comedy science fiction Hitchhiker's Guide to the Galaxy, where the answer to the question of life, universe and everything is 42. “But no one knows what the question is. We can help you with the right answers. You just need to have your questions ready,” said Mr Singhal whose Bengaluru-based firm is backed by Facebook and Flipkart investor Accel. In Mumbai, data analytics startup Heckyl Technologies is set to challenge and change the manner of perceiving credit risk in financial institutions -- from a post event system to an 'early warning system.'

“The product aims at monitoring the most important events and news in real time that influence companies and sectors where the bank’s exposure lies,” said Mukund Mudras, cofounder of Heckyl. A chief experience officer, who is responsible for the overall user experience of an organization, is provided with information and clarity on his overall portfolio size and exposure, cash flows and defaults at a click of a button.

Kotak Securities has tied up Heckyl to develop various applications. These would help investors with insights about global markets, along with recommendations and research on trading opportunities.

WhatsApp Moment
Infosys co-founder and billionaire Nandan Nilekani who spearheaded the country’s massive unique identification project is of the view that the financial sector is going through a “WhatsApp moment.” This is because digital innovation is changing the payment and banking space in India the same way WhatsApp disrupted the messaging space from 2009 onwards.

Mr. Nilekani said that everything is coming together. This includes the technological disruption fueled by government initiatives such as Aadhaar and the direct benefit transfer (DBT) payments by banks.

The Aadhaar-based two factor authentication on smartphones and immediate payment service (IMPS) has been a great success in remittances. There are other elements that are coming together such as mobile wallets and recharging platforms.

“This entire stack allows you to completely re-imagine a bank; that opportunity is open to the existing banks to re-imagine the way they operate and is open to the new banks,” said Mr. Nilekani in an interview. “I am not saying who is going to win or lose, I am just saying there is a certain period of disruption happening and it is up to individual players to take advantage.”

For instance, the lending based on relationship also encourages banks to chase big customers and very few are able to focus on small and young businesses. This is where Capital Float, a startup uses technology to ensure that small and medium enterprises have access to collateral free working capital. Founded by Gokaldas Exports scion Gaurav Hinduja and Stanford Graduate School of Business alumni Sashank Rishyasringa, Capital Float uses algorithms and sifts through data to find hidden insights in order to make lending decision quickly. This ensures efficient and fast turn-around time.

“Technology has also enabled us to expand our business faster and reach out and support the small and medium enterprise community,” said Mr. Hinduja.

Banks are also at the centre of all payments. Businesses with multiple branches or outlets face the challenge of cash disbursement, handling and tracking it. The expense reporting is delayed by 30-45 days. The reconciliation never matches as there is 5-10 percent cash leakage, posing serious trust and scaling issues for business owners.

Happay, a start-up, which provides a pre-paid, card-based business expense management solution is bridging this gap. “With our expense management integrated with VISA Cards, business owners can give cards to all employees, who need to spend, and with complete real time control and tracking,” said Varun Rathi, co-founder of Happay.

An alumnus of IIT-Kharagpur, Mr Rathi co-founded the firm along with his batch mate Anshul Rai in 2012. He said more than 80 per cent of business payments can now be made cashless and brought under the banking infrastructure, which were earlier made using cash. The expense reporting cycle can be reduced from 45 days to less than two days and the cash leakage can be controlled fully. For instance, on-demand delivery firm Grofers disburses cash to its delivery executives through Happay’s card. They then use the card to buy and deliver fruits, vegetables, groceries and bakery items for customers from the local merchants and deliver it to consumers.

Fintech investments quadruple

Investors too have responded favourably to fintech firms. Investments in fintech across Asia-Pacific skyrocketed in 2015 – from about $880 million (Rs. 5,840 crore) in all of 2014 to almost $3.5 billion (Rs. 23,240 crore) in just the first nine months of 2015, according to a report by Accenture.

In July, US-based online retailer Amazon invested Rs. 375 crore in online financial services portal BankBazaar.com.

The firm was founded by Adhil Shetty, an alumnus of Anna University. He returned after a stint at Deloitte Consulting in New York to cofound the company along with his brother Arjun Shetty and Rati Rajkumar.

BankBazaar is investing heavily on its mobile app that will help consumers get financial products and also provide support to manage their finances.

Mr. Deosthalee of L&T Finance said product aggregators like BankBazaar, PolicyBaazar and FundsIndia.com are seeing increased traffic as they take away customer relationships from banks, insurance companies and asset management companies.

Big banks are also now spending thousands of dollars and hundreds of hours mentoring fintech entrepreneurs who can help them with innovations.

Mr. Deosthalee said if existing players do not smarten up and digitize, a revolution similar to what happened to the telecom sector does not seem unlikely.

“We do not want a similar tsunami to hit” the financial services sector, he said.