Fintech — old wine in a new bottle

Will fintech revolutionise banking services or is it more hype than substance?

In the last few months, fintech has been attracting a lot of attention; the valuations of some of the companies seem astronomically high. (Recently, a UK company attracted valuation in excess of $10 billion, well in excess of its gross earnings, and when there is no profit!) Will fintech revolutionise banking services or is there more hype than substance? In a recent paper, the European Banking Authority (EBA) defined fintech as “technologically-enabled financial innovation that could result in new business models, applications, processes or products”. EBA also classified fintech services under four clusters:

Credit, deposit and capital raising services

Payments, clearing and settlement services

Investment services/investment management services Other financial-related activities.

Given that Silicon Valley in the US is supposed to be the leader in information technology, one would have expected that country to be the leader in fintech as well. Astonishingly, it is China, which is by far the largest investor, innovator and user of fintech. To quote a couple of figures, in 2015 alone, the volume of new credit generated by fintech in China was almost $100 billion, three times what the US did (the corresponding number for India is barely $20 million). One reason for the huge amount of credit generated is the propensity of individuals to borrow and lend on peerto-peer (P2P) platforms, which is close to 40 per cent in the case of China. While India’s figure looks very small, the actual number through traditional P2P channels like venture capital and chit funds is huge. To be sure, in China’s fintech-facilitated credit, a preponderant proportion is P2P, as distinct from individuals to business (peer-to-business or P2B). The use of mobile payments, also part of fintech, in China amounted to as much as $5.6 trillion in 2016 — more than twice India’s gross domestic product.

Fintech also seems to have generated a large amount of cross-fertilisation in financial and, indeed, e-tailing services. On the one hand, traditional brick and mortar commercial banks are using fintech companies for assessment of credit risk on personal/consumer loans. On the other hand, some fintech companies are happy to partner banks in their payment and other services. A relatively new dimension is that e-tailers (say, Amazon and Flipkart in India) are entering the consumer loan business, taking advantage of the large customer base they already have. On the other hand, payment firms such as Paytm are invading the e-commerce arena (Paytm Mall). As mobile and card payments grow, will one day the ATM (automated teller machine) become a museum piece? Just a decade back, after the banking crisis of 2007, which was triggered by highly complex structured credit and credit risk protection instruments, Paul Volcker, former chairman of the US Federal Reserve, had described ATM as the only useful financial innovation by the banking industry.

In India, after the demonetisation exercise of last year, there was a spurt in electronic payments. In recent months, we seem to have gone back to our old habits of cash payments by currency notes.