How Moody’s Stacks Up Fintechs Against Banks
"Public sector banks, other than SBI, will be particularly vulnerable to growing competition," Moody's said.
India’s fintechs will face challenges in extending payment dominance to other financial services, while major banks have significantly beefed up their digital products that customers have adopted widely, according to Moody’s Investor Service.
Privately owned fintechs have led the creation of the market for digital payments in India and driven its rapid growth and increase in financial inclusion, the rating agency said in a March 17 report. “The introduction of the Unified Payments Interface in 2017, which allows funds to be transferred instantaneously, has been a key catalyst to the development of digital payments due to the ease of use of apps running on the system.”
Moody’s cited the instance of Paytm that capitalised on a spike in demand for non-cash transactions after the demonetisation in 2016. “Similarly, PhonePe was among the first private companies to introduce a UPI payment app in the market.”
Yet, fintechs’ dominance in payments may not translate into competitive advantages they can use to expand into other financial services because the primary network for digital transactions in India or UPI has an open architecture that levels the playing field for all companies, Moody’s said.
“Banks, playing a crucial role in facilitating UPI payments, have access to transactions on the network. Because of this, fintechs’ dominance in digital payments may not result in a significant data advantage over banks.”
Also, fintechs can’t charge any fees for UPI transactions.
“As UPI transactions are not remunerative, the payment fintechs have been trying to use their platform to cross sell other financial services,” Moody’s said. “But, so far, their penetration in other retail financial services has been low, reflecting limited competitive advantages from their large customer bases.”
The rating agency cited the Reserve Bank of India’s restriction on Paytm Payments Bank from onboarding new customers. “Even after three years of operation, it had a deposit market share of less than 0.1% as of March 2021. Its market share in wealth management products, such as insurance and mutual funds, is similarly minimal.”
Besides, regulations such as common, interoperable QR codes and a cap on market share ensure no one entity dominates any segment. The market share of any single company on the UPI by transaction value has been capped at 30% from 2023. Google Pay and PhonePe each exceed the limit, so they will need to reduce their shares.
Banks Beef Up Digital Play
To defend against fintechs and meet growing customer demand, banks, particularly State Bank of India and private peers, are increasingly shifting to digital channels across key retail services such as deposits-taking, lending and wealth management, the report said.
Banks have also increased their market share in sale of third-party products such as life insurance in the past five years.
A significant part of services that previously were only offered at bank branches are now available on their mobile apps. “Their mobile apps offer competitive features.”
As such, customers are actively using banks’ digital platforms, driving rapid growth in their transaction volumes. At ICICI Bank Ltd., about 74% of customers use digital channels, with monthly logins on its mobile app averaging 19 per user. Axis Bank Ltd., too, is seeing its mobile app users continue to grow strongly. “In absolute terms, sales of banks’ financial products through digital channels dwarf those of fintechs.”
Pressure On Banks
Fintechs will continue to try to take advantage of their brand recognition and distribution capabilities to expand into other segments such as personal loans and loans to small merchants, because they do not generate revenue from UPI payments, the report said. “This will heighten competition and pressure margins for banks.”
Public sector banks, other than SBI, will be particularly vulnerable to growing competition, Moody’s said. “They have been slow in technology investment, as reflected in their small shares in digital transactions. Their market share in retail lending and fee income is lower than their overall loan and deposit market share. Their growth in these segments will continue to trail overall market growth, in part because of their weak digital offerings.”
The overall market, however, will expand as “technology creates more opportunities for the digital savvy banks”, it said. “Higher digitalisation has led to a significant increase in data availability, and this creates more underwriting opportunities. Also, digitalisation reduces costs for lending, making it more viable for banks to profit from small loans.”
Moody’s foresees a rise in partnerships between banks and fintechs, or non-financial technology firms.