Banks could end up beholden to online platforms with reach

Source: This post is based on the article “Banks could end up beholden to online platforms with reach” published in Livemint on 30th August 2021.

Relevance: Disruption in the banking sector by tech giants.

Synopsis: Deposit mobilization through Big Tech apps might weaken banks.

What has happened?

According to a press release, Equitas Small Finance Bank will now offer Google Pay customers up to 6.85% interest on one-year funds.

Alphabet’s Google already provides one of the two most popular payment wallets (Google Pay) in the country. But now, Google Pay wants to push time-deposit products (fixed deposits) of small Indian banks.

Significance

• It exposes the weak nature of the financial institutions on a core operation like deposit-taking, and their vulnerability to an assault from an online search, social media and e-com giants.
• Alphabet, Facebook and Amazon.com may pose a far bigger challenge to brick-and-mortar lenders than fintech startups that don’t have the scale of platform businesses.
• In India, banks short on deposits might face problems as tech intermediaries have hundreds of millions of active users. Once these giants enter the sector, even larger banks will lose control of banking.

Implications

• Consumers will gain: Equitas doesn’t have a pre-existing relationship with the Google Pay customer, and even after getting the money, the lender might not get to build one. Once the deposit matures, the money will simply go back into whichever bank’s account it came from, [And] if another lender offers a better deal, idle funds might go there next. Customer loyalty, which is often just inertia, will no longer ensure stickiness. Savers will gain.
• If the move is successful, the likes of PhonePe and WhatsApp Pay might also want to copy it. For a fee, platforms can easily extend their insights into consumer behaviour and payment flows to influence deposit mobilization. The higher the commission, the lower the banks’ profit.

Global examples

China’s tech giants have already shown how easy it is to dislodge traditional lenders. In a growing network of users, real-time non-financial data can be a more powerful predictive tool than credit scores relied upon by banks. Adding a layer of financial activity to an online platform brings in yet more information. Before Beijing stepped in, Jack Ma’s Ant Group pursued this advantage to its maximum.

The present scenario in India

Silicon Valley never had a chance in China. However, it’s in a stronger position in India.

• Traditional bank strongholds are being challenged by tech innovation: For instance, the government’s digital identification system [Aadhaar] has made paper trails and physical presence redundant. A wallet can establish a customer identity as easily as a bank and manage the process of seeking her consent. This has turned the cumbersome KYC procedure into a simpler process.
• Customers prefer to use other apps/wallets: Even in the case of retail money, India’s banks have no special advantage. They still hold the accounts for sending or receiving funds but rather than transacting on their bank apps or cards, customers prefer to use Google Pay or Walmart’s PhonePe to pay one another and merchants. The two wallets were used to transfer ₹5 trillion in July 2021, giving the duo an 85% share of a market that has more than 50 apps, including from banks.

What must Indian PSBs do?

India’s state-run lenders will need to become more efficient. Or they’ll have to lobby regulators to rein in tech giants. Amazon, Google and Facebook were all competing to build a new payment network in India, but the central bank put the licence on hold because of data safety concerns.

Conclusion

Regulated banks may hold licences to take deposits, but platforms will decide if their offers are displayed prominently or put in a corner. What happened to print media after publishers lost their influence over readers may be waiting to happen with the banking too.