ET Explainer: The magnetic charm of a bank licence

Indian fintech unicorn Slice earlier this week received the regulatory no objection to merge with North East Small Finance Bank, that would help it transform into a bank. Earlier, Resilient Innovations, which operates fintech firm BharatPe, became a financial investor in Unity Small Finance Bank, one of the 12 small finance entities that got a bank licence as part of a central bank initiative to expand the bailiwick of formal financing beyond credentialed high-street lenders.

Here’s an ET explainer about the enduring allure of a banking licence for financial technology (fintech) companies, several of which are backed by bulge-bracket global funds and Wall Street private equity investors.

WHAT DOES A BANKING LICENCE MEAN FOR A FINTECH?
The most crucial aspect of getting a banking licence is access to low-cost funds. The Reserve Bank of India (RBI) allows only banks to mobilise savings and current account deposits, creating a stiff entry barrier in the lending industry. Banks garner current account deposits without paying any interest, while most of them offer just about 3.5% on savings accounts. Accessing sizeable funds at such low rates help banks earn fatter margins on advances to borrowers — be they an individual, a company, or any other entity. Banks also dominate the lending market as few rivals can be as competitive in garnering funds at such rates.

IS A NIMBLE PLATFORM ALONE GOOD ENOUGH TO SUCCEED AS A BANK?
Modern banking depends on quick decision making, using a technology spine. A fintech firm, especially a unicorn, enjoys this technological advantage. With a robust capital parentage, such a firm can harness a moat-ensuring banking licence to carve a sizeable share of the loan pie.

DOES ACQUIRING A BANKING LICENCE HELP BUSINESS GROW?
It is a symbiotic relationship: Several fintech firms need banks as strategic partners to grow and vice versa. Receiving a banking licence, either directly or through a merger, eliminates the need for banking partners. A bank typically offers a bouquet of products — both on the asset and liability sides. By contrast, fintechs currently can address only one side of the balance sheet — a gap effectively filled with a banking licence.

DOES A BANKING LICENCE HELP IN CROSS-SELLING OF PRODUCTS?
It does. To succeed as a bank, one needs a base of depositors that trust a lender with their savings. Once a fintech becomes a bank, it can harness its data algorithms and cross sell, leveraging the customer base.

DOES SECURING A BANKING LICENCE IMPROVE SHAREHOLDER VALUE AT FINTECHS?
Shareholder value, of course, depends on how efficiently capital is used in any business. Still, entry into a business that is provided with a regulatory moat changes the perception of stakeholders for the better. It increases the trust of both a fintech’s customers and shareholders.

WHAT ARE THE CHALLENGES FOR FINTECHS TURNING INTO A BANK?
On the debit side, theoretically, it is the compulsion to run on the regulatory tramlines. Fintech firms enjoy greater regulatory freedom while banks must follow a rigorous set of rules governing risk assessment, asset classification and provisioning norms. Furthermore, a part of the deposits mobilised are impounded by the central bank for reasons of liquidity adequacy, and these unyielding deposits inflate a bank’s cost base.