India’s Central Bank Tells Banks: Go Digital or Become Obsolete in the FinTech Age

The deputy governor of the Reserve Bank of India has said that banks need to go digital in the face of FinTech or they could risk becoming obsolete as the industry continues to grow.

According to a report from Bloomberg Quint, SS Mundra said, to an audience at the College of Agricultural Banking, that banks shouldn’t see financial technology companies as a threat, but that the two should work together to help under-served and credit-starved micro and small enterprises (MSMEs).

He said:

An estimate suggests that at present almost 93 percent of such (micro) units are outside the formal credit system. I think this segment, including the small enterprises, can benefit immensely from the collaboration between banks and the fintech players whereby their other payment records can form a basis for working (out) their credit worthiness.

India’s Demonetization

The banning of India’s largest banknotes, the Rs 500 and Rs 1,000 notes in November, to help tackle corruption, black money, and terrorism, could make the digital move simpler for many companies who have been forced to adopt different payment methods.

Arun Jaitley, India’s finance minister, has also taken steps to get banks to promote digital banking to limit the use of fiat currency. By doing so, it’s hoped that cashless transactions will increase in the country. This can already be seen by the fact that many MSMEs that typically used cash in the first instance are now conducting these transactions through their bank accounts.

FinTech Opportunity

Mundra, however, believes there is a ‘huge opportunity’ with the big data that FinTech companies use and think that banks can utilize the data mining techniques.

While FinTech companies have more regulatory freedom they don’t necessarily come with the big client base or the trust that more established financial service providers have. Not only that, but as they lack the capital or the experience to deal with a regulatory environment, banks could hold the answer enabling the two to work together.

India’s massive smartphone-adopting population brings significant potential for FinTech companies.

Of course, while banks may have many advantages to their name compared to FinTech companies, Mundra warned that banks could ‘run the risk of becoming history’ as the financial technology sector continues to grow.

With such different comparative advantages, a team effort between FinTech companies and banks would help them to work together by focusing on what they are good at while creating an innovative process that works for both.

Mundra concluded by adding that banks should look at the growth of the FinTech industry as an opportunity for them to work with rather than a threat.

Featured image from Shutterstock.

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