The Significance of Banking License for Fintech Companies
Unveiling the Benefits and Challenges of Acquiring a Banking License for Fintech Ventures
Indian fintech unicorn Slice recently received regulatory approval to merge with North East Small Finance Bank, marking its transition into a full-fledged bank. Similarly, Resilient Innovations, the operating company behind fintech firm BharatPe, became a financial investor in Unity Small Finance Bank, as part of a central bank initiative to expand formal financing beyond traditional high-street lenders. In this ET explainer, we delve into the enduring allure of a banking license for fintech companies, supported by prominent global funds and Wall Street private equity investors.
The Significance of a Banking License for Fintech Companies
Obtaining a banking license renders access to low-cost funds as the most critical advantage. The Reserve Bank of India (RBI) restricts the mobilization of savings and current account deposits to banks, which creates a formidable entry barrier for lending industry participants. While banks can accumulate current account deposits without paying interest, savings accounts typically offer a modest interest rate of about 3.5%. This enables banks to procure substantial funds at lower rates, leading to higher margins on loans extended to individuals, businesses, and other entities. With their ability to secure funding at competitive rates, banks inevitably dominate the lending market.
Can a Nimble Platform Alone Fuel Banking Success?
Success in modern banking heavily relies on quick decision-making facilitated by robust technological infrastructure. Fintech firms, especially unicorns, enjoy a technological advantage, but their aspirations are fully realized when coupled with a banking license. Operating as a bank enables these firms, backed by strong capital bases, to secure a favorable position in the lending industry.
The Business Growth Potential of Acquiring a Banking License
Acquiring a banking license establishes a mutually beneficial partnership between fintech firms and banks. Many fintech companies seek strategic banking partners to foster their growth, while banks benefit from the innovative capabilities of fintech firms. By obtaining a banking license, either directly or through a merger, fintech companies eliminate the need for external banking partnerships. As a bank, these companies can offer a comprehensive suite of products, catering to both asset and liability sides of banking operations. It bridges the current gap faced by fintech firms, which have limited capabilities to address both sides of the balance sheet.
Enhanced Opportunities for Cross-Selling
A banking license plays a pivotal role in empowering fintech companies to enhance cross-selling opportunities. Building a strong base of depositors who trust the lender with their savings is instrumental in the success of a bank. Fintech firms, upon transforming into a bank, can leverage their robust data algorithms and cross-sell a wider range of products to their existing customer base, further expanding their market presence.
Impact on Shareholder Value
Shareholder value is heavily influenced by the efficient utilization of capital in any business. Acquiring a banking license imparts a positive perception among stakeholders, as it grants entry into a business domain upheld by strong regulatory measures. This enhances the trust of both customers and shareholders, bolstering the long-term prospects of fintech companies.
Challenges Faced by Fintech Companies in Transitioning to Banks
Transitioning from fintech companies to banks introduces challenges, particularly related to adhering to stringent regulatory requirements. Fintech companies currently experience greater regulatory freedom, while banks must comply with rigorous rules governing risk assessment, asset classification, and provisioning norms. Additionally, central bank regulations mandate that a portion of deposits mobilized be impounded for liquidity adequacy purposes. These regulated deposits inflate a bank’s cost base.
In conclusion, the acquisition of a banking license holds unparalleled significance for fintech companies, empowering them with access to low-cost funds, increased customer trust, and the ability to offer a comprehensive suite of banking products. Despite the challenges associated with regulatory compliance and cost implications, obtaining a banking license unlocks new avenues for growth and strengthens the overall value proposition of fintech ventures.
Disclaimer:
Estabizz Fintech compiled the material in this article using the most recent Acts, Rules, Circulars, Notifications, Provisions, Press Releases, and material applicable at the time. They ensured the completeness and correctness of the material through due diligence. When using this material, users must consult the relevant, applicable legislation. The given data may change without prior notice and does not constitute professional advice. Estabizz Fintech disclaims all liability for any results from the use of this material.
